Why would an insurer use reinsurance?

Insurers utilize reinsurance primarily to protect against large financial losses. When an insurance company issues policies, it assumes the risk associated with potential claims made by policyholders. In situations where a significant claim arises—such as major disasters or catastrophic events—this financial exposure can become overwhelming.

By transferring some of the risk to a reinsurer, the primary insurer effectively shares the potential burden of these large losses. This arrangement not only stabilizes the insurer’s finances but also allows it to maintain solvency and continue operations, even in the face of significant claims. Additionally, reinsurance enables insurers to underwrite more policies than they could safely handle alone, thereby expanding their market operations while maintaining a manageable level of risk.

While other options might seem relevant, they don't accurately capture the primary purpose of reinsurance. For example, reinsurance does not directly reduce premiums for customers; rather, it is a risk management tool for insurers. Enhancing the claims process or eliminating all risks is also not feasible with reinsurance, as these aspects involve operational and risk acceptance strategies beyond the scope of what reinsurance can accomplish.