Which of the following best describes reinsurance?

• A. Reinsurance replaces primary insurance.
• B. Reinsurance is the sale of policies by brokers.
• C. Reinsurance is insurance for insurers; it reduces exposure, stabilizes losses, and increases capacity to write more business.
• D. Reinsurance is a type of investment product for individuals.

Answer: (C)

Reinsurance is a risk-management tool used by insurers to share part of their risk with another company. By passing a portion of their potential losses to a reinsurer, the primary insurer reduces its maximum exposure on any given book, smooths earnings by lowering volatility from claims, and frees up capacity to write more business because its capital is no longer tied to every single risk. This partnership helps insurers stay solvent and able to underwrite larger or more policies, especially in the presence of big or catastrophic losses.

The other statements don’t fit. Reinsurance doesn’t replace the policies written for policyholders; the primary insurer still markets and issues those policies. It isn’t the sale of policies by brokers to consumers, which describes the normal insurance market, not reinsurance. And it isn’t an investment product for individuals; it’s a risk-transfer arrangement between insurers, though investors may participate in related instruments, not as policyholders.