Reinsurance is a type of insurance that insurance companies purchase to protect themselves from large losses. It works by an insurer, or primary company, paying another insurance company, known as the reinsurer, to take on some of the risk associated with policies they have issued. This means that if a claim exceeds the limits set by the primary company's policy, the reinsurer will cover the excess amount. Essentially, it is a way for companies in the insurance industry to spread and manage their risks.