What practice involves an insurance company buying insurance from another to mitigate risk?

Reinsurance is a practice where an insurance company purchases insurance from another insurer to reduce its risk exposure. This process allows primary insurers to protect themselves from significant losses while maintaining their ability to underwrite policies. By transferring parts of their risk to a reinsurer, primary insurers can stabilize their financial performance, manage capital requirements more efficiently, and enhance their capacity to take on more policyholders.

In essence, reinsurance supports the safety and stability of the insurance market by ensuring that insurers have a safety net against unpredictable and catastrophic losses. This practice is fundamental to the insurance industry, as it helps distribute risk across various companies, thereby enhancing overall market resilience and improving financial security for both insurers and policyholders.