Certified Professional in Health Care Risk Management (CPHRM) 2025 – 400 Free Practice Questions to Pass the Exam

Reinsurance plays a crucial role in the insurance industry primarily as a means of redistributing risk among insurers. By allowing primary insurance companies to transfer portions of their risk to other insurers (the reinsurers), the system enhances financial stability and capacity. This redistribution helps primary insurers manage their exposure to large claims and catastrophic losses, enabling them to underwrite more policies without risking insolvency.

When an insurance company issues policies, it assumes the risk of potential claims. However, no company wants to shoulder this burden alone. Reinsurance allows insurers to share this financial responsibility. For instance, if an insurer has taken on a significant amount of risk, it can engage a reinsurer to take over a portion of that risk, thus mitigating its potential losses. This practice not only protects the primary insurer's financial health but also contributes to a more stable insurance market overall.

The other choices do not accurately convey the core function of reinsurance. Direct coverage for clients is the role of primary insurers, not reinsurers. Reinsurance does not eliminate the need for original insurance; instead, it complements it. Finally, while reinsurance can potentially lead to lower premiums due to reduced risk for primary insurers, its primary purpose is the redistribution of risk rather than directly impacting consumer premiums.