The primary function of reinsurance is to increase the ceding company's __________to accept larger exposures than it would ordinarily be able to accept.

Question

Options

• Aplanning
• Bcapacity
• Cprojects
• Dpredictability

• A
  8% (4)
• B
  72% (36)
• C
  4% (2)
• D
  16% (8)

Explanation

Capacity is the correct answer because reinsurance allows a ceding company (the insurer that transfers risk) to take on larger policies or more risks than its own financial resources would normally permit - the reinsurer absorbs a portion of the risk, effectively expanding how much the ceding company can underwrite.

• A. Planning is wrong because reinsurance is a risk-transfer mechanism, not a planning tool; it doesn't enhance a company's ability to strategize or forecast.
• C. Projects is wrong because it's not a standard insurance or financial term in this context - it's simply a distractor with no relevant meaning here.
• D. Predictability is wrong because while reinsurance can stabilize losses, its primary function is expanding underwriting capacity, not improving the accuracy of loss forecasting.

Memory tip: Think of reinsurance as a "loan" for risk-taking ability - just as a bank loan increases your capacity to buy a bigger house, reinsurance increases an insurer's capacity to cover bigger risks.

No community discussion yet for this question.