What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to smooth peaks and troughs in the trading results. Reinsurance allows insurers to share the risks associated with large or catastrophic losses. By doing so, it provides greater stability to an insurance company’s financial performance, allowing it to manage its own risk exposure effectively over time. When insurers face unpredictable and volatile claims costs, reinsurance helps in balancing these fluctuations, ensuring that they do not disproportionately affect the insurer's profitability or solvency.

The way reinsurance works means that when claims exceed anticipated levels in one period, the losses are mitigated by reinsurance agreements, allowing the insurer to maintain more consistent earnings. This is especially important in financial planning and maintaining investor and policyholder confidence.

While aspects like transferring costs, enabling quick claims settlement, or reducing costs for clients might be secondary benefits of reinsurance arrangements, they do not capture the primary objective. Thus, the focus on stabilizing financial results through risk-sharing is the fundamental role that reinsurance plays within the insurance industry.