What Is Reinsurance?

By Matthew DiLallo – Updated Oct 17, 2025 at 2:27 AM

Key Points

Reinsurance allows insurers to transfer risks, increasing their capacity for more policies.
There are two main types of reinsurance: treaty and facultative, each serving different needs.
By using reinsurance, insurance companies can mitigate losses from catastrophic events.

Reinsurance is often described as an insurance policy for insurance companies. It lets insurance companies offload some of their financial risk to another insurer. That increases their capacity to provide insurance and helps stabilize their results. Here, we'll talk about how reinsurance works and its benefits and then provide an example.

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Person reading through an insurance policy lying on a desk. — Image source: Getty Images.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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Matt DiLallo has positions in Lemonade. The Motley Fool has positions in and recommends Lemonade. The Motley Fool has a disclosure policy.