Which purpose of reinsurance helps to stabilize claims experience?

The purpose of reinsurance that helps to stabilize claims experience is indeed related to smoothing peaks and troughs in claims. Reinsurance allows primary insurers to transfer portions of their risk to other insurers, which helps manage volatility in claims. By doing so, the primary insurer can avoid significant financial strain during catastrophic events or periods of high-frequency claims. This stabilization occurs because reinsurance can provide coverage for unexpectedly high claims, enabling the primary insurer to maintain consistent cash flow and financial stability throughout various market cycles.

This mechanism is vital, especially in industries subject to sudden changes in claims frequency or severity. It allows insurers to absorb claims over time without risking insolvency or large fluctuations in profitability. The smoothing effect comes from the reinsurance structure that distributes the impact of large claims over multiple years or across different underwriting years.

The other options, while they may offer different advantages, do not serve the same specific purpose of stabilizing claims experience. Improving customer service relates more to the insurers' interactions with clients rather than financial risk management. Protecting profit margins is certainly an important aspect, but it is a secondary effect of effective risk management rather than the primary reason for reinsurance. Reducing the complexity of risks pertains to simplifying risk portfolios, which may not necessarily lead to stabilization of