What is reinsurance and what objective does it serve?

Reinsurance is a risk-sharing mechanism where an insurer (primary insurer) transfers a portion or all of its risk to another insurer (reinsurer) in exchange for a premium. It acts as a safety net for primary insurers against catastrophic losses, ensuring financial stability.

Objectives of Reinsurance:

1. Risk Reduction – Limits exposure to large claims.
2. Financial Stability – Prevents insolvency by capping liabilities.
3. Capacity Expansion – Allows insurers to underwrite larger policies.
4. Expertise Sharing – Leverages reinsurers' specialized knowledge.
5. Profit Optimization – Balances risk and return through risk transfer.

Reinsurance is widely used in life, property, and casualty insurance to enhance solvency and operational efficiency.