What typically triggers "reinsurance" for primary insurers?

The primary reason reinsurance is often triggered for insurers is to safeguard against large losses. Insurance companies assume risks by underwriting policies, but they may face significant financial strain if a catastrophic event occurs, like natural disasters or large-scale claims. To mitigate this risk, insurers purchase reinsurance, which provides additional coverage that protects them against losses that exceed their capacity to pay.

This mechanism allows primary insurers to stabilize their finances, ensuring they can meet their obligations to policyholders even in the face of substantial claims. It also enables insurers to underwrite more policies without being overexposed to risk, as they have a safety net in the form of reinsurance. Thus, reinsurance serves as a crucial tool for maintaining a healthy insurance market and ensuring insurer solvency during challenging times.