What does 'reinsurance' refer to?

Reinsurance is defined as the process by which insurers transfer portions of their risk to other insurance companies. This arrangement allows primary insurers to mitigate potential losses by sharing their risks, enhancing their capacity to underwrite new policies and manage overall risk exposure. The practice of reinsurance plays a crucial role in stabilizing the insurance market, ensuring that no single insurer is overwhelmed by large claims while also providing them with the necessary financial backing to meet their obligations. By spreading risk across multiple entities, reinsurance contributes to the financial health and sustainability of insurance companies, as they can collect premiums from a broader risk pool and avoid catastrophic losses that could threaten their solvency.