New Jersey Life Producer Law Practice Test

When an insurance company collaborates with another to share the risk, what is this practice known as?

1. Co-insurance

2. Reinsurance

3. Underwriting

4. Agency agreement

The correct answer is: Reinsurance

When insurance companies collaborate with one another to share the risk, this practice is known as reinsurance. Reinsurance involves one insurance company (the reinsurer) taking on all or part of the risk that another insurer (the ceding company) has underwritten. This is done to help manage risk exposure and stabilize the overall financial performance of the insurance companies involved. Reinsurance allows the ceding company to reduce the risk of large payouts, as it can transfer a portion of that risk to the reinsurer. It's a critical practice in the insurance industry that helps companies maintain solvency and support their capacity to underwrite more policies, knowing they have a safety net in place. The other options represent different concepts within the insurance industry. Co-insurance generally refers to a risk-sharing arrangement where multiple parties share in the insurance coverage. Underwriting is the process by which insurers evaluate risk and determine the terms of coverage. An agency agreement involves a relationship between an insurance company and an agent, allowing the agent to sell policies on behalf of the company, but it does not pertain to the sharing of risk between insurers.