What is the objective of reinsurance?

The objective of reinsurance fundamentally revolves around spreading risk and thereby reducing the likelihood of catastrophic loss for insurers. When insurance companies take on policies, they assume the financial risk associated with potential claims. This can be especially significant in the case of large or numerous claims resulting from natural disasters or major accidents.

By utilizing reinsurance, insurers can transfer some of this risk to another company, effectively sharing the burden of potential losses. This mechanism allows them to stabilize their financial performance, ensures they remain solvent in the face of high claims, and enables them to manage a larger portfolio of policies than they could safely underwrite on their own.

This strategic risk management tool also enhances the capacity of insurers to cover large policies or unusual risks, providing them with greater confidence to operate within the market. This serves the dual purpose of protecting the insurer's financial health while allowing for continued support of policyholders by ensuring that claims can be met even in adverse circumstances.