Texas General Lines — Property and CasualtyGeneral InsuranceHard
A large manufacturing company is exploring options to protect itself from potentially catastrophic losses, such as a major factory fire or a widespread product liability claim, beyond what its primary insurer can cover. They decide to enter into an arrangement where another insurer agrees to accept a portion of the risk for a premium. What is this arrangement called?
- ACo-insurance
- BDeductible
- CSelf-insurance
- DReinsurance
Show answer & explanationAnswer & explanation
Correct answer: D. 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 own exposure to large losses.
Why the other options are wrong
- A. Co-insurance is a provision in a policy requiring the insured to bear a portion of a loss if they don't maintain a certain amount of coverage.
- B. A deductible is the amount of loss the insured must pay before the insurer begins to pay.
- C. Self-insurance means the company retains the risk itself, setting aside funds to cover potential losses.
Reinsurance
Reinsurance is insurance purchased by an insurance company from another insurance company to spread the risk and reduce the ceding insurer's exposure to large or catastrophic losses.
- Allows primary insurers to write larger policies.
- Helps stabilize underwriting results for the primary insurer.
- Can be treaty (automatic) or facultative (per-risk).
Memory trick: Insurers Re-share Risks to spread the burden and stay stable.