Sometimes though, we can't entirely avoid or reduce our exposure to a potential loss enough for us to handle it ourselves, so we choose to share this exposure with an insurance company. Your parents probably insure their car and house. If your family's car or house were totaled or seriously damaged due to an accident or fire, it would be financially devastating. They buy insurance so that if there is a loss, they don't have to pay for all of the repairs or replacement themselves. By collecting a fee called the premium, the insurance company makes an agreement called an insurance policy, which says the company will assume the risk for damages or loss up to a certain amount and under specified conditions.
Reinsurance does the same thing for insurance companies.
The reason insurance companies need reinsurance is that they may assume the risk for very large exposures. If something catastrophic were to happen, such as an earthquake, the cost of building a new aquarium might be a debilitating loss to one insurance company. If, however, the insurance company purchases reinsurance, possibly from several different reinsurance companies, the risk is spread. No one company will suffer greatly due to one specific loss. American Re, based in Princeton, NJ is the second largest writer of property-casualty reinsurance in the United States.