The primary purpose of reinsurance is to:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
Reinsurance is insurance purchased by an insurer. The ceding insurer, also called the primary insurer, transfers a portion of its risk to a reinsurer in exchange for a share of the premium. The primary purpose of reinsurance is to allow the ceding insurer to accept larger risks than it could retain alone and to stabilize its loss experience against unusually heavy claims. Reinsurance operates only between insurers; it does not change the original insured's policy or its relationship with the primary insurer. Because the reinsurer shares in losses, the ceding insurer's financial results are smoothed, which supports the insurer's solvency and its ability to continue writing coverage.
Why the other options are wrong
- B) Reinsurance transfers risk between insurers, not from the individual insured to a third party. The insured's policy and relationship with the primary insurer remain untouched; the reinsurance contract sits behind the primary policy and operates only between the two insurers.
- C) Reinsurance is not designed to raise the premiums charged to policyholders. Its purpose is to manage the insurer's own exposure and stabilize its results, and it does not operate as a mechanism for increasing what insureds pay.
- D) The original policy issued to the insured remains in force and is not replaced by reinsurance. Reinsurance stands behind the primary policy, supporting the ceding insurer, and the insured's coverage continues exactly as written.
Memory hook
Reinsurance is the insurer's own insurance, purchased to share the risk.