Reinsurance is often described as insurance for insurers.

Insurance is where an insurer takes on risk from the individual or company being insured.

Reinsurance provides a similar function, but for insurance companies, it transfers risk from a primary insurer to a reinsurer.

For example, if an insurer has written many home insurance policies in an earthquake prone area, it might buy reinsurance to cover any losses exceeding a certain amount if there were to be a major earthquake, although the insurer would have to pay the policy holders what is owed to them, the primary insurer would then be able to make a claim under its reinsurance policy.

With the reinsurance company, think of it as a safety net.

It protects insurers from being overwhelmed by claims after major events like hurricanes or earthquakes, but also provides a route for insurance companies to manage their risk profile.

Reinsurance tends to be offered by specialist reinsurance companies such as Swiss Re, Munich Re, or RGA, the Reinsurance Group of America.