What is the main purpose of reinsurance?

The main purpose of reinsurance is to stabilize an insurer's financial performance. Reinsurance acts as a financial safety net for insurers by transferring some of the insurance risk to another company, known as the reinsurer. This allows primary insurers to manage their risk exposure more effectively, ensuring that they have the capital available to pay claims even during periods of high loss.

By engaging in reinsurance, insurance companies can reduce the volatility of their results, protecting themselves against catastrophic losses that could overwhelm their reserves. This stability is crucial for their long-term viability, as it helps maintain solvency and strengthens their overall financial health. It also allows insurers to underwrite more policies, as they can spread the risk among different reinsurers.

While enhancing customer service, reducing coverage, or increasing the number of policies may have their own significance in insurance operations, these factors do not directly reflect the core function of reinsurance, which is primarily concerned with risk management and financial stability.