What is the primary function of 'reinsurance' in the insurance market?

The primary function of reinsurance is to manage risk by sharing it with other insurers. This process allows insurance companies to protect themselves from significant losses by transferring portions of their risk to other insurers, known as reinsurers. In doing so, the original insurer can stabilize their financial position and improve their capacity to underwrite new policies. Reinsurance spreads the risk of large claims arising from catastrophic events, ensuring that no single insurer bears the full burden of these potential losses.

In terms of context, while policyholder service management and fraud minimization are important aspects of the insurance industry, they do not directly relate to the core purpose of reinsurance. Distributing workload among policy underwriters pertains more to operational efficiency within the primary insurer's team, rather than the risk-sharing mechanism that reinsurance provides. Thus, the focus on risk management underscores the essential role that reinsurance plays in the overall insurance market structure.