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 in liability insurance for a ship owner in the event of collision with another ship. A running down clause, when added to basic hull marine insurance, protects against liability ...
Local life insurance office that sells and services ordinary life insurance as well as other forms of life insurance except debt insurance. ...
Utilization of life insurance to make annual gifts into a trust in order to produce the largest tax-free death benefit possible to the trust beneficiaries. ...
Procedure to minimize the adverse effect of a possible financial loss by (1) identifying potential sources of loss; (2) measuring the financial consequences of a loss occurring; and (3) ...
Insurance coverage sold by a broker as contrasted with insurance coverage sold by an agent. ...
Distribution of a deceased beneficiary's share of an estate among all of his or her living heirs. Contrast with per stirpes. ...
In insurance, volume of premiums written. Also describes commercial activities with the profit motive as the goal of the organization. Commercial insurance companies are organized with the ...
Means of funding permitted under the employee retirement income security act of 1974 (ERISA). The administrator of a pension plan can comply with required minimum funding standards by ...
Funding of an employee's benefits in a pension plan for his or her beginning past service of employment. This is a significant cost factor in pension planning and financing of future ...
Have a question or comment?
We're here to help.