What is the primary function of reinsurance in the insurance industry?

The primary function of reinsurance in the insurance industry is to allow insurers to share and mitigate risk. Reinsurance serves as a mechanism through which primary insurance companies transfer a portion of their risk to other insurers, known as reinsurers. By doing so, primary insurers can protect themselves against large losses that might arise from individual claims or catastrophic events. This risk-sharing enables insurers to stabilize their financial performance and promotes overall market stability.

Furthermore, reinsurance can enhance an insurer's capacity to underwrite new policies, as it allows them to take on larger or more numerous risks than they could manage alone. However, the essential point remains that the central purpose of reinsurance is risk management rather than simply increasing capacity or selling policies directly to customers.

Consequently, while options that mention underwriting capacity or selling directly to consumers touch on related concepts, they do not encapsulate the core function of reinsurance, which fundamentally revolves around the sharing and mitigation of insurance risk. The notion that all risk can be eliminated is also misleading, as risk cannot be completely eradicated but can only be managed and mitigated through effective reinsurance strategies.