What is the purpose of reinsurance?

Reinsurance serves a fundamental purpose in the insurance industry by allowing insurers to mitigate risk through the transfer of liabilities to other companies. This process enables insurers to protect themselves from significant losses that could arise from large claims or a high volume of claims, which might otherwise threaten their financial stability. By purchasing reinsurance, primary insurers can share the burden of large risks, ensuring they have sufficient capital to handle their obligations.

This practice provides a safety net, allowing insurers to underwrite more policies than they could safely hold on their own. It effectively reduces the potential impact of catastrophic events, giving companies the resilience to manage their risk portfolio more effectively. As a result, reinsurance is a strategic tool that helps maintain the overall health of the insurance market, rather than simply aiming to increase profits or reduce paperwork.