New Liability Insurance Company began operations last year and has been very successful.The company's ability to grow is being restricted by an accounting rule that requires insurers to realize acquisition expenses immediately,while not realizing premiums received as income until some time has passed.Reinsurance is often used in such cases for which of the following purposes?
A)to stabilize profitability
B)to reduce the unearned premium reserve
C)to provide protection against catastrophic losses
D)to withdraw from a line of business or territory

Question

Quizplus · Accepted Answer

Reinsurance can help reduce the impact of the accounting rule that requires insurers to immediately realize acquisition expenses while not realizing premiums as income until later. By sharing a portion of the risk with a reinsurer, the insurer can reduce its unearned premium reserve and free up capital to support growth. Reinsurance can also provide additional protection against catastrophic losses, but this is not the primary purpose in this scenario. Withdrawing from a line of business or territory is also not relevant in this situation.

New Liability Insurance Company Began Operations Last Year and Has