Why is it important for insurers to have reinsurance?

Reinsurance is crucial for insurers primarily because it helps ensure they have the ability to cover significant losses. By transferring some of the risks associated with their policies to a reinsurance company, insurers can manage their exposure to large claims more effectively. This practice allows them to maintain financial stability and solvency, especially in the event of catastrophic events, such as natural disasters or large-scale accidents that could lead to far higher claims than anticipated.

Having reinsurance in place enables primary insurers to take on more risks and write larger policies than they otherwise could, as the financial burden is shared with the reinsurer. This mechanism enhances the overall resilience of the insurance company, ensuring that it can meet its obligations to policyholders, even in challenging circumstances.