Life & Health Insurance Practice Exam 2026 - Free Practice Questions and Study Guide

The term that describes the process where one insurer takes on a portion of the risk from another insurer is known as reinsurance. This practice is fundamental in the insurance industry as it helps insurers manage their risk exposure by spreading it across multiple insurers.

Reinsurance allows a primary insurer to limit its losses by transferring a portion of its risk to another company, which can provide additional financial stability. This can be particularly important in the event of large claims or catastrophic events, as it ensures that no single insurer bears the full brunt of high payouts. By utilizing reinsurance, insurers can maintain their solvency and continue to offer coverage to policyholders.

In contrast, risk retention involves an insurer keeping the risk and the associated liabilities, whereas risk sharing typically refers to a scenario where multiple parties collaborate to spread the risk without formally transferring it as in reinsurance. Risk exposure pertains to the potential for financial loss due to various factors, but it does not involve the transfer of risk as seen in reinsurance arrangements.