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
Government agency whose function is to administer the Federal Flood Insurance Program, the Federal Crime Insurance Program, and the fair access to insurance requirement (fair) plan. ...
Trust that cannot be revoked by the creator. ...
Contract combining whole life and decreasing term insurance. A monthly income is paid to a beneficiary if an insured dies during a specific period. At the end of that period, the full face ...
New pension-accounting rule created by the Financial Accounting Standards Board. The objective of this rule is to clarify pension accounting so that investors, employers, and employees will ...
Injury that does not qualify either for partial or total disability income under a disability income or Workers Compensation policy. ...
U.S. government group term life insurance for male and female members of the federal uniformed forces on active duty, underwritten by private insurance companies. Premiums reflect peacetime ...
Expenses and damages incurred as the result of damage to a ship and its cargo and/or of taking direct action to prevent initial or further damage to the ship and its cargo. These expenses ...
Time interval between the date benefits end under Social Security and the date these benefits resume. For example, survivor benefits are paid only as long as the parent (if less than age ...
Tax assessed by the states as a payroll tax on employers to pay for unemployment compensation ...
Have a question or comment?
We're here to help.