Understanding Reinsurance as a Risk Management Tool

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Source: Understanding Reinsurance as a Risk Management Tool

Reinsurance is a critical risk management mechanism that enables insurance companies to maintain financial stability by transferring a portion of their risk to reinsurers in exchange for a premium. This process helps insurers remain solvent during catastrophic events such as natural disasters or economic downturns, while also allowing them to underwrite larger or more complex risks. Reinsurance operates mainly through two forms—facultative and treaty.

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