When an insurance company transfers part of its risk to another insurer, the company that transfers the risk is called the:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
In reinsurance, the insurer that transfers (cedes) part of its risk to another insurer is the ceding company, and the insurer that accepts the risk is the reinsurer. Reinsurance allows the primary insurer to reduce its exposure on large policies or catastrophic losses so that no single loss threatens its solvency. The ceding company retains its relationship with the policyholder — the policyholder deals only with the primary insurer — while the reinsurer stands behind the ceding company for the share of risk assumed. The ceding company pays a portion of its premium to the reinsurer in exchange for that protection, and the arrangement is a normal part of how insurers manage their overall risk portfolios.
Why the other options are wrong
- B) The reinsurer is the company that accepts the transferred risk in exchange for a share of premium; it is not the company transferring the risk. The ceding company pays the reinsurer a share of the premium and retains the relationship with the original policyholder.
- C) Surplus refers to an insurer's capital and assets in excess of required amounts, not to a party in a reinsurance transaction. Surplus is a measure of financial strength, while reinsurance is a contract allocating risk between two insurers.
- D) A fraternal company is a member-owned benefit society organized around a common bond, unrelated to the identity of the transferring insurer in a reinsurance deal. Fraternal membership is about the common bond among insureds, not about the party that transfers risk in a reinsurance arrangement.
Memory hook
The ceding company hands off risk; the reinsurer is the insurer's own insurer.