What is reinsurance?

Reinsurance is best understood as a form of insurance that takes place between insurers. It is specifically designed to help primary insurance companies manage and reduce their risk, particularly in the face of potentially catastrophic losses. By transferring a portion of their risk to another insurer (the reinsurer), companies can stabilize their operations and ensure they have sufficient capital to cover significant claims. This practice allows insurers to underwrite more policies with heavy risks while maintaining solvency and protecting their financial health.

The other options do not accurately capture the essence of reinsurance. For instance, describing it as insurance for personal property does not reflect the relational dynamic between insurers. Insurance purchased by individuals for liability coverage is a fundamental aspect of personal insurance but is unrelated to the functions or objectives of reinsurance. Lastly, characterizing reinsurance as a method of increasing premiums overlooks its primary goal of risk management and financial stability for insurers, rather than focusing on revenue generation from premiums. Thus, the correct identification of reinsurance emphasizes its crucial role in the insurance industry as a risk-sharing mechanism.