What is "reinsurance" and its purpose?

• A. Insurance for individual policyholders against major losses
• B. Insurance purchased by an insurance company to mitigate risk across its portfolio
• C. A government mandate for all insurance companies
• D. Special coverage for catastrophic events only

Answer: (B)

Reinsurance is a crucial concept in the insurance industry that involves one insurance company purchasing insurance from another insurance company to manage risk. Specifically, it serves to mitigate the overall risk exposure of the primary insurer by allowing them to transfer a portion of their risk to the reinsurer. This is particularly important for insurers that handle large volumes of policies or those that cover high-value risks, as it helps stabilize their financial performance and capacity to pay claims.

By utilizing reinsurance, an insurance company can protect itself from unexpected large losses that could jeopardize its solvency. This redistributes risk among various entities in the industry and enhances the industry's financial stability. Reinsurance can also enable insurers to write more policies or cover larger risks than they could otherwise handle alone.

In contrast, individual insurance for policyholders does not address the broader industry risk management strategy represented by reinsurance. A government mandate does not align with the voluntary nature of how reinsurance operates within the private insurance market. Lastly, while reinsurance can cover catastrophic events, its scope extends far beyond that, applying to a wide range of risks and not limited to just special coverage for catastrophic occurrences. Thus, the role of reinsurance in mitigating risk across an insurance company's portfolio is its primary purpose, making the correct answer