Reinsurance is a critical risk management tool used by insurance companies to transfer portions of their risk exposure to other insurers, known as reinsurers. This strategic practice enables primary insurers to protect themselves against large or catastrophic losses that exceed their risk capacity. By sharing risks with reinsurers, insurers can enhance their financial stability and maintain the ability to underwrite policies beyond their individual financial limits.

There are two primary types of reinsurance: proportional and non-proportional. Proportional reinsurance involves sharing risks and premiums based on predetermined percentages, while non-proportional reinsurance kicks in when losses exceed a specified threshold, with the reinsurer covering the excess.

Reinsurance plays a crucial role in the insurance industry ecosystem by allowing insurers to manage risk more effectively, ensuring they have sufficient capacity to cover potential liabilities, and promoting market stability. It involves complex risk assessment, contractual agreements, and regulatory considerations to safeguard the interests of all parties involved while ensuring the availability of insurance coverage for policyholders.