Maryland Life and Health Insurance License Practice Exam

Which term refers to a financial arrangement where a life insurance company transfers some of its risks?

1. Assignment

2. Co-insurance

3. Reinsurance

4. Underwriting

The correct answer is: Reinsurance

Reinsurance is a financial arrangement utilized by life insurance companies to manage risk. This process involves one insurance company (the cedent) transferring a portion of its risk to another insurance company (the reinsurer). The primary purpose of reinsurance is to protect the cedent from significant losses that could arise from large claims, allowing it to maintain stable operations and financial viability. By engaging in reinsurance, an insurer can improve its capacity to underwrite new policies and stabilize its financial position in case of mass claims due to disasters or unexpected events. This concept is especially important in the insurance industry, where uncertainty and variability play crucial roles in financial outcomes. In contrast, assignment refers to the transfer of policy ownership from one person to another, and co-insurance typically pertains to arrangements where multiple insurers share coverage for a single risk, while underwriting involves the evaluation and pricing of risk for an insurance policy. Each of these terms speaks to different aspects of insurance operations and does not specifically describe the process of transferring risk between insurance companies as reinsurance does.