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Difficulty: EasyReinsurance, Co-insurance, and Underwriting Concepts

An insurance firm accepts a policy for a factory but transfers a fraction of the risk to another insurer to shield itself from excessive loss. Which insurance concept describes this arrangement between the two insurance firms?

  1. ReinsuranceAnswer
  2. B
    Co-insurance
  3. C
    Underwriting
  4. D
    Indemnity

Answer

Reinsurance
Reinsurance is the practice whereby an original insurer (ceding company) transfers a portion of its accepted risk to another insurer (reinsurer) to guard against massive losses. The insured party is not a direct party to the reinsurance contract.

Step-by-Step Solution

1
Identify the entities involved in the transaction
The transaction takes place between two insurance companies.
Determining whether the arrangement is between insurer and policyholder or between two insurers clarifies the core concept.
2
Distinguish between risk-sharing mechanisms
Transferring already-accepted risk from one insurer to another is reinsurance.
Co-insurance involves direct joint coverage with the policyholder, whereas reinsurance involves an insurer ceding risk to another insurer.

Key Concept

Reinsurance vs Co-insurance Operational Distinction
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Topics

Reinsurance, Co-insurance, and Underwriting Concepts

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