How do insurers typically reduce their losses?

Insurers typically reduce their losses through several methods, with the most effective one being reinsurance. Reinsurance is an agreement in which an insurer transfers a portion of its risk to another insurer, known as the reinsurer. This helps spread the financial exposure across multiple companies, allowing the primary insurer to protect itself from significant losses, especially in the event of large claims or catastrophic events.

Underwriting involves evaluating the risk of insuring applicants and determining appropriate premiums, but it is primarily used to select risks rather than reduce losses after they have been incurred. Salvage refers to recovering and selling any remaining value from damaged property, which can help mitigate losses after they occur, but it does not prevent the loss itself. Pooling is a concept where multiple entities combine their risks to reduce individual exposure, yet it is a broader risk management approach rather than a direct mechanism for loss reduction.

Reinsurance stands out as the most effective tool for insurers to manage and reduce potential financial losses while maintaining their operational stability.