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.

BREAKING DOWN '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. Blended Covers

    A form of reinsurance that combines features of finite and convention ...
  2. Reinsurance Credit

    An accounting entry made by an insurer for premiums ceded to ...
  3. Cession

    The portions of the obligations in an insurance company's policy ...
  4. Reinsurer

    A company that provides financial protection to insurance companies. ...
  5. Following Reinsurer

    A reinsurance company that signs onto a reinsurance treaty, but ...
  6. Lead Reinsurer

    The reinsurer responsible for negotiating the terms and rates ...
Related Articles
  1. Insurance

    When Things Go Awry, Insurers Get Reinsured

    Guru Warren Buffett is making this sector popular. Learn more here.
  2. Insurance

    The Business Model of Reinsurance Companies

    Learn about the business of reinsurance, a hidden industry that underpins the entire financial and insurance structure around the globe.
  3. Insurance

    The Reinsurance Industry: An Inside Look

    Low demand and high regulatory pressures may be problematic for the global reinsurance market following the shrinking margins and declining demand of the first half of 2016.
  4. Tech

    The Reinsurance Industry: An Inside Look (BRK.A)

    Warren Buffett has a major influence on the global reinsurance market, which has seen momentum in 2016 for higher revenue.
  5. Insurance

    Facultative vs. Treaty Reinsurance: Differences and Examples

    Reinsurance companies offer insurance to other insurers in case the traditional insurer does not have enough money to pay claims against its written policies.
  6. Investing

    5 Reinsurance Stocks To Watch

    Due to the decline in the reinsurance sector, many stocks within the sector are now trading at historic lows relative to book value. For investors, the time may be right to pounce on the values. ...
  7. Insurance

    How Does Reinsurance Work?

    Reinsurance is a practice in which insurers transfer portions of portfolios to other parties in order to reduce their exposure to claims.
  8. Insurance

    Third Point Reinsurance Notes Largest Profit in Years

    Third Point Reinsurance saw a tripling of net income in the second quarter of 2016 over last year.
  9. Taxes

    2 Ways Hedge Funds Avoid Paying Taxes

    Learn about two strategies hedge funds use to minimize their tax liabilities. Read why some hedge funds are in the reinsurance business in Bermuda.
  10. Trading

    Are Derivatives A Disaster Waiting To Happen?

    They've contributed to some major market scandals, but these instruments aren't all bad.
RELATED FAQS
  1. Why do some companies in the insurance sector engage in reinsurance?

    Discover how some companies in the insurance sector engage in reinsurance. Reinsurance allows insurance companies to transfer ... Read Answer >>
  2. What is Warren Buffett's relation to "Supercat" insurance?

    Understand the concept of catastrophe reinsurance and learn how Berkshire Hathaway makes billions providing such insurance ... Read Answer >>
  3. What are some examples of risk management techniques?

    Understand what risk management is in business and why it is a necessary component of ongoing business planning, and review ... Read Answer >>
  4. What are the main factors that impact share prices in the insurance sector?

    Learn about some of the main factors that impact share prices in the insurance sector. Insurance companies make money by ... Read Answer >>
  5. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
Hot Definitions
  1. Free Rider Problem

    1. In economics, the free rider problem refers to a situation where some individuals in a population either consume more ...
  2. Dumping

    In international trade, the export by a country or company of a product at a price that is lower in the foreign market than ...
  3. Tender Offer

    An offer to purchase some or all of shareholders' shares in a corporation. The price offered is usually at a premium to the ...
  4. Ponzi Scheme

    A fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns ...
  5. Dow Jones Industrial Average - DJIA

    The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange ...
  6. Revolving Credit

    A line of credit where the customer pays a commitment fee and is then allowed to use the funds when they are needed. It is ...
Trading Center