What does reinsurance typically involve?

Reinsurance typically involves one insurer obtaining coverage from another insurer. This process allows insurance companies to manage risk by spreading it among multiple entities. When an insurance company issues policies to its clients and collects premiums, it takes on the risks associated with those policies. To protect itself from significant losses—especially in the event of large claims or catastrophic events—the insurer can purchase reinsurance. This means that if the primary insurer experiences losses above a certain threshold, the reinsurer will cover the excess costs.

This practice is crucial for maintaining the financial stability of insurance companies, ensuring they can meet their obligations to policyholders, even in times of high claims. Reinsurance also allows insurers to increase their capacity to underwrite more policies, ultimately enabling a more robust insurance market.

In contrast, acquiring a second policy, selling directly to individual clients, or self-insuring are not functions of reinsurance. Each of those involves direct client relationships and coverage rather than the risk-sharing dynamics central to the reinsurance process.