Insurance Broker Certification Practice Exam

In the context of reinsurance, what does indemnify mean?

1. To reduce premiums for policyholders

2. To provide compensation for losses

3. To create new insurance policies

4. To limit coverage options

The correct answer is: To provide compensation for losses

In the context of reinsurance, the term "indemnify" refers to providing compensation for losses that an insurer incurs. Reinsurance is an arrangement where one insurance company (the reinsurer) provides financial protection to another insurance company (the ceding company) against losses that the ceding company may face. By indemnifying the ceding company, the reinsurer helps cover the cost of claims that arise from certain policies, enabling the ceding company to stabilize its financial situation after a loss. The other options do not accurately reflect the meaning of indemnity in reinsurance. While reducing premiums may be a consequence of reinsurance arrangements through risk distribution, it is not the definition of indemnification. Similarly, creating new insurance policies and limiting coverage options do not relate to the concept of indemnifying an insurer for losses already incurred. Thus, the focus on providing compensation for losses distinctly captures the essence of what it means to indemnify in the realm of reinsurance.