What does "reinsurance" involve?

Reinsurance is a practice where insurance companies purchase insurance to manage their own risk. This arrangement allows primary insurers to mitigate the financial impact of large claims, ensuring that they have sufficient resources to cover potential losses. By transferring portions of risk to other insurers, known as reinsurers, companies can stabilize their operations, maintain solvency, and sustain growth even when faced with high claims or catastrophic events.

This process is crucial in the insurance industry, as it helps maintain the overall financial health of insurers, allowing them to offer coverage without overextending their risk exposure. It also enables them to underwrite policies with confidence, knowing they have a safety net against significant losses.

In contrast, the other options refer to different aspects of insurance or investment. Insurance purchased by policyholders pertains to end-user protections, personal insurance products deal with direct consumer needs, and investment returns are usually associated with life insurance policies or annuities rather than the mechanism of transferring risk that defines reinsurance.