What is the main purpose of reinsurance?

The main purpose of reinsurance is to allow insurers to mitigate risk by sharing claims. Reinsurance involves one insurance company transferring a portion of its risk to another insurer. By doing so, the primary insurer can reduce its potential financial exposure from large claims or an accumulation of claims that could exceed its capacity. This process helps stabilize the insurer's financial position, enabling it to take on more policies and better manage the risks it underwrites.

Through reinsurance, companies can protect themselves from significant losses, which can be especially important in the event of catastrophic events. This risk-sharing mechanism helps ensure that insurers remain solvent and can continue to offer coverage to policyholders, ultimately benefiting the entire insurance industry.