Which statement best describes the purpose of reinsurance?

Which statement best describes the purpose of reinsurance?

• A. To increase a primary insurer's risk
• B. To spread risk among insurers and stabilize loss experience
• C. To avoid all regulation
• D. To ensure only individual policies are written

Answer: (B)

Spreading risk and stabilizing loss experience is the main purpose of reinsurance. By transferring part of the risk from the primary insurer to a reinsurer, the insurer lessens the impact of large claims or a string of losses, helps protect solvency, and increases capacity to write more or larger policies. This makes the insurer’s results more predictable and safer over time, and it’s especially valuable for protecting against catastrophes. The other statements don’t fit because reinsurance isn’t about increasing risk, it isn’t about avoiding regulation, and it isn’t limited to writing only individual policies—the goal is to share risk across insurers and portfolios.

Spreading risk and stabilizing loss experience is the main purpose of reinsurance. By transferring part of the risk from the primary insurer to a reinsurer, the insurer lessens the impact of large claims or a string of losses, helps protect solvency, and increases capacity to write more or larger policies. This makes the insurer’s results more predictable and safer over time, and it’s especially valuable for protecting against catastrophes. The other statements don’t fit because reinsurance isn’t about increasing risk, it isn’t about avoiding regulation, and it isn’t limited to writing only individual policies—the goal is to share risk across insurers and portfolios.