What is the primary purpose of reinsurance?

The primary purpose of reinsurance is to increase the ceding insurer's capacity to write business. Reinsurance allows insurance companies to transfer a portion of their risk to another insurer, known as the reinsurer. By doing this, the ceding insurer can take on more policies than it could otherwise handle on its own, effectively increasing its underwriting capacity. This mechanism is essential in the insurance industry, as it helps primary insurers manage their risk exposure and maintain solvency while expanding their business operations.

In this context, the option regarding reducing premiums for policyholders is more about the end effect of competitive practice rather than the direct aim of reinsurance. The goal of lower risk for the reinsurer is secondary and a byproduct of the reinsurance arrangement, not the main purpose. Likewise, increasing the number of claims processed does not relate to the fundamental function of reinsurance, as it deals primarily with risk management rather than operational efficiency in claim handling.