What is the purpose of reinsurance?

Reinsurance serves the vital function of risk management within the insurance industry by enabling insurers to transfer portions of their risk to other insurance companies. This process helps primary insurers to reduce their exposure to large losses, which can occur from catastrophic events or unforeseen circumstances. By spreading the risk among multiple insurers, reinsurance enhances the financial stability and solvency of the original insurer, allowing them to maintain their operational capacity and fulfill claims.

This risk-sharing mechanism also enables insurers to underwrite more policies since they can manage their accumulated risk more effectively. As a result, they can offer broader coverage options or cover larger amounts than they would be able to sustain on their own. This security offered by reinsurance is crucial for maintaining confidence in the insurance market as a whole.

The other options do not accurately represent the primary role of reinsurance. Full coverage for policyholders depends on the primary insurer's ability to manage risk rather than being a direct purpose of reinsurance. While investment returns are an important aspect of an insurer's overall strategy, that is not the primary objective of reinsurance. Lastly, reinsurance does not aim to reduce the total number of policies sold; instead, it enables insurers to sell more policies by managing the associated risks effectively.