What Does Finite Risk Reinsurance Mean?
A finite risk reinsurance is a type of insurance contract that incorporates the time value of money as it usually covers multiple years. This means that it can spread the risk over time and takes into consideration the income generated by a particular investment over a period of time. Finite risk reinsurance has the following features (1) risk transfer and financing are combined and the time value of money is included in the contract, (2) contract term involves multiple years, (3) limited assumption of risk by the reinsurer, and (4) sharing of results with the insured.
Insuranceopedia Explains Finite Risk Reinsurance
Finite risk reinsurance exists in different types. In one type of reinsurance, the insurance company transfers the claims to the reinsurer then pays a premium corresponding to the value of the claims transferred. In this type of reinsurance, the timing risk is very important especially if the claims are settled earlier than expected, the investment income is lower, and the reinsurer can eventually lose money.
Another type of finite risk reinsurance is when the claims that have not been settled yet are transferred. The risk is that the claims will become more expensive over time. Lastly, other types of insurance involve greater financing losses, but the contract needs to meet the requirements in terms of the value of the risk transfer and the quality for a reinsurance.