New Jersey Life Producer Law Practice Test

What is it called when an insurer procures insurance for itself from another insurer?

1. Reinsurance

2. Delegated authority

3. Underwriting

4. Co-insurance

The correct answer is: Reinsurance

The process where an insurer obtains insurance for itself from another insurer is referred to as reinsurance. This practice is used by primary insurance companies to manage their risk exposure. By transferring some of their risk to another insurer, also known as the reinsurer, the primary insurer can stabilize its financial outcomes, protect against catastrophic losses, and free up capital that can be used to underwrite more policies. Reinsurance can take various forms, including treaty reinsurance or facultative reinsurance, and it plays a crucial role in the overall stability of the insurance market. This mechanism allows for the distribution of risk among different companies, facilitating better financial management and encouraging insurers to take on larger or more complex risks knowing that a portion of those risks is shared. Other terms listed, such as delegated authority, underwriting, and co-insurance, refer to different aspects of the insurance process and do not involve the arrangement of insurance to cover the insurer's own risk. Understanding these distinctions helps clarify the specific roles and functions within the insurance industry.