What is the business of insuring insurance companies through risk spreading?

Reinsurance is the process by which insurance companies transfer a portion of their risk to other insurance companies. This practice involves one insurer (the cedent) purchasing insurance from another insurer (the reinsurer) to mitigate the risk of large losses. By spreading risk across multiple insurers, reinsurance enhances financial stability and enables primary insurers to underwrite more policies than they might otherwise be able to handle alone.

This mechanism is essential for managing underwriting risks and provides additional capacity for insurers to cover claims, especially in high-risk segments. Reinsurers take on this risk with the expectation of receiving premium payments and can also provide expertise in risk management to the primary insurer.

Underwriting refers to the process of evaluating risks and determining appropriate premium rates for insurance policies, while self-insurance involves an entity retaining its own risk rather than transferring it to an insurance company. Co-insurance is an arrangement where two or more insurers share the coverage and cost of a risk, but it is not the same as reinsurance, which specifically refers to insuring the insurance company itself.