What is the term for when a risk underwritten by an insurer is ceded entirely or mostly to another insurer?

What is the term for when a risk underwritten by an insurer is ceded entirely or mostly to another insurer?

• A. Delegation
• B. Fronting
• C. Risk sharing
• D. Reinsuring

Answer: (D)

Reinsuring refers to the practice where an insurer transfers some or all of its risk to another insurance company. This is typically done to manage risk exposure, ensure financial stability, and protect against significant losses. When an insurer underwrites a policy, it assumes the risk associated with that policy. However, to maintain a balanced portfolio or mitigate losses from particularly large policies, the insurer may cede part of that risk to another insurer, known as a reinsurer. By doing so, the original insurer can free up capital and enhance its capacity to underwrite additional policies. This practice is fundamental to the insurance industry as it helps spread risk across multiple insurers, thereby reducing the financial impact on any single insurer. Other options refer to different concepts: delegation involves transferring responsibilities or duties, fronting typically describes a situation where one insurer writes a policy on behalf of another, and risk sharing implies a mutual agreement to share the costs and liabilities of a risk rather than transferring it. Reinsuring specifically captures the transfer of risk to another insurer, making it the correct term in this context.

Reinsuring refers to the practice where an insurer transfers some or all of its risk to another insurance company. This is typically done to manage risk exposure, ensure financial stability, and protect against significant losses. When an insurer underwrites a policy, it assumes the risk associated with that policy. However, to maintain a balanced portfolio or mitigate losses from particularly large policies, the insurer may cede part of that risk to another insurer, known as a reinsurer.

By doing so, the original insurer can free up capital and enhance its capacity to underwrite additional policies. This practice is fundamental to the insurance industry as it helps spread risk across multiple insurers, thereby reducing the financial impact on any single insurer.

Other options refer to different concepts: delegation involves transferring responsibilities or duties, fronting typically describes a situation where one insurer writes a policy on behalf of another, and risk sharing implies a mutual agreement to share the costs and liabilities of a risk rather than transferring it. Reinsuring specifically captures the transfer of risk to another insurer, making it the correct term in this context.