What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to spread risk among multiple insurers. Reinsurance is a financial arrangement where an insurance company transfers a portion of its risk to another insurer, known as the reinsurer. This practice helps insurers manage their risk exposure and provides greater financial stability by sharing the burden of potentially large claims. By doing so, it allows primary insurers to underwrite more policies, protect against catastrophic losses, and maintain solvency. This risk distribution mechanism is essential for the insurance industry as it enhances the capacity of insurers to offer coverage while mitigating the impact of large losses on their financial health.