What is "reinsurance"?

Reinsurance is a crucial concept in the insurance industry that involves insurance companies purchasing insurance themselves to safeguard against substantial financial losses. This practice allows insurers to mitigate risk by spreading it over various entities, thus providing additional financial stability. When a primary insurer faces the possibility of large payouts due to claims, such as from natural disasters or large-scale accidents, they can turn to reinsurance to cover some of those potential losses.

This process ensures that the primary insurance company remains solvent and capable of meeting its obligations to policyholders. By transferring portions of their risk to reinsurance companies, insurers can write more policies and take on more risks without exposing themselves to the possibility of insolvency.

The other choices discuss different aspects of insurance, but do not accurately describe reinsurance. For instance, the first option pertains to personal risk coverage for individual consumers, and the third talks about employee injury insurance, which falls under workers' compensation rather than the reinsurance framework. The last option restricts coverage to catastrophic events, which does not encompass the broader purpose of reinsurance that addresses various risks for insurance companies overall.