What is the main reason for insurance companies to use reinsurers?

Reinsurers play a crucial role in the insurance industry by allowing primary insurance companies to spread risks more widely. This process effectively increases the capacity of insurers to underwrite more policies and cover larger claims than they would be able to handle on their own.

When an insurance company takes on a new policy, it absorbs the associated risks; however, by transferring some of that risk to a reinsurer, the primary insurer can protect its financial stability and manage potential large losses more effectively. This risk-sharing arrangement allows the primary insurer to operate with greater confidence and stability, knowing some of the financial responsibility is handed off to the reinsurer.

While the other options may seem relevant, they do not accurately capture the primary purpose of reinsurance. Insurance companies cannot prevent losses from occurring or directly protect policyholders through reinsurance; rather, they use reinsurance as a strategic tool for risk management. Improving business retention is a byproduct of a well-structured reinsurance agreement but not the main objective. Therefore, the fundamental reason for utilizing reinsurers is to spread risks more broadly, ensuring a more manageable and sustainable operational model for insurance companies.