The correct option is C. re-insurance. Explanation of the Correct Answer Re-insurance is a practice used by insurance companies to manage risk. When an insurance company takes on a large policy or a significant amount of risk, it may choose to share that risk with other insurance companies. This is done to protect itself from potential large losses that could arise from claims. Here’s a step-by-step breakdown of why re-insurance is the correct answer:

1. Understanding Risk in Insurance: Insurance companies operate by pooling risks. They collect premiums from policyholders and, in return, agree to pay claims when necessary. However, if a single event leads to many claims (like a natural disaster), the insurance company could face substantial financial strain.
2. The Role of Re-insurance: To mitigate this risk, insurance companies can purchase re-insurance. This means they transfer a portion of their risk to another insurance company (the reinsurer). For example, if an insurance company has a policy that could result in a $10 million payout, it might decide to retain $5 million of that risk and transfer the other $5 million to a reinsurer.
3. Benefits of Re-insurance:
4. Risk Management: It helps insurance companies manage their risk exposure and maintain financial stability.
5. Capacity: It allows insurers to underwrite more policies than they could handle alone, as they can share the risk.
6. Stability: It provides financial stability and helps insurers remain solvent during catastrophic events.

Why the Other Options Are Incorrect

• A. Subrogation: This is a process where an insurance company seeks reimbursement from a third party that caused a loss after it has paid a claim to its insured. Subrogation does not involve sharing risk with other insurers; rather, it is about recovering costs after a claim has been paid.
• B. Contribution: This refers to the principle where multiple insurance policies cover the same risk, and when a claim is made, each insurer contributes to the payout based on their share of the risk. This is not about transferring risk to another insurer but rather about how multiple insurers share the responsibility for a claim.
• D. Indemnity: This is a principle in insurance that ensures that the insured is compensated for their loss without profit. It means that the insured should be restored to the financial position they were in before the loss occurred. Indemnity does not involve sharing risk with other insurers.

Summary of Key Points

• Re-insurance is the practice of sharing large risks among insurance companies to manage potential losses.
• It allows insurers to maintain financial stability and underwrite more policies.
• Subrogation, contribution, and indemnity are related concepts but do not involve the sharing of risk with other insurers.
• Understanding these terms is crucial for grasping how insurance companies operate and manage their risks effectively.

This knowledge is essential for anyone studying commerce, particularly in the context of insurance and risk management.