Finite reinsurance transfers only a portion of total risk to the reinsurer, allowing the client to manage overall risk without paying high costs associated with other reinsurance strategies. This type of coverage is structured to allow monthly, semi-annual, or annual payments, and either party may terminate coverage at any time.
Finite reinsurance is coverage that only transfers a part of the total risk to the reinsurer. The rest of the risk remains with the insured. This approach allows the client to receive enough 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 an insurance cover for companies that offer different types of insurance to companies and individuals. Obtaining this type of coverage helps protect the insurance provider in the event that customers file a large number of claims, and the provider does not have cash assets available to settle all the claims. By obtaining reinsurance on the insurance claims written by the provider, the two companies essentially share the risk of having to pay out enough in claims to undermine the provider’s operations.
With finite reinsurance, the provider chooses to obtain enough coverage to keep the risk within a range that is considered reasonable. How much cash and cash equivalents the provider can use if claims on a large number of policies are filed within a short period of time generally defines that range. By taking out finite reinsurance to manage any amounts not covered by the provider’s cash, the business can continue operations without creating any real financial hardship.
For example, if an insurance provider has written policies that are valued at $1 billion in United States dollars (USD) and has assets on hand that could be used to easily withdraw $750 million without causing business hardship, the provider would cover rest with a reinsurance policy. This would involve securing a finite reinsurance policy that would cover at least $250 million dollars. If the worst case scenario were to occur, and every customer of the provider filed a claim at the same time, all claims would be accepted and the provider 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 what is known as full or complete reinsurance. As with most insurance policies, this type of reinsurance can be structured to allow monthly premiums to be paid directly to the reinsurance company or arranged with semi-annual or annual payments. Either party may terminate 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.
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