New Jersey Life Insurance Exam Practice Question
The ABC Insurance Company sells a large life policy and enters into an agreement with XYZ Insurance Company which requires XYZ to cover part of any loss on the policy. This situation is most commonly known as
Correct Answer: A
Rationale: In this scenario, the agreement between ABC Insurance Company and XYZ Insurance Company is best described as reinsurance. Reinsurance involves one insurer (XYZ) agreeing to take on some of the risk from another insurer (ABC), effectively sharing the financial burden of claims.
Option B, retrocession, refers to a reinsurance agreement where a reinsurer passes on some of its risk to another reinsurer, which does not apply here.
Option C, a reciprocal agreement, typically involves mutual exchanges of insurance coverage between companies, rather than risk-sharing on a specific policy.
Option D, an illegal transaction, is incorrect as reinsurance is a legitimate and regulated practice within the insurance industry.
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