Definition of "Financial insurance"
Structured product designed to meet specific needs of the insured that may involve any of the following funding arrangements:
- loss portfolio transfers in which the self-insurer transfers the reserves that it had established for its known losses to the insurance company; by concluding such a transfer, the self-insurer can use the capital it had previously set aside for loss reserves;
- retrospective transfers in which a self-insurer has losses for which inadequate insurance coverage exists and now these companies require additional insurance coverages so that the limits can be raised to an adequate amount;
- prospective loss transfers in which a self-insurer has a requirement to fund in advance its future losses, thereby removing its liability for loss reserves from its balance sheet. The premium paid by the self-insurer to the insurance company reflects the self-insurer's expectation of loss.
Under the three funding approaches, the self-insurer must have adequate loss experience so that the LAW OF LARGE NUMBERS will be able to operate; that is, so that the credibility of the prediction will approach one and the standard deviation of the actual losses (X) from the expected losses (X) will approach zero. This statistical base is important because the self-insurer's loss experience is not combined with another self-insurer's loss experience to form an overall statistical bank from which to develop premiums for a specific category of self-insurers.
This specifically designed structured product enables the self-insurer to eliminate its liability for maintaining loss reserves. Also, this product enables the self-insurer to protect itself against adverse future loss experience resulting in earnings per share not being affected by unexpected losses.
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