What role does reinsurance play in the insurance industry?

Reinsurance serves a crucial role in the insurance industry by enabling insurers to transfer and share risk with other companies. This process helps insurance companies manage their overall risk exposure, especially when faced with potential large losses from catastrophic events or significant claims. By obtaining reinsurance, insurers can protect their balance sheets, stabilize their financial performance, and ensure that they can meet their obligations to policyholders even in times of high claim frequency or severity.

This sharing of risk allows primary insurers to underwrite policies more confidently and potentially take on more policies without overexposing themselves to potential losses. It also supports the financial health of the insurance industry as a whole, fostering stability by diversifying risk among multiple parties.

The other options do not accurately represent the function of reinsurance. While reinsurance can contribute to financial stability, it does not guarantee profits, limit coverage, or eliminate customer premiums, all of which are fundamental aspects of how insurance operates.