_____________ is considered to be self-sustaining if it is financially and operationally independent of the reporting enterprise.
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A. B. C. D.D
The correct answer to the question is B. Reinsurance.
Reinsurance is a contractual arrangement between two insurance companies, where the reinsurer agrees to indemnify the primary insurer (also known as the ceding company) for a portion of the risks assumed under the insurance policies issued by the primary insurer. In simple terms, reinsurance is insurance for insurance companies.
In the context of the question, being "self-sustaining" means that a particular entity operates independently and is capable of supporting itself financially and operationally without relying on the reporting enterprise. Therefore, the entity should have its own financial resources and operational capabilities to function effectively.
Let's examine the other answer choices to understand why they are not the correct options:
A. Retrocession: Retrocession refers to a situation where a reinsurer transfers a portion of the risks it assumed from the primary insurer to another reinsurer. It is essentially reinsurance for reinsurers. Retrocession is not directly related to the financial and operational independence of an entity from the reporting enterprise.
C. Portfolio Investments: Portfolio investments involve the purchase of a collection of financial assets, such as stocks, bonds, and other securities, by an individual or entity. While portfolio investments can generate income and contribute to an entity's financial independence, they do not necessarily indicate operational independence.
D. Foreign operation: Foreign operation refers to the establishment and operation of a business entity or subsidiary in a foreign country. While foreign operations can be financially independent, operational independence may vary depending on the level of control and integration with the reporting enterprise. Therefore, it is not a definitive indicator of self-sustainability.
In contrast, reinsurance is an arrangement where the reinsurer assumes a portion of the risks from the primary insurer and operates independently. Reinsurers are separate entities with their own financial resources and operational capabilities. By transferring a portion of the risks to the reinsurer, the primary insurer reduces its exposure and potential losses, making the reinsurer self-sustaining without relying on the reporting enterprise.
Therefore, the correct answer is B. Reinsurance, as it best aligns with the concept of an entity being financially and operationally independent of the reporting enterprise.