What is reinsurance?

Reinsurance is best defined as an agreement between a ceding insurer and an assuming insurer. This type of arrangement allows primary insurance companies (ceding insurers) to transfer some of their risk to another insurance company (assuming insurer). The purpose of reinsurance is to reduce the burden of claims on the ceding insurer, stabilize their loss experience, and conserve capital. Through this process, the ceding insurer can enhance their underwriting capacity and reduce the likelihood of insolvency in the face of significant losses.

In contrast, the other options do not accurately describe the nature of reinsurance. An agreement between an insurer and an insured pertains to the primary insurance contract, which is fundamentally different from the reinsurance arrangement where one insurer transfers risk to another. The term "originating insurer" does not specifically denote the role of the ceding insurer in the reinsurance process, and the distinction between domestic and foreign insurers is more about their geographic operation than the reinsurance mechanism itself.