What does reinsurance involve?

Reinsurance revolves fundamentally around the concept of risk management within the insurance industry. By sharing risk with another company, an insurer can reduce its overall exposure to large claims or catastrophic events. This practice allows insurers to manage their balance sheets more effectively and ensure they have adequate capital reserves to pay out claims.

When an insurer underwrites a policy, it takes on the risk associated with that policy. However, to protect themselves from potentially large losses, insurers often purchase reinsurance. This means they transfer a portion of the risk to a reinsurance company in exchange for a premium. This arrangement helps to spread the risk across multiple entities, thereby stabilizing the insurance market and ensuring that policyholders receive their claims even in adverse situations.

The other options do not accurately capture the essence of reinsurance. Decreasing premium prices may occur due to competition or other factors but is not a function of reinsurance itself. Increasing commissions for agents and eliminating underwriting requirements do not align with the primary goals or mechanisms of reinsurance, which focuses on risk sharing and capital preservation.