What is the main purpose of reinsurance?

The primary purpose of reinsurance is to help insurers manage risk by sharing it with other insurance companies. This process allows insurers to protect themselves from large losses that could arise from catastrophic events or significant claims. By transferring a portion of their risk to reinsurers, insurers can stabilize their operations, maintain their financial health, and ensure they can meet their policyholder's claims in times of high demand.

Reinsurers take on the risk of specific policies or a part of an insurer’s portfolio, allowing primary insurers to underwrite more policies than they would be comfortable with on their own. This risk-sharing mechanism is essential in the insurance industry, especially in high-risk environments, as it enhances capacity and diversification.

While the other options reference important aspects of insurance, they do not capture the essence of reinsurance. Providing additional coverage is a function of primary insurers, not reinsurance. Similarly, increasing profits through investments pertains more to the financial strategies of the insurers themselves rather than the reinsurance framework. Lastly, simplifying the claims process focuses on the relationship between policyholders and insurers, rather than the risk-sharing arrangement between insurers and reinsurers.