Finite Reinsurance

AAA

DEFINITION of 'Finite Reinsurance'

A type of reinsurance that transfers over only a finite or limited amount of risk. Risk is reduced through accounting or financial methods, along with the actual transfer of economic risk. By transferring less risk to the reinsurer, the insurer receives coverage on its potential claims at a lower cost than traditional reinsurance.

INVESTOPEDIA EXPLAINS 'Finite Reinsurance'

For example, an insurer will set aside an amount to cover a percentage of the payouts that would be required if the particular risk is realized. Only when the amount does not cover the payouts will the reinsurer cover the risk. This limits the potential risk that the reinsurer faces and leads to lower costs for the insurer. The amount set aside is usually invested in government bonds and provides income that is put against potential claims. Due to the highly complex structure of these risk instruments, there can be abuses where no risk is transferred and the insurer's income is improved.

RELATED TERMS
  1. Cedent

    A party to an insurance contract who passes financial obligation ...
  2. Cession

    The portions of the obligations in an insurance company's policy ...
  3. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked ...
  4. Reinsurance

    The practice of insurers transferring portions of risk portfolios ...
  5. Insurance

    A contract (policy) in which an individual or entity receives ...
  6. Risk

    The chance that an investment's actual return will be different ...
RELATED FAQS
  1. What is reinsurance?

    Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit ... Read Full Answer >>
  2. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Full Answer >>
  3. What are some good online resources for me to learn about Generally Accepted Accounting ...

    The two definitive authorities on developing and interpreting the U.S. generally accepted accounting principles, or GAAP, ... Read Full Answer >>
  4. How do you calculate shareholder equity?

    Shareholders' equity is listed on a company's balance sheet and measures its net worth. A company's shareholders' equity ... Read Full Answer >>
  5. What is the difference between earnings and profit?

    Earnings, specifically retained earnings, and profit are often used as synonyms in corporate finance, although they are different ... Read Full Answer >>
  6. How is minimum transfer price calculated?

    A company that transfers goods between multiple divisions needs to establish a transfer price so that each division can track ... Read Full Answer >>
Related Articles
  1. Home & Auto

    Long-Term Care Insurance: Who Needs It?

    No one is immune to the possibility of one day needing long-term care - and the costs can deplete a life savings.
  2. Insurance

    Life Insurance: Putting A Price On Peace Of Mind

    Would your death leave loved ones financially stranded? Find out how to ease your mind and keep them protected.
  3. Home & Auto

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  4. Economics

    Calculating Net Realizable Value

    An asset’s net realizable value is the amount a company should expect to receive once it sells or disposes of that asset, minus costs from its disposal.
  5. Insurance

    Who Needs Extortion Insurance?

    Insurance can help mitigate the financial damage of an extortion plot, but it’s important to read the fine print before taking out one of these policies.
  6. Insurance

    Indexed Universal Life Insurance: The Pros & Cons

    What you need to know, to see if these vehicles fit into your financial plan.
  7. Insurance

    Do You Need Kidnap & Ransom Insurance?

    Americans working abroad – and high-profile individuals traveling frequently in kidnapping hot spots – should consider this type of protection.
  8. Insurance

    A Guide To Kidnap & Ransom Insurance

    Every year, thousands of people are kidnapped for ransom all over the world. This insurance offers protection – and peace of mind.
  9. Investing Basics

    Calculating Unlevered Free Cash Flow

    Unlevered free cash flow (UFCF) is the free cash flow of a business before interest payments.
  10. Taxes

    Understanding Write-Offs

    Write-off has different meanings depending on the context in which it is used, but generally refers to a reduction in value due to expense or loss.

You May Also Like

Hot Definitions
  1. Radner Equilibrium

    A theory suggesting that if economic decision makers have unlimited computational capacity for choice among strategies, then ...
  2. Inbound Cash Flow

    Any currency that a company or individual receives through conducting a transaction with another party. Inbound cash flow ...
  3. Social Security

    A United States federal program of social insurance and benefits developed in 1935. The Social Security program's benefits ...
  4. American Dream

    The belief that anyone, regardless of where they were born or what class they were born into, can attain their own version ...
  5. Multicurrency Note Facility

    A credit facility that finances short- to medium-term Euro notes. Multicurrency note facilities are denominated in many currencies. ...
  6. National Currency

    The currency or legal tender issued by a nation's central bank or monetary authority. The national currency of a nation is ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!