Reinsurance means insurance for insurance companies. Just like people buy insurance to protect themselves, companies also protect themselves from big losses by buying reinsurance.
If a company has to pay many claims at once—like after a natural disaster—it may struggle to pay. Reinsurance helps share that risk. A part of every premium is given to a bigger company (called a reinsurer), which agrees to help pay in such situations.
For example, if an insurance company promises to pay $1 million, it may only keep half the risk. The other half is passed to the reinsurer.
Reinsurance keeps insurance companies strong and helps them stay in business even during big losses. It also keeps insurance prices stable for customers.
