Financial reinsurance is a type of reinsurance in which an insurance company only pays premiums for a specified amount of time. At the end of this time period, or if the insurance company suffers a covered loss, the full premium amount is returned to the insured company, minus a small profit margin for the reinsurer.
The purpose of financial reinsurance is for insurance companies to essentially stash away some of their profits so that they can use them to cover losses if need be. Stashing away profits in the form of financial resinsurance can give certain tax benefits that would be unavailable if they opted for other means of banking the funds.
If the insurance company suffers major losses, financial resinsurance can play a key role in keeping them solvent while they pay out massive amounts of claims.
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