What is the purpose of reinsurance in health insurance?

Reinsurance serves as a vital mechanism in the health insurance industry, primarily aimed at mitigating risk for insurers. When insurance companies underwrite policies, they assume a degree of risk related to potential claims. By transferring some of this risk to another insurer through reinsurance, the primary insurer can enhance its stability and financial security. This arrangement allows insurance companies to manage their exposure to large losses, ensuring that they remain solvent and capable of meeting their obligations to policyholders.

Reinsurance also enables insurers to underwrite more policies than they otherwise could, as they can share the risk associated with those policies with the reinsurer. This helps maintain a balance in the insurer's overall risk portfolio, allowing for more effective risk management. The impact of reinsurance ultimately translates to healthier insurance markets, which benefits both insurers and policyholders by providing greater confidence and stability in the system.