What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to share risk. Reinsurance allows insurance companies to transfer a portion of their risk to other insurers, which helps them manage their exposure to large losses. By spreading risk across multiple insurers, the original insurer can stabilize its financial performance and increase its capacity to underwrite more policies without the corresponding increase in risk. This mechanism also facilitates the sharing of potential losses due to catastrophic events, which can be detrimental to the insurer's solvency if not properly managed. Through reinsurance, insurers can find a balance between maintaining their underwriting risks and ensuring they have sufficient capital to cover potential claims.