How can an insurance company minimize its exposure to loss?

An insurance company can minimize its exposure to loss effectively by reinsuring risks. Reinsurance is a practice where an insurance company transfers a portion of its risk to another insurance carrier, known as the reinsurer. This process allows the primary insurer to protect itself from significant losses by sharing the financial responsibility with another entity, which can absorb part of the risk.

When an insurer faces potential large payouts due to high claims, it can seek reinsurance to limit its liability. By ceding some of the risk, the insurer ensures that it maintains a more stable financial position and can continue to provide coverage to its clients without the fear of devastating losses affecting its solvency.

In contrast, approaches such as risk concealing do not address the underlying financial implications of potential claims and may lead to more significant problems if losses do occur. Reissuance and risk assumption do not effectively distribute or mitigate the risk, which is critical for managing exposure to loss in the insurance industry.