What is "reinsurance" in health insurance?

Reinsurance in health insurance refers to the practice where insurance companies purchase additional insurance to manage their risk exposure. By transferring a portion of their risk to another entity, known as a reinsurer, insurance companies can protect themselves against significant losses that might occur due to high claim volumes or catastrophic events. This not only allows them to stabilize their financial standing but also enables them to continue offering coverage without the threat of insolvency.

Understanding this mechanism is essential because it plays a crucial role in the overall stability of the insurance market. Reinsurers gain insight into the insurance industry and help spread the risk across multiple entities, which ultimately benefits policyholders by ensuring that insurers remain solvent and capable of paying claims.

The other options do not accurately describe reinsurance. Individual policies for special conditions are specific to the policyholder rather than a collective risk management strategy. Basic coverage for preventive health services relates to the benefits covered under health insurance policies but does not pertain to risk management through reinsurance. Insurance that only covers natural disasters pertains to specific types of coverage and does not encompass the broad risk management strategies that reinsurance entails.