Reinsurance is a form of insurance purchased by insurance companies in order to mitigate risk. Essentially, reinsurance can limit the amount of loss an insurer can potentially suffer. In other words, it protects insurance companies from financial ruin, thereby protecting the companies’ customers from uncovered losses.
The simple explanation is that reinsurance is insurance for insurance companies. Reinsurance is the mechanism that insurance companies use to lower their risk or reduce their exposure to a specific catastrophic event.