What is the role of reinsurance in the insurance industry?

The role of reinsurance in the insurance industry is fundamentally about risk management. By allowing one insurer to transfer a portion of its risk to another insurer, reinsurance helps to stabilize the primary insurer's financial position. This transfer of risk means that if a significant loss occurs, the reinsurance company will cover some of those losses, providing the original insurer with the necessary support to mitigate financial strain.

Reinsurance also enables insurers to underwrite more policies and expand their offerings by sharing the risks associated with large or numerous claims. This mechanism helps maintain the insurer's solvency and promotes greater market stability, as it allows for risk diversification.

Other options do not accurately represent the broader purpose of reinsurance. Direct coverage for high-risk clients is typically handled by primary insurance companies rather than reinsurance arrangements. While some reinsurers may provide support in claims processing, that is not their primary role; their main function lies in risk transfer. Lastly, reinsurance does not eliminate all risks for insurers; rather, it distributes risk among multiple parties, hence reducing the potential impact of large losses but not eradicating risk entirely.