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
Coverage to indemnify an owner for whom work was done if the completed work is not free of worker's liens for labor and material. ...
Exchange, in insurance, of an adequate consideration (premium paid by an insured) for the promise of an insurance company to pay benefits in the event the insured incurs a loss. ...
Coverage on an all risks basis whether the airplane is on the ground or in the air; also called hull aircraft insurance. Exclusions, although none are standard, include illegal use of an ...
Endorsement to an existing policy or a separate policy covering loss of rental income to the property owner, caused by the damage or destruction of a building, rendering it unrentable. The ...
Law created by government regulatory agencies, such as the office of the commissioner of insurance, through decisions, orders, regulations, and rules. For example, rate making hearings ...
Coverage for less than one year. Insurers generally charge higher rates for short-term policies than for longer term insurance, such as an annual policy, because of the need to recoup ...
Irrevocable trust into which the grantor places assets and receives in turn a variable amount of income from a variable annuity (amount of income will vary yearly depending upon the ...
Fee charged to a policyowner when a life insurance policy or annuity is surrendered for its cash value. This fee reflects insurance company expenses incurred by placing the policy on its ...
Coverage in which an insurance company's portfolio is ceded to a re insurer who re insures a given percentage of a particular line of business. ...
Have a question or comment?
We're here to help.