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
Limitation imposed on insurance companies by state law. States oversee the insurance industry, being responsible for making certain that the rates are fair, reasonable, and adequate, and ...
Right of a beneficiary of a life insurance policy to exchange the future installments due that beneficiary for a lump sum distribution. ...
Provision in business interruption insurance that excludes coverage for continuing the wages of rank and file employees. Business interruption insurance covers an employer for loss of ...
Section of the Internal Revenue Code that provides for the taking of the proceeds from one life insurance policy or annuity and the reinvesting of these proceeds immediately in another life ...
Covers all employees of a business on a blanket basis with the maximum limit of coverage applied separately to each employee guilty of a crime. ...
Assumption of total disability when an insured loses sight, hearing, speech, or a limb. When such a loss occurs to an insured with disability income insurance, the insurer often assumes ...
Individual retirement account established under the tax reform act of 1986, for a spouse who has unearned income. The maximum annual combined contribution into the worker's and spouse's IRA ...
Ratio of the company's investment in noninvestment grade bonds dividend to its adjusted surplus. This ratio shows how vulnerable the company's surplus is to the market fluctuations in ...
Methods for payment of the value of a policy. An insurance company can select one of three options in settlement of a loss: make a cash payment; take possession of damaged or destroyed ...
Have a question or comment?
We're here to help.