What is the purpose of reinsurance in commercial insurance?

The purpose of reinsurance in commercial insurance is to transfer portions of risk to other insurers to minimize large obligations. This is a critical strategy used by primary insurers to protect themselves from significant losses that could arise from catastrophic events or the accumulation of claims in a particular area or sector. By spreading the risk across multiple insurers or reinsurers, a primary insurer can manage its exposure more effectively, ensuring that it maintains enough capital to honor policyholder claims while optimizing its operational capacity.

In many instances, insurers may take on risks that exceed their capacity to absorb potential liabilities. Reinsurance helps mitigate this by allowing them to cede a part of these risks to other firms, which can then share the financial burden. This leads to more stability in the insurance market, as it helps prevent any single insurer from facing financial ruin due to an overwhelming volume of claims.

The other options do not accurately represent the primary function of reinsurance. Keeping all the risk within one insurance company contradicts the fundamental goal of reinsurance, which is to spread and minimize risk. While additional benefits for insured parties and increased competition in the market are positive outcomes associated with a healthy insurance environment, they are not direct purposes of reinsurance itself.