In reality, the situation is much more complex. In the US, rates are regulated by each state and thus a political element affects the relationship between risk and rate. Also, many insurers lose money on their underwriting, and are profitable only because of the success of the investments of the capital they hold. Primary insurance companies also buy insurance against losses that are larger than they want to handle. They turn to reinsurance companies, and in a process analogous to that described above, transfer some of their risk.
Reinstatement entails purchase of coverage for a second loss with payment of a second premium.
The total reinsurance package acquired by a primary insurer may include multiple layers with multiple conditions for when coverage begins. Reinsurers generally pool their resources to share the limits in the larger layers. In this way, the reinsurers can more easily diversify their own risk by writing more treaties covering different types of events in different regions of the world. The reinsurance market is global in scope and less regulated than the primary market. Following Hurricane Andrew, a new group of companies were formed in Bermuda that specialize in catastrophe risks.