Reinsurance serves as a means for insurance companies to manage their risk exposure. Essentially, it involves an agreement between an insurer (the ceding company) and another insurer (the reinsurer). Here, the reinsurer agrees to indemnify the ceding company against specified losses in exchange for part of the premium income. This process allows the ceding company to stabilize its operations by reducing volatility in claims and also provides additional capacity for underwriting more policies. By utilizing reinsurance, companies can protect themselves from catastrophic losses, thereby encouraging growth in their lines of business without overexposing themselves financially.