Which of the following best describes the relationship between reinsurance and risk management?

Reinsurance plays a critical role in the risk management strategies of insurance companies by enabling them to reduce their exposure to large potential losses. Essentially, reinsurance involves an insurer transferring a portion of its risk to another insurance company, known as the reinsurer. This practice allows the primary insurer to maintain solvency and stability even in the face of significant claims, as the reinsurer takes on a share of the risk and associated financial impact.

By using reinsurance, insurers can protect themselves from catastrophic losses that might otherwise threaten their financial viability. This enables them to underwrite more policies and expand their coverage options while managing their risk exposure effectively. The transfer of risk can also enhance the insurer's capacity to provide coverage for higher-value policies or in more volatile sectors, thus improving their overall risk management framework.

In contrast, while reinsurance may assist in other aspects of an insurer's operations, it does not eliminate all risks, as the responsibility for certain risks still resides with the primary insurer. Furthermore, reinsurance does influence an insurer's risk profile, as the structured agreements determine how and when risk is shared and mitigated. Lastly, while clients may benefit from efficient risk management due to the stability that reinsurance brings to their insurers, the direct benefit primarily lies