What method can an insurer use to manage risk exposure?

Transferring a portion of risk to reinsurers is a fundamental method that insurers use to manage their risk exposure. By doing so, an insurer can mitigate the potential financial impact of large claims or losses. Reinsurance allows an insurer to share the risk associated with its policies with another company, known as the reinsurer. This partnership is crucial for maintaining financial stability, particularly in situations where claims exceed expectations or where catastrophic events occur.

By using reinsurance, insurers can set limits on their maximum exposure, thus allowing them to underwrite more policies without significantly increasing their overall risk. Additionally, it enhances the insurer's ability to manage their capital efficiently, ensuring they have sufficient funds available to cover claims while still offering competitive pricing and maintaining solvency.

This approach contrasts sharply with the other options, which do not effectively address risk management in a proactive or sustainable manner. For instance, increasing premiums annually might help regain some losses but could drive customers away, while denying policies based on risk factors could limit market reach and profitability. Modifying policy terms randomly could lead to customer dissatisfaction and trust issues.