What method do insurers use to manage risk through sharing potential losses with other insurers?

Reinsurance is a method that insurers use to manage risk by sharing potential losses with other insurers. In this arrangement, an insurer (the ceding company) transfers portions of its risk to another insurer (the reinsurer) in exchange for a premium. This practice allows the primary insurer to reduce its liability exposure, enhance its capacity to write more policies, and stabilize its financial performance by spreading risk across multiple entities.

Through reinsurance, an insurer can protect itself from significant losses that may arise from large claims or catastrophic events. By transferring some of this risk, the primary insurer can remain solvent and able to meet claims obligations to policyholders. This is particularly important in cases where the original insurer might otherwise be overwhelmed by a high volume of claims or unexpected losses.

The other options, while related to risk management, do not involve the sharing of risk between insurers in the same way. Pooling often refers to the collective risk-sharing among multiple parties, while deductibles reduce the insurer's potential exposure by requiring policyholders to absorb a portion of losses. Salvage refers to recovering value from damaged property rather than managing risk through shared responsibility.