What is the purpose of reinsurance?

Reinsurance serves a critical role in the insurance industry by mitigating risk. Insurance companies often take on more risk than they can comfortably handle, especially when underwriting large policies or insuring numerous clients. By entering into reinsurance agreements, an insurer can transfer a portion of that risk to another company, known as the reinsurer. This sharing of risk allows the primary insurer to stabilize its financial position, ensuring that it can meet its obligations to policyholders even in the face of significant losses.

Through reinsurance, insurers can protect themselves against extreme claims or catastrophic events that could potentially threaten their solvency. It enables them to balance their portfolios and manage volatility in claims. As a result, reinsurance not only provides a safety net for individual insurance companies but also contributes to the overall stability of the insurance market.

The other options do not accurately capture the core purpose of reinsurance. Offering health insurance or paying out claims directly relates to the primary functions of insurance but does not reflect the risk management aspect of reinsurance. Additionally, while reinsurance can influence premium costs, lowering premiums is not its primary purpose—it primarily focuses on sharing risk rather than directly impacting pricing strategies.