What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to spread risk and reduce the potential impact of large claims. Reinsurance acts as a financial safety net for insurance companies, allowing them to transfer a portion of their risk to another insurer. This transfer helps to protect the insurer’s financial stability and solvency by minimizing the impact of catastrophic losses or significant claims that could arise from unforeseen events.

By spreading the risk across multiple entities, reinsurance allows original insurers to take on more policies without exposing themselves excessively to potential financial strain. This mechanism helps to ensure that even in the face of large claims, the insurer can fulfill its obligations to policyholders, providing stability in the insurance market.

While the other options mention important aspects related to the insurance industry, they do not encapsulate the primary function of reinsurance in the context of risk management. Providing claims assistance, diversifying investments, or lowering premiums can be ancillary benefits but are not the fundamental reason for the existence of reinsurance.