Which of the following is a catastrophe-related benefit of reinsurance?

• A. Expands capacity
• B. Spread the risk of catastrophes and stabilize underwriting results
• C. Finance expanding volume
• D. Aid withdrawing from a line

Answer: (B)

Catastrophe reinsurance is all about sharing and transferring large, low-frequency losses to keep the insurer’s financial results more stable. When a major catastrophe occurs, the losses can be huge and volatile, threatening solvency and profitability. By transferring part of that catastrophe risk to a reinsurer, the primary insurer spreads the impact across a larger pool and across time, which smooths the swings in underwriting results and protects capital.

That’s why the option describing spreading catastrophe risk and stabilizing underwriting results is the best fit. Expanding capacity or financing growth can be indirect benefits of reinsurance, but they aren’t specifically about catastrophe risk, and one option even points to a non–catastrophe use. In a catastrophe scenario, reinsurance helps by absorbing part of the extreme loss, keeping the insurer’s financials more predictable.