Casualty Actuarial Society (CAS) Practice Exam

What does stabilizing loss experience with reinsurance typically involve?

1. Reducing the size of insurance premiums

2. Limiting liability for various loss exposures

3. Creating a larger policyholder base

4. Improving claims processing speed

The correct answer is: Limiting liability for various loss exposures

Stabilizing loss experience with reinsurance primarily involves limiting the liability for various loss exposures. Reinsurance acts as a risk management tool for insurers, enabling them to transfer a portion of their risk to another entity. By doing so, they can mitigate the financial impact of large claims or unfavorable loss experiences that may arise in their insurance portfolio. When an insurer enters a reinsurance agreement, they typically set specific terms that define the limits of liability. This helps them manage volatility in loss patterns, ensuring their financial stability even in the event of significant claims. The practice of ceding some of the risks to reinsurers allows the primary insurer to maintain a more predictable loss experience, protecting their capital and allowing for more controlled growth and pricing strategies. The other options, while related to the insurance industry, do not directly pertain to the stabilizing of loss experiences through reinsurance. Reducing insurance premiums, for example, may be influenced by various factors but is not a function of reinsurance itself. Similarly, expanding the policyholder base and improving claims processing speed are important operational goals but do not address the core purpose of risk stabilization that reinsurance provides.