Which statement correctly describes a reinsurance contract?

• A. A contract between a policyholder and insurer
• B. A contract between two insurers in which one transfers part of its risk to the other
• C. A contract that guarantees profits to the original insurer
• D. A contract used only for life insurance

Answer: (B)

Reinsurance is an agreement between two insurance companies in which one cedes part of its risk on the policies it has issued to the other insurer, in exchange for a share of the premium. This setup lets the primary insurer reduce its exposure, stabilize losses, and protect solvency, especially after large or unexpected claims. It isn’t a contract with a policyholder, so it doesn’t govern benefits to individuals; it also doesn’t guarantee profits to the original insurer—the reinsurer simply assumes risk for a portion of losses. And it isn’t limited to life insurance—the concept applies across many lines of insurance.