New Jersey Life Producer Law Practice Test

What is the process called when an insurer obtains insurance for itself from another insurer?

1. Underwriting

2. Reinsurance

3. Co-insurance

4. Captive Insurance

The correct answer is: Reinsurance

The process in which an insurer obtains insurance for itself from another insurer is known as reinsurance. This mechanism allows insurance companies to manage their risk exposure by transferring portions of their risk portfolios to other insurers. Through reinsurance, the primary insurer can stabilize its loss experience, increase its capacity to underwrite additional policies, and provide protection against catastrophic losses. Reinsurance can take various forms, including treaty reinsurance and facultative reinsurance, and it plays a crucial role in the overall functioning of the insurance industry. By redistributing risk, insurers can enhance their financial stability and ensure that they can meet their obligations to policyholders, even in the face of large claims. Underwriting, while related to the evaluation and selection process that insurers engage in when determining the risk of insuring a particular individual or entity, does not involve transferring risk to another insurer. Co-insurance refers more to a situation where multiple insurers share the risk of a policy, rather than one insurer obtaining coverage from another. Captive insurance is a form of self-insurance where a company creates its own insurance company to cover its risks, rather than seeking conventional insurance from the market.