What is a common strategy used by insurance companies to minimize exposure to loss?

Reinsurance is a common strategy used by insurance companies to minimize exposure to loss. This practice involves transferring certain risks from one insurer to another. By doing so, the primary insurer can reduce the potential financial impact of large claims or catastrophic events. Reinsurance enables insurers to manage their risk portfolios more effectively, ensuring they can cover claims while maintaining their financial stability.

Through reinsurance, companies can protect themselves against significant losses that could arise from single events or a series of large claims within a short time frame. This arrangement provides additional security, allowing insurers to underwrite larger policies or expand into new markets without overly exposing themselves to risk.

While other strategies like diversification and claims adjustment also play roles in risk management, they do not provide the same level of direct financial protection against specific claims as reinsurance does. Risk retention, on the other hand, involves accepting certain risks rather than transferring them, which can increase exposure rather than minimize it.