When an insurer transfers part of its risk to another insurer through reinsurance, the insurer transferring the risk is known as the:
Select an option to reveal the answer and the full 3-part explanation — free, no signup.
Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The ceding company is the primary insurer that transfers, or cedes, a portion of its risk to a reinsurer. Reinsurance allows a direct insurer to accept larger exposures or a broader book than its capital would otherwise support, while the reinsurer assumes a share of the underlying risk for a portion of the premium. The ceding company remains responsible to its policyholders; the reinsurance arrangement exists solely between the two insurers. Recognizing the roles of the ceding company and the reinsurer is essential to understanding how insurers manage catastrophic and accumulation risk.
Why the other options are wrong
- B) The reinsurer is the company that assumes the ceded risk; the ceding company is the one transferring the risk.
- C) A reciprocal is an unincorporated insurance exchange in which members insure one another's risks, which is a different structure entirely.
- D) A fraternal is a nonprofit benefit society issuing coverage to members, not the company transferring risk under reinsurance.
Memory hook
Ceding = passing the baton of risk to the reinsurer. The primary insurer stays on the hook to the public.