What is the purpose of reinsurance?

The purpose of reinsurance is to transfer some or all insurance risks to another company. This practice allows insurance companies to manage their risk exposure more effectively by sharing the potential financial impact of large claims or catastrophic events. By ceding portions of their risk to reinsurers, insurers can stabilize their financial performance, maintain solvency, and ensure they have the capacity to cover claims made by policyholders.

Reinsurance plays a critical role in the insurance industry as it helps protect insurers from large losses that could arise from events that exceed their initial capacity. This transfer of risk enables insurers to offer more competitively-priced products and to underwrite policies with higher limits than they could independently support.

In contrast, the other options do not accurately reflect the primary function of reinsurance. While reinsurance can lead to premium cost efficiencies over time, directly reducing premium costs for the policyholder is not its primary purpose. Additionally, reinsurance does not eliminate all risks faced by the insurer; rather, it redistributes those risks. Lastly, reinsurance is designed to limit or manage an insurer's responsibility toward claims, not increase it.