California Life-Only & Accident and Health AgentGeneral InsuranceEasy
A newly formed insurance company wants to ensure it has enough financial capacity to cover potential large losses without jeopardizing its solvency. They decide to transfer a portion of their risk to another insurer. What is this practice called?
- AReinsurance
- BSelf-insurance
- CReciprocal exchange
- DCo-insurance
Show answer & explanationAnswer & explanation
Correct answer: A. Reinsurance
Reinsurance is the practice where one insurance company (the ceding company) transfers a portion of its risks to another insurance company (the reinsurer) to reduce its own potential for large losses. This helps maintain financial stability.
Why the other options are wrong
- B. Self-insurance involves an entity retaining its own risk rather than transferring it to an insurer.
- C. A reciprocal exchange is an insurer owned by its policyholders, where members insure each other, which is a type of insurer, not a risk transfer mechanism between insurers.
- D. Co-insurance involves the policyholder sharing a percentage of the loss with the insurer, not one insurer sharing risk with another.
Reinsurance
Reinsurance is the practice of an insurance company transferring a portion of its insured risks to another insurance company.
- Helps insurers manage risk exposure and capacity.
- Allows insurers to take on more policies than they might otherwise.
- Protects insurers from catastrophic losses.
Memory trick: Risk shared is risk halved, a powerful shield for insurers.