Minnesota Life Insurance License Practice Exam

What is the primary purpose of reinsurance?

1. To enhance commissions for agents

2. To protect insurers against large losses

3. To avoid underwriting altogether

4. To provide insurance to policyholders

The correct answer is: To protect insurers against large losses

The primary purpose of reinsurance is to protect insurers against large losses. Reinsurance allows insurance companies to spread their risk by transferring a portion of their insurance obligations to other insurance companies. This arrangement helps maintain the financial stability of the original insurer by reducing the potential impact of catastrophic claims or unexpected increases in claims frequency. By doing so, reinsurance enables insurers to take on larger risks than they could manage alone, thus enhancing their capacity to underwrite policies while also safeguarding their overall financial health. In the context of the other options, enhancing commissions for agents focuses on compensation structures rather than risk management. Avoiding underwriting altogether is not a goal of reinsurance; it actually supports underwriting by enabling insurers to accept more policies than they might otherwise be able to without risking insolvency. Providing insurance to policyholders is the ultimate goal of the insurance industry, but reinsurance specifically addresses the need for insurers to protect themselves financially from excessive losses.