Reinsurance refers to the practice where insurance companies purchase insurance policies from other insurers to manage their risk exposure. This spreads the risks associated with claims over a larger financial base, ensuring stability and sustainability in the insurance sector. For example, if an insurance company provides policies to cover natural disasters in a flood-prone area, it can use reinsurance to protect against the high claim payouts if a flood were to occur. Reinsurance promotes risk management, allowing insurers to underwrite policies for larger risks than they could otherwise manage. The reinsurer, in turn, diversifies its risk portfolio by entering into agreements with multiple primary insurers covering various types of risk.