What is the main function of reinsurance?

Reinsurance serves as a crucial tool for insurance companies, functioning primarily to protect them from significant financial losses. It involves one insurance company transferring a portion of its risk to another insurance company. By doing this, the original insurer can manage its risk exposure more effectively, ensuring that it has the necessary capital to pay out claims in the event of large disasters or unexpected surges in claims.

This strategy allows insurers to maintain financial stability and solvency, particularly when they face catastrophic events that could lead to large-scale claims. In essence, reinsurance acts as a safety net, enabling insurance companies to operate without the constant fear of being overwhelmed by high payouts, which, in turn, promotes a healthier insurance market overall.

The other options address different aspects of the insurance industry but do not capture the primary purpose of reinsurance. Providing insurance to individual consumers pertains to direct insurance policies, while managing distribution and handling claims processing focuses on operational tasks that do not encapsulate the risk management purpose served by reinsurance.