What describes a situation where the insurer purchases coverage from another insurer?

In the context of insurance, a situation where one insurer purchases coverage from another insurer is known as a reinsurance treaty. This arrangement allows the original insurer, often referred to as the ceding company, to transfer some of its risk to another insurance company, typically called the reinsurer. By doing so, the original insurer can protect itself against large losses and stabilize its financial performance.

Reinsurance can take various forms, including proportional reinsurance, where the reinsurer receives a portion of the premiums and agrees to pay a portion of the claims, and non-proportional reinsurance, where the reinsurer only pays after the original insurer has incurred losses above a certain amount. The main purpose of reinsurance is to manage risk more effectively, ensuring that the insurer remains solvent and able to cover its liabilities.

In contrast, the other options provided do not refer specifically to the concept of one insurer purchasing coverage from another:

• Excess coverage typically refers to additional insurance that kicks in after the primary insurance policy limits have been exhausted, rather than a transfer of risk between insurers.

• A participating plan generally relates to policies that allow policyholders to share in the insurer's profits, which also does not pertain to the insurer buying additional coverage.

• An indemnity claim