Which of the following is a characteristic of reinsurance?

The correct answer, indicating that reinsurance allows a primary insurer to reduce risk exposure, reflects a fundamental aspect of the reinsurance process. Reinsurance is a risk management strategy used by insurance companies to share some of their risk with another insurer, known as the reinsurer. This means that the primary insurer can transfer portions of risk associated with its policies to the reinsurer, thereby reducing the potential financial impact of large claims or catastrophic losses.

By doing this, primary insurers can stabilize their financial performance, manage their capital more effectively, and ultimately maintain their solvency while still fulfilling their obligations to policyholders. This is particularly important in situations where they may face claims that exceed their financial capacity, as it allows them to operate with a greater level of security and confidence.

The other options provided do not accurately represent the characteristics of reinsurance. The notion that the primary insurer assumes all potential losses contradicts the purpose of reinsurance, while the statement regarding regulatory compliance implies an incorrect distribution of responsibilities. Moreover, implying that reinsurance eliminates the need for insurance entirely misrepresents the relationship between the two, as reinsurance is essentially an extension of the insurance model rather than a replacement.