What is the deadline
Finite reinsurance is a Category of reinsurance that transfers only a finite or limited amount of risk to the reinsurer. Risk is reduced through accounting and financial techniques, along with the actual transfer of economic risk. By transferring less risk to the reinsurer, the insurer and receives coverage on its potential claims at a lower cost than traditional reinsurance.
Breaking down the ‘finite reinsurance’
Finite reinsurance is reinsurance, the primary insurer, called a concession by the insurer, by purchasing from the reinsurer, called the assuming insurer. Reinsurance of course, when it covers only certain risks and certain conditions and if these conditions are not met, the reinsurer not to pay the primary insurer.
For example, the insurer will set aside some cash to cover interest payments that will be required, unless a different risk is realized. Only when the amount does not cover the payment of the reinsurer to cover the risk. This limits the potential risk of the reinsurer faces and leads to lower costs for the insurer. The reserved amount is usually invested in government bonds and provides income to put against potential claims.
The advantages and disadvantages of finite reinsurance
The main advantage of the method of finite reinsurance to purchase insurance company is that it is a relatively cheap form of reinsurance. The reinsurer receives a very limited amount of risks to reinsurance. Each participant in politics may feel that they are getting a bargain, but the risk is distributed relatively evenly between them.
The disadvantage of finite reinsurance is that it is so limited that it can be useless for the acquisition of the company. If all conditions are not met by the buyer, the ultimate reinsurance policy will not pay, resulting in the loss not only of the amount of money spent on the purchase of finite reinsurance and requirements of the procurement, the insurer is obliged to pay to his insurers that he does not intend to pay, without reimbursement from the reinsurance.
The real drawback of finite reinsurance, which was a vehicle for fraud. In the 1980-ies, the primary insurers have paid the exact amount of prizes as the limit of the payment of the final insurance receivable from reinsurers, which protects them from losses due to claims, but allowed them a tax deduction is a premium, where they wouldn’t be able to keep in direct settlement of the claim. In 1992, the Council for financial reporting standards, or the Committee on financial accounting standards issued by the FAS 113, a rule designed to limit the misuse of finite reinsurance.