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. Reinsurance

    The practice of insurers transferring portions of risk portfolios ...
  4. Catastrophe Bond - CAT

    A high-yield debt instrument that is usually insurance linked ...
  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 ...
  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 ...
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. Fundamental Analysis

    The Best 5 Online Accounting Systems For Small Business

    Running a small business can be difficult, but thanks to these online accounting services, taking care of payroll doesn't have to be.
  5. Investing

    Understanding Cost Accounting

    Cost accounting is the method of financially allocating expenses to goods that are manufactured for resale. Cost accounting is also referred to as managerial accounting, because managers use ...
  6. Investing

    What are Prepaid Expenses?

    A prepaid expense is an asset on the balance sheet. Due to accounting principles, expenses are often accrued on the balance sheet and expensed in a later period.
  7. Investing

    What's a Sunk Cost?

    A sunk cost was incurred in the past, is independent of future events and cannot be recouped. Economists teach that sunk costs should not be considered when making a financial decision. Rather, ...
  8. Investing

    What are Fixed Costs?

    Fixed costs are business expenses that do not change as the level of production goes up or down. They are one of two types of business expense, the other being variable costs. Variable costs ...
  9. Fundamental Analysis

    What's the FCCR?

    The fixed charge coverage ratio (FCCR) is an accounting calculation that shows a company’s ability to pay its fixed costs – expenses that generally do not vary with production level. This may ...
  10. Investing

    What's an Average Collection Period?

    Average collection period is an accounting term referring to the average number of days between a sale made on credit, and receipt of the payment. Businesses monitor this number to make sure ...

You May Also Like

Hot Definitions
  1. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  2. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  3. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  4. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
  5. Investment Grade

    A rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such ...
  6. Fringe Benefits

    A collection of various benefits provided by an employer, which are exempt from taxation as long as certain conditions are ...
Trading Center