Liberty Mutual License Practice Exam 2025 - Free Practice Questions and Study Guide

Reinsurance is primarily used to protect the financial stability of insurance companies. This process involves one insurance company (the ceding company) transferring some or all of its risk to another insurance company (the reinsurer). By doing so, the ceding company can mitigate the impact of large claims that could threaten its financial wellbeing.

When an insurer faces an unforeseen event, such as a natural disaster or a high volume of claims, reinsurance provides a safety net. This allows the insurer to remain solvent and continue operations, even in tough financial situations. It effectively helps companies manage their risk portfolio, ensuring that they do not take on more risk than they can handle.

The other options do not accurately represent the primary purpose of reinsurance. Increasing policyholder premiums is related to pricing strategies rather than risk management through reinsurance. Limiting the number of claims processed does not align with the goals of reinsurance, which is about spreading risk rather than restricting claims. Providing loans to agents is unrelated to the concept of reinsurance, as it pertains more to financing within the insurance distribution process rather than protecting an insurer's financial condition.