What role does reinsurance play in health insurance?

Reinsurance plays a critical role in the health insurance industry by transferring portions of risk from one insurance company to another. This transfer is essential for managing overall risk exposure and maintaining financial stability. By sharing risk, insurers can minimize potential losses, which is particularly valuable in the health insurance sector where claims can be unpredictable and substantial.

Through reinsurance, primary insurers can protect themselves against catastrophic claims that could exceed their capacity to pay. This practice not only helps them maintain solvency but also allows them to underwrite more policies since they have a form of backup for potentially high-risk individuals or groups.

The other choices do not accurately reflect the primary function of reinsurance. For example, while claims payments are made directly to policyholders by the insurance company, reinsurance companies do not interact with policyholders directly in this regard. Marketing of health plans and the development of new insurance products are also not the core functions of reinsurance, as these activities pertain more to primary insurers. Thus, the function of reinsurance as a risk transfer mechanism is critical to the stability and efficacy of health insurance operations.