What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to protect an insurer from large losses. Reinsurance involves one insurance company transferring a portion of its risk to another insurance company. This arrangement helps the original insurer manage its exposure to significant claims that could threaten its financial stability. By spreading the risk in this manner, insurers can maintain more stable operations and ensure they have the necessary resources to pay out claims, especially in the event of catastrophic events or higher-than-expected claims.

While increasing the number of agents, diversifying product offerings, and complying with state regulations are all important aspects of an insurance company's operations, they do not directly relate to the risk management function that reinsurance provides. The use of reinsurance is primarily a strategic tool for financial security and stability within the insurance industry.