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Finite reinsurance transfers only a portion of the total risk to the reinsurer, allowing the insured to receive sufficient coverage without paying high costs. It helps protect insurers in the event of a large number of claims and is cheaper than full reinsurance. Monthly or annual payments can be made, and either party can terminate coverage.
Finite reinsurance is coverage that transfers only a portion of the total risk to the reinsurer. The rest of the risk remains with the insured. This approach allows the client to receive sufficient coverage to make the overall risk factor manageable, but without the need to pay the higher cost associated with other reinsurance strategies.
Understanding the nature of reinsurance makes it much easier to see the value of a finite reinsurance approach. Reinsurance is essentially insurance coverage for businesses that offer different types of insurance to companies and individuals. Obtaining this type of coverage helps protect the insurer in the event that a huge number of claims are being filed by customers and the provider lacks the cash resources to settle all claims. By obtaining reinsurance on the supplier’s written insurance claims, the two companies essentially share the risk of having to pay enough in claims to undermine the supplier’s operations.
With finite reinsurance, the provider chooses to obtain sufficient coverage to keep the risk within a range considered reasonable. The amount of cash and cash equivalents the provider can use if claims on a large number of policies are filed within a short period of time usually defines that range. By taking out limited reinsurance to handle any amount that the supplier’s money wouldn’t cover, the business is able to continue operations without creating real financial hardship.
For example, if an insurance provider has policies worth $1 billion in US dollars (USD) and has assets on hand that could be used to easily withdraw $750 million USD without causing hardship for the business, the provider will cover the rest with a reinsurance policy. This would involve securing a finished reinsurance policy that would cover at least $250 million dollars. If the worst-case scenario occurs and every customer of the vendor filed a claim at the same time, all claims would be honored and the vendor could continue operations.
Since finite reinsurance is designed to offer protection for a portion of the provider’s risk, the cost is lower than insuring so-called full or comprehensive reinsurance. As with most insurance policies, this type of reinsurance can be structured to allow for monthly premiums paid directly to the reinsurance company, or managed in semi-annual or annual installments. Either party may terminate the coverage at any time, provided the reasons for such termination comply with the laws and regulations governing the sale of insurance products within a given legal jurisdiction.
Smart Asset.
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