Over the long-term, the leveling effect for the reinsured is accomplished; however, the reinsurer frequently sustains significant losses in any one or several years, this leveling effect for the…

The correct answer is A. stabilization. Stabilization is correct because its defining characteristic is smoothing out a cedent's (reinsured's) loss experience over time - absorbing the peaks and valleys - even though this means the reinsurer itself may absorb large losses in any given year. The long-term leveling…

Question

Over the long-term, the leveling effect for the reinsured is accomplished; however, the reinsurer frequently sustains significant losses in any one or several years, this leveling effect for the reinsured is referred to as which function of reinsurance?

Options

Astabilization
Bhomogeneity
Cprotect capital
Dline of business

How the community answered

(14 responses)

A
79% (11)
C
14% (2)
D
7% (1)

Explanation

Stabilization is correct because its defining characteristic is smoothing out a cedent's (reinsured's) loss experience over time - absorbing the peaks and valleys - even though this means the reinsurer itself may absorb large losses in any given year. The long-term leveling effect for the reinsured is precisely what stabilization does.

Homogeneity (B) refers to grouping similar risks together so a portfolio behaves more predictably, not to the smoothing of a single reinsured's results over time. Protect capital (C) is about shielding the reinsured from catastrophic losses that could threaten solvency - a one-time shield, not a long-term leveling mechanism. Line of business (D) is simply a category of insurance coverage, not a reinsurance function at all.

Memory tip: Think of stabilization like a shock absorber - it doesn't prevent bumps, it smooths the ride over time for the person in the car (the reinsured), even if the absorber itself takes the full hit.

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