Financial Reinsurance
Transaction of reinsurance under which there is a limit on the total liability of the re-insurer and future investment income is a recognized component of the underwriting process. This financial instrument incorporates the time value of money into the CEDING process such that the CEDENT can re-insure its liabilities at a premium rate less than the true rate for the liabilities transferred (difference in the two rates to be made up by the investment income generated during the years the reinsurance contract remains in force). Financial reinsurance can be used effectively in several situations:
- surplus relief (QUOTA SHARE REINSURANCE) CEDING COMPANY transfers a percentage of its book of business to the re-insurer (there insurer will limit its total liability under any one contract).
- portfolio transfers ceding company transfers reserves on known losses to the re-insurer in exchange for premiums equal to the present value of the future claims experience.
- retrospective aggregates ceding company transfers reserves on known losses as well as INCURRED BUT NOT REPORTED LOSSES (IBNR).
- prospective aggregates ceding company pays a premium on a PROSPECTIVE RATING basis to the re-insurer. In exchange, the re-insurer is obligated to pay future losses incurred by the cedent. If these future losses are less than expected, the cedent will receive the UNDERWRITING GAIN. Any gains from investments and fees will be retained by the re-insurer. Through this mechanism, in essence, the cedent gains current capacity for writing additional business by borrowing against income to be received in the future.
- catastrophe protection coverage against shock losses is provided by spreading the payment of such losses over several years.
Popular Insurance Terms
Section of the code that qualifies that the death benefit paid under a life insurance policy is received by the beneficiary income-tax free. These tax consequences apply regardless of the ...
Transportation firm that must carry any customer's goods if the customer is willing to pay. Common carriers include trucking companies, bus lines, and airlines. ...
Combination of an interest rate cap and an interest rate floor, creating a band within which interest rates can range. For example, if an interest rate band is between 6% and 10%, the ...
Form of coverage in which an insurer automatically reinsures individual risks with its reinsurer. The insurer must transfer (cede) the risks to its reinsurer and its reinsurer must accept ...
Coverage for the inside of an insured premises of a business firm if it experiences a loss of money, securities, personal property, and damage or destruction of real or personal property ...
Classification of insured life and health risks based on the sex of the proposed insured. Gender has long been one of many factors in classifying, accepting, and rating risks. For example, ...
Practice of a ceding company whereby insurance previously ceded to a re insurer is returned to that ceding company. ...
Frequency with which employees resign, are fired, or retire from a company, usually computed as the percentage, of an organization's employees at the beginning of a calendar year. The ...
Classification of ships according to their construction material, age, physical condition, propulsion type, stress tests of structure, and owners. Marine insurance rates for a particular ...
Have a question or comment?
We're here to help.