Reinsurers essentially provide insurance for insurers, by providing additional capital allowing insurers to write larger limits for their clients or allowing them to hold a minimal amount of the risk in order to protect their balance sheet and meet their solvency requirements. This means the underwriter/insurer is able to limit their actual exposure for larger claims especially, by sharing the risk of that claim occurring, with a reinsurer.
Reinsurers are based, for the most part, outside Australasia such as in Europe and the USA. Whilst reinsurance tends to be most publically recognised in major claims and catastrophes (such as the September 11 2001 terrorist attacks on the World Trade Centre in New York, and in the 2011 Queensland floods and Christchurch earthquakes), many of the day-to-day contracts underwritten by insurers is covered by reinsurance in one form or another.
The two main types of reinsurance are proportional and non proportional. Proportional reinsurance is exactly what is says - the reinsurer takes a proportion of the risk, an equal proportion of the premium and pays the same proportion of the claim. Non-Proportional insurance is somewhat different. The reinsurer will only pay the portion of the claim exceeding a certain amount (known as the attachment point) for a certain premium, usually substantially less than the proportional amount would have been.
Reinsurance is further split into two separate categories - treaty and facultative. Treaty reinsurance is generally a contract between the insurer and reinsurer where all risks that fit within certain parameters are automatically reinsured (or ceded) to the treaty. The reinsurer is obliged to accept these risks and the insurer is obliged to pay the required premium to the reinsurer. Facultative reinsurance is singe risk reinsurance - the insurer presents the risk and the proposed terms to the reinsurer and the reinsurer can choose whether or not to accept the terms proposed by the insurer. in this situation, neither party is obligated to accept the reinsurance or cede any premium.