What happens to the risk transferred to a reinsurer?

The correct answer indicates that the risk that is transferred to a reinsurer is fully absorbed by the reinsurer. In the context of reinsurance, the primary insurer cedes a portion of its risk to the reinsurer, which can enhance the primary insurer's capacity to underwrite new policies and manage potential losses.

When a primary insurer transfers risk to a reinsurer, it enters into a contractual agreement whereby the reinsurer assumes specific liabilities associated with the insurance policies underwritten by the primary insurer. This allows the primary insurer to reduce its exposure to large claims or catastrophic events, as the reinsurer effectively takes on that portion of the risk. Thus, the reinsurer becomes responsible for fulfilling the obligations laid out in the reinsurance contract, which includes compensating the primary insurer for losses covered under that agreement.

The dynamics of reinsurance are crucial for stability in the insurance market, as they allow for greater risk-sharing and help manage the financial impact of claims on the primary insurer's balance sheet. Through this mechanism, insurers can maintain solvency and continue operations even when faced with large-scale losses.

In this context, while options might mention other aspects of risk management, they do not accurately capture the specific nature of reinsurance arrangements, where the reinsurer fully