when purchasing insurance the insurer agrees to indemnify or compensate the policyholder up to a certain amount for a specified loss or losses in exchange for payment 
insurance companies collect premiums from thousands or millions of customers every year that provides a pool of cash that is available to cover the costs of damage or destruction to the properties of some small percentage of its customers the premiums also cover administrative and operating expenses and provide the company s profits life insurance works the same way insurers rely on actuarial statistics and other information to project the number of death claims it can expect to pay out per year because this number is relatively small the company sets its premiums at a level that will exceed those death benefits reinsurance companies accept transfers of risk from insurance companies the insurance industry exists because few individuals or companies have the financial resources necessary to bear the risks of the loss on their own so they transfer the risks risk transfer to reinsurance companiessome risks are too big for insurance companies to bear alone that s where reinsurance comes in 