The o-ring is important to install as it seals the grease inside of the swingarm cross tube and protects the internals from the introduction of contaminants.
The rubber o-ring fits in a groove around the steel bobbin, forming a seal between the bobbin and the swing arm bushing.
The bobbin, o-ring, and special flanged washer work together to retain the grease in the swing arm cross tube and prevent contamination and premature wear of the swing arm bushings.
The o-ring is fitted into the groove on the bobbin. The bobbin is then inserted into the bushing, and the flanged end plate washer finishes the assembly on the end of the swing arm cross tube.