What does "reinsurance" mean in the context of health insurance?

Reinsurance is a practice where insurance companies share their risk with other insurance companies. This involves one insurer purchasing insurance from another to mitigate the financial impact of large claims or to stabilize their loss experiences. By transferring a portion of their risk to a reinsurer, the primary insurance company can protect itself against significant losses, ensuring that it remains financially solvent and capable of paying claims to its policyholders.

This concept is vital in the health insurance industry because it helps insurers manage their risk exposure, particularly in volatile markets or in circumstances where they may face unusually high claims, such as during a health crisis or pandemic. By doing so, reinsurance aids in maintaining competitive pricing and improves the availability of coverage for consumers, as it enables insurers to take on larger or more varied risks without the fear of catastrophic financial loss.

The other options do not accurately define reinsurance. Individual coverage usually refers to personal insurance policies rather than the risk-sharing mechanism between insurers. Preventive services coverage is specific to healthcare plans and does not encapsulate the broader concept of reinsurance. Lastly, life insurance policies, while related to health insurance, are not synonymous with the reinsurance process, which is more focused on risk management among insurers rather than providing life coverage.