Certified Financial Consultant (CFC) Practice Exam

What is one of the main benefits of reinsurance for insurers?

1. Increased premiums

2. Reduction in policies offered

3. Enhanced risk management

4. Greater regulatory scrutiny

The correct answer is: Enhanced risk management

Reinsurance serves as a key tool for insurers to enhance their risk management capabilities. By transferring a portion of their risk to another company, insurers can stabilize their financial performance and protect themselves against large losses. This practice allows insurers to underwrite more policies or larger policies than they could otherwise handle on their own, as they have the support of their reinsurers to absorb some of the potential losses. Enhanced risk management through reinsurance also helps insurers maintain more predictable cash flows. This is particularly important during adverse conditions when claims might spike. By spreading risk, insurers can mitigate their overall exposure and reduce the likelihood of solvency issues. The other responses, while related to insurance, do not capture the primary role of reinsurance as effectively as enhanced risk management does. Increased premiums and reduction in policies offered do not directly relate to the protective financial strategy that reinsurance provides. Greater regulatory scrutiny pertains to the operation and oversight of insurance markets rather than a direct benefit of reinsurance itself. Therefore, the focus on enhanced risk management accurately reflects a core advantage of reinsurance for insurers.