Which structure can be used by an insurance company to manage greater risks effectively?

Reinsurance is a mechanism that insurance companies employ to manage greater risks effectively. By transferring a portion of their risk to other insurers, known as reinsurers, they can protect themselves against significant losses that could arise from catastrophic events or unexpected claims. This practice allows primary insurers to maintain financial stability and more effectively manage their capital by diversifying their risk exposure.

When an insurance company underwrites a policy, they assume the risk associated with that policy. However, if claims exceed their capacity to pay, it can jeopardize their financial health. Reinsurance serves as a safety net, enabling the primary insurer to share the risk and thus alleviate the burden of potentially overwhelming claims.

Other options, such as self-insurance, government intervention, and excessive premiums, do not effectively help an insurance company manage risks in the same manner. Self-insurance involves the insurer bearing the full risk themselves, which can lead to financial strain. Government intervention typically provides regulatory oversight rather than direct risk management solutions. Excessive premiums may deter customers and do not directly address the underlying risks that insurance companies face. Therefore, reinsurance stands out as a strategic approach to risk management within the insurance industry.