What is reinsurance primarily used for?

Reinsurance is primarily used to distribute risk among multiple insurers. This practice allows insurers to share the risks associated with policy underwriting, enabling them to handle larger policies or an increased volume of policies than they could on their own. By transferring a portion of their risk to another company, insurers can protect themselves against significant losses that might occur from large claims or catastrophic events.

This risk-sharing mechanism enhances the financial stability of the primary insurer and helps maintain a balance in the insurance market. It also allows insurers to operate more effectively by freeing up capital, which can then be invested in other areas of their business or used to underwrite additional policies.

While other options, such as increasing policy coverage limits or reducing premiums, may occur in conjunction with reinsurance practices, they are not the primary purpose of reinsurance. The core function lies in the effective distribution of risk to create a more stable insurance environment.