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
Income supplement program under Social Security to provide a minimum monthly income to aged, blind, and disabled persons. The SSI payments, which were introduced in January 1974, make up ...
Aggregate amount of insurance policies that are paid-up (or are being paid) that a life or health insurance company has on its books. The size of a life or health insurance company is often ...
Time frame during which an annuitant makes premium payments to an insurance company. The obligations of the company to the annuitant during this period depend on whether a pure annuity or ...
Act that prohibits employers from discriminating against employees in employee benefit plans, regarding contributions or benefits based on race or gender. ...
Statistical term indicating the central value of a frequency distribution, such that smaller and greater values than this central value occur at an equal rate. For example, given the ...
Same as term Original Age: insured's age at the date a term life insurance policy is issued. An original age or retroactive conversion option permits the insured to convert the term policy ...
Federal law, effective February 4, 1989, that requires company notification of employees prior to laying them off or closing a plant or an office. Workers covered under WARN are to include ...
Insurance for which (1) an application has been filed but the first premium has not yet been paid or (2) a life insurance policy that has not yet been delivered to an insured. ...
Federal legislation passed in 1988 (repealed November 23, 1989) that significantly increased the benefit amounts provided under medicare, both Part A and Part B, in the following manner: ...
Have a question or comment?
We're here to help.