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
Average earned monthly income (AEMI) for the tax year in which the insured wage earner has income interrupted or terminated because of illness, sickness, or accident. This AEMI is important ...
Coverage for personal property of a manufacturer on an all risks basis when that property is off the manufacturer's premises. ...
Insurance policy that pays a face amount/ lump sum if the insured is diagnosed with a specified critical illness. This sum is paid directly to the insured regardless of any other sources of ...
Expectation of illness or injury. The probability of such occurrence is shown by a morbidity table, which is important in determining the premiums for health insurance policies. ...
Actual or attempted malicious and deliberate burning of a physical asset owned by another party. Coverage against arson is provided under property insurance, but only if the insured has not ...
Coverage outside an insured's home for personal items usually carried or worn while traveling. Protection is for personal property (apparel and jewelry), not for real property or property ...
Rule that prohibits the introduction into a court of law of any oral or written agreement that contradicts the final written agreement. For example, an insurance contract containing clauses ...
Resident patient of a medical installation. Previously, health insurance benefits were limited to in-patient care. Today health insurance policies provide an extensive list of out-patient ...
Retirement center with a focus on group living arrangements for senior citizens. The center has separate apartments for each resident as well as an on-site nursing facility. Generally, ...
Have a question or comment?
We're here to help.