In risk transfer analysis, what does the term risk transfer primarily assess?

• A. The degree to which the ceding company transfers risk to the reinsurer
• B. The amount of premium charged
• C. The regulatory capital requirement
• D. The profitability of the reinsurer

Answer: (A)

Risk transfer analysis looks at whether the reinsurer actually takes on the underwriting risk from the ceding company. The best answer is that the ceding company transfers risk to the reinsurer when the reinsurer bears the potential losses and can incur losses beyond what the cedent would face alone. In other words, it's about who is exposed to the variability of losses and who ultimately pays for those losses—the reinsurer, not the cedent. Premium levels, regulatory capital requirements, or the reinsurer’s profitability aren’t the measures of whether risk has been transferred; they pertain to pricing, capital rules, and financial performance rather than the actual transfer of risk.