Canadian Accredited Insurance Broker (CAIB) One Practice Exam

What type of insurance is purchased by an insurance company?

1. Reinsurance

2. Risk avoidance insurance

3. Full protection

4. Umbrella insurance

The correct answer is: Reinsurance

Reinsurance is a specialized form of insurance that insurance companies purchase to protect themselves from the risk of large losses. Essentially, it is insurance for insurers, allowing them to manage their risk exposure by transferring portions of the risk they underwrite to another carrier. This helps maintain financial stability, especially in the event of catastrophic losses, by spreading the risk across multiple entities. The other options do not accurately describe the type of insurance that an insurance company typically purchases. Risk avoidance insurance is not a standard term in the industry. Full protection suggests a comprehensive coverage approach but lacks the specificity associated with reinsurance. Umbrella insurance is an additional liability coverage that offers extra protection over and above what a standard policy provides, typically purchased by individuals or businesses, not by insurance companies themselves. Thus, reinsurance is the most fitting choice as it directly relates to the operational risk management practice of insurance companies.