Final answer:
Reinsurance is the acceptance by insurers of a portion of the risk underwritten by another insurer. It helps insurers mitigate their exposure to large losses by transferring a portion of the risk to another insurer.
Step-by-step explanation:
The acceptance by insurers of a portion of the risk underwritten by another insurer is commonly known as reinsurance. Reinsurance is a practice in which one insurer transfers a portion of its risk to another insurer in exchange for a premium. This helps the primary insurer mitigate its exposure to large losses and stabilize its financial position.
For example, let's say an insurer A has underwritten a policy with a maximum liability of $1 million. To reduce its risk, insurer A may enter into a reinsurance agreement with insurer B, where insurer B agrees to cover a portion of losses beyond a certain threshold, such as $500,000. In this case, insurer A accepts the primary risk up to $500,000, and any losses beyond that are borne by insurer B.
Reinsurance plays a crucial role in the insurance industry as it helps spread risk among multiple insurers and ensures the stability of the market.