What is reinsurance primarily used for in the insurance industry?

Reinsurance is primarily utilized in the insurance industry to mitigate the risk of large claims for insurers. This practice involves one insurance company transferring a portion of its risk to another insurer. By doing this, the primary insurer can protect itself from significant financial losses that could occur due to unexpected events or a concentration of claims. This is particularly important in situations where a single event causes multiple losses, such as natural disasters, or when the overall risk exceeds what the insurer is prepared to handle on its own.

Through reinsurance, insurers can stabilize their financial performance, manage capital more effectively, and ensure that they have sufficient resources to cover potential claims, which ultimately contributes to the overall stability of the insurance market.