Florida 2-20 General Lines Agent (Property, Casualty, Commercial Lines and Florida Law)General InsuranceEasy
A financially sound insurance company decides to transfer a portion of its catastrophic risk exposure to another insurer to limit the potential for a single, large claim to jeopardize its solvency. This practice is known as:
- AReinsurance
- BCo-insurance
- CRetention
- DSelf-insurance
Show answer & explanationAnswer & explanation
Correct answer: A. Reinsurance
Reinsurance is the practice where an insurance company (the ceding insurer) transfers a portion of its risks to another insurance company (the reinsurer) to reduce its exposure to large losses.
Why the other options are wrong
- B. Co-insurance involves the insured sharing a percentage of the loss, not one insurer transferring risk to another.
- C. Retention is when an insurer keeps the risk itself, the opposite of transferring it.
- D. Self-insurance means an entity assumes its own risk, not transferring it to another insurer.
Reinsurance
Insurance purchased by insurance companies to protect themselves from large losses or catastrophic events.
- Allows insurers to underwrite larger risks.
- Spreads risk across multiple companies.
- Can be facultative (individual risks) or treaty (groups of risks).
Memory trick: Reaching out for Reinsurance helps keep the company sound.