What is the arrangement called where the primary insurer transfers potential losses to another insurer?

The arrangement where the primary insurer transfers potential losses to another insurer is known as reinsurance. This process allows the primary insurer to mitigate risk by sharing it with another insurer. In essence, reinsurance acts as a safety net, providing the primary insurer with financial protection against large claims or losses that could exceed their capacity to pay. This is especially crucial in situations where a primary insurer may face substantial liabilities or when it seeks to maintain its solvency.

Reinsurance can come in various forms, such as facultative reinsurance, where individual risks are negotiated, or treaty reinsurance, where a contract covers a broader group of risks. Utilizing reinsurance helps primary insurers expand their underwriting capacity, stabilize their financial results, and enhance their ability to take on more significant risks while maintaining overall safety and security in their operations.