Final answer:
Reinsurance is when one insurance company transfers some of its potential losses to another insurer. Coinsurance is when an insurance holder shares the cost of a loss with their insurer. Moral hazard refers to the change in behavior when someone is protected from risk, which can impact insurance systems.
Step-by-step explanation:
An arrangement whereby an insurer initially writes insurance and then transfers part or all of the potential losses to another insurer is known as reinsurance. This practice is a key component in the management of risk for insurance companies as it allows them to share the burden of large or potentially risky insurance policies.
Understanding coinsurance is also important in the context of insurance. Coinsurance is a situation where an insurance policyholder pays a percentage of a loss, and the insurance company pays the remaining cost. This is different from reinsurance, as coinsurance involves the policyholder and the insurer, while reinsurance involves transactions between insurance companies.
Another related concept is moral hazard, which refers to the notion that individuals may behave differently when they are insulated from the consequences of their actions, such as when they have insurance coverage. Insurance companies mitigate this risk through various strategies including coinsurance and premium pricing based on the risk levels of the insured.