What is the purpose of re-insurance?

The purpose of reinsurance is primarily to limit the amount of loss that an insurer may experience at any one time. This technique is essential for managing risk within the insurance industry. When an insurance company underwrites policies, it takes on the possibility of significant claims. By entering into reinsurance agreements, an insurer can transfer a portion of that risk to another insurance company, known as the reinsurer.

This approach allows the primary insurer to mitigate its exposure to large or unexpected claims, ensuring financial stability and continued operation even in the face of substantial payouts. It can also enhance an insurer's capacity to underwrite more policies, as it can cover larger risks knowing that a portion is reinsured. The reinsurer assumes this risk in exchange for a premium, which helps balance the financial liabilities between the companies involved.

Reinsurance does not serve to increase the actual value of the insurance policies offered to policyholders, nor does it directly provide coverage for them; rather, it supports the insurer's capacity and stability to fulfill its obligations to policyholders. Additionally, while reinsurance might indirectly affect claims payments through improved financial health of the insurer, its main goal is the management of risk rather than facilitation of customer claims.