What is ‘reinsurance’ as it relates to surplus lines?

Reinsurance refers to the practice wherein an insurance company purchases insurance from another insurer to manage its risk exposure. This is particularly relevant in the context of surplus lines, which often involves higher-risk insurance markets that may not be adequately covered by standard insurance companies. By obtaining reinsurance, an insurer can transfer a portion of the risk associated with its underwriting practices, particularly in unique or high-risk scenarios that surplus lines often address.

This process not only helps insurers stabilize their financial standing by spreading the risk across multiple parties but also allows them to take on larger or more complex policies than they might be able to on their own. Essentially, it acts as a financial buffer, ensuring that the insurer can meet its obligations even in the face of significant claims.

In the context of the other options, while coverage purchased by brokers and policy types for consumers relate to various aspects of the insurance process, they do not specifically address the risk management function that reinsurance serves. Insurance taken on surplus lines insurers is not accurate, as reinsurance is about the original insurer managing its risk with another insurer.