What is the main purpose of reinsurance?

The main purpose of reinsurance is to spread risk among insurers. Reinsurance allows insurance companies to transfer a portion of their risk to other insurers, which helps to stabilize their financial performance, especially in the face of large losses from catastrophic events or high claim frequencies. By diversifying the risk, primary insurers can protect their balance sheets and maintain their solvency, even when faced with significant claims. This process is crucial in the insurance industry, as it ensures that no single insurer is overwhelmed by losses, thus fostering overall market stability.

The other options do not accurately reflect the purpose of reinsurance. Increasing premiums for policyholders is more a result of the insurance market dynamics rather than a goal of reinsurance. Eliminating the need for insurance is contrary to the very foundation of risk management through insurance; reinsurance exists to support insurance companies, not to negate the need for insurance itself. Lastly, while reinsurance may indirectly promote competition by allowing insurers to take on larger risks, it is not its primary purpose. The essential function of reinsurance is risk management and distribution among insurers.