What is the primary function of reinsurance?

The primary function of reinsurance is to allow insurance companies to share risk. Reinsurance is a mechanism where an insurance company transfers a portion of its risk to another insurance company, known as the reinsurer. This process helps the primary insurer mitigate its exposure to significant losses, allowing them to maintain their financial stability and solvency while still providing coverage to their policyholders.

By sharing risk, insurers can underwrite more policies and write larger policies than they would be able to do on their own. This is especially critical in industries where catastrophic events can lead to substantial losses, thereby ensuring that insurers can pay claims and provide ongoing coverage to their customers.

The other options provided do not capture the essence of reinsurance. While tax benefits may be a consequence of certain financial structures, they are not the primary function of reinsurance. Managing customer claims is part of an insurer's day-to-day operations, but it is not a direct function of reinsurance itself. Similarly, increasing premiums is not a goal of reinsurance; rather, reinsurance can help stabilize costs for insurance companies and potentially keep premiums more manageable for insureds.