Reinsurance, sometimes referred to as stop-loss insurance, is a special type of insurance between two different insurance companies. It is essentially insurance for insurance companies.
A company looking to protect its insurance portfolio, known as the ceding party, forms an agreement with a company that has the capacity to insure a portion of its portfolio, called the reinsurer.
This agreement protects the ceding party by offering protection from a high volume of claims.
If an unexpected event occurs, such as a natural disaster, and the ceding party experiences large obligations due to claims, insurance funds from the reinsurer via a reinsurance agreement can help the ceding party stay solvent and be able to pay out claims.