Washington Life Producer Practice Exam

ABC Insurance Company transfers part of their risk to XYZ Insurance Company. This situation is called:

1. Subrogation

2. Reinsurance

3. Risk pooling

4. Excess insurance

The correct answer is: Reinsurance

The correct choice is reinsurance, which refers to the practice where an insurance company, such as ABC Insurance Company, transfers a portion of its risk to another insurance company, such as XYZ Insurance Company. This mechanism allows the originating insurer to reduce its exposure to potential losses, stabilize its financial performance, and maintain solvency by sharing risk. Reinsurance is an essential aspect of the insurance industry as it helps insurers to manage their risk more effectively and allows them to underwrite more policies than they could handle alone. In this scenario, ABC Insurance Company is engaging in reinsurance to ensure that it can cover claims while minimizing financial vulnerability. The other options present different concepts within the realm of insurance but do not accurately describe the situation. Subrogation involves the transfer of rights to pursue a claim from one party to another, typically occurring after an insurer pays a claim and seeks reimbursement from a third party. Risk pooling refers to the practice of group members sharing their risks collectively, allowing for the distribution of losses over a larger base. Excess insurance is a type of coverage that kicks in after a primary policy's limits have been exhausted, providing additional security but does not involve risk transfer between insurers like reinsurance does.