Take this example to explain the characteristics of Finite Risk Reinsurance.
Type: Catastrophe excess of loss reinsurance
Term: 5 years
Limit: $25 million aggregate excess of $25m per event ( non-reinstateable)
Premium: $4m per year for the 5-year term
Profit sharing:
–If premium plus investment income is greater than losses, 90% of the difference is returned to the primary insurer.
–At the primary insurer’s option, this amount can be rolled over and used to purchase additional limits.
The finite risk reinsurance is a performance of excess of loss reinsurance. But there are some stipulations make it different.
The finite risk reinsurance has the characteristic of “multiyear period”. In this policy, we can see the term is 5 years.
The finite risk reinsurance has the characteristics that the premium is a high percentage of the reinsurance limits. In this policy, the reinsurer keeps a ceiling figure of $25m for 5 years while the reinsurance premium is $4m per year, which means the premium is 80% of the reinsurance limits.
The finite risk reinsurance also has the characteristics of “profit sharing”. In a general XL reinsurance, the investment profits do not share between contract participants, while in this policy, we can see stipulation that if premium plus investment income is greater than losses, 90% of the difference is returned to the primary insurer.