What is Reinsurance in health insurance?

Reinsurance in health insurance refers to a method where insurers transfer a portion of their risk to other insurance companies. This process allows the primary insurer to reduce its risk exposure on large claims or accumulation of losses from multiple claims, which can be particularly impactful during periods of high claims frequency. By utilizing reinsurance, insurers can stabilize their financial position, ensure they have sufficient capital to cover substantial claims, and protect themselves from unexpected large losses.

This approach is crucial for maintaining solvency and financial health for insurance companies since it spreads the risk. In cases where claims exceed a certain threshold, the reinsurer takes on the additional burden, which allows the primary insurer to manage its reserves more effectively. This financial mechanism supports the overall stability of the insurance market and helps to ensure that insurers can meet their obligations to policyholders.