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
Insured peril in some property insurance policies that encompasses any accidental damage to insured property while being removed to safety from the immediate threat of damage by another ...
Federal legislation that established the old age survivors, disability, and health insurance (OASDHI). ...
Element usually found in industrial life insurance policies under which the insurance company upon the death of the insured under certain conditions is allowed to choose the beneficiary if ...
Type of commercial property policy that provides coverage for a business' indirect losses resulting from damages to the property of the business. Coverage normally contains a coinsurance ...
Hospital charges in addition to room and board. Miscellaneous expenses are covered under a basic hospital plan, with the limits of coverage expressed either as a multiple of the daily ...
Coverage for acts or omissions committed by an agent or broker resulting in adequate insurance in the event of a liability suit or property damage to a client. ...
Association formed to address the requirements of government risk pools. ...
Five primary sectors of insurance coverage. Their purposes are: LIFE INSURANCE provides income to a beneficiary in the event of the death of the insured. HEALTH INSURANCE provides two types ...
Individual licensed to sell securities to the public. For example, to sell variable annuities and variable life insurance products and mutual funds, an insurance agent is required to pass ...
Have a question or comment?
We're here to help.