Final answer:
The contractual agreement where one insurer transfers a portion of risk to another insurer is called reinsurance. It helps insurance companies manage risk and stabilize finances by sharing potential large losses with a reinsurer who receives a premium in exchange.
Step-by-step explanation:
The contractual arrangement where an insurer transfers a portion of its risk exposure to another insurer is known as reinsurance. Reinsurance is a method used by insurance companies to protect themselves from large financial losses by spreading the risk. An insurer (the ceding company) pays a premium to another insurance company (the reinsurer), which agrees to pay for losses above a certain amount.
Reinsurance is different from coinsurance, which occurs when the policyholder and the insurance company share the costs of a claim. It is also distinct from a deductible, which is the amount the policyholder must pay before the insurance coverage kicks in. Unlike subrogation, where one party takes over the legal rights of another to collect a debt or damages, and unlike an assignment, which is a transfer of rights or property, reinsurance is a risk-sharing agreement between insurance companies.