Question

An insurer enters into a contract with a third party to insure itself against losses from insurance policies it issues. What is this agreement called?

- A) Reinsurance
- B) Coinsurance
- C) Excess insurance
- D) Self-insurance

Answer 1

The agreement described in the question is called reinsurance, which is when an insurer enters into a contract with a third party to transfer a portion of the risk. This helps the insurer protect itself against large losses by spreading risk.

Step-by-step explanation:

The agreement described in the question is called reinsurance. Reinsurance is when an insurer enters into a contract with a third party, known as a reinsurer, to transfer a portion of the risk in exchange for a premium. This helps the insurer protect itself against large losses by spreading risk.

For example, if an insurance company issues policies with a combined coverage amount of $10 million, they may enter into a reinsurance agreement where the reinsurer agrees to take on a portion of that risk, such as $5 million. In the event of a claim, the insurer would pay out up to their coverage limit, and the reinsurer would cover any losses beyond that limit up to the agreed-upon amount.

Other options mentioned in the question, such as coinsurance, excess insurance, and self-insurance, refer to different concepts. Coinsurance is when an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost. Excess insurance is a type of reinsurance where the reinsurer provides coverage only after the primary insurer's limits have been exhausted. And self-insurance is when an entity, such as a company, chooses to bear the financial risk of losses themselves rather than purchasing insurance.