What is the main purpose of reinsurance?

The main purpose of reinsurance is to limit an insurer's exposure and spread risk. By transferring a portion of their risk to another insurance company, insurers can protect themselves from significant losses that may occur due to large claims, natural disasters, or other catastrophic events. This mechanism allows primary insurers to maintain more stable financial standing and lower the likelihood of insolvency when faced with large payouts.

Reinsurance serves as a risk management tool, helping insurers balance their portfolios and ensure they have sufficient resources to respond to policyholder claims. It enables them to take on more risk than they normally would by providing a safety net that mitigates potential losses. This is crucial not only for the insurer's stability but also for the overall health of the insurance market.

In contrast, options that mention increasing revenue, enhancing policy coverage, or simplifying the claims process do not accurately capture the primary function of reinsurance, which is centered around risk management rather than direct revenue generation or improving the client experience in terms of policy coverage or claims handling.