Federal Office of Private Insurance FOPI
Federal Office of Private Insurance FOPI
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Finite Re
Finite re, or alternative risk transfer (ART), has become increasingly important in recent years. So far, there is no generally applicable definition of finite reinsurance. However, finite reinsurance contracts generally have one or more of the following characteristics:
- The contracts are tailored and as a rule more complex than traditional reinsurance contracts. For this reason, finite re is often called non-traditional reinsurance.
- The maximum indemnification of a reinsurer is limited. This is also sometimes true of traditional reinsurance. In traditional reinsurance, however, the limits are calculated so that they are only very rarely exhausted. In contrast, the limits for non-traditional reinsurance contracts are often exhausted even in the case of relatively small deviations from the expected claims payments. The risk of the reinsurer is therefore very heavily limited, which is why the term “finite reinsurance” is often used.
- The contracts extend over several classes of business and/or years. The fluctuation potential of the claims rate is thereby reduced.
- Experience estimates take the expected financial earnings into account. If the claims history is very favourable, the reinsurance client (ceding company) receives participation in the profits; if the claims history is very unfavourable, the reinsurer receives an additional premium. In extreme cases, this entails that the risk transfer is very small to non-existent. In such cases, the term “financing contract” is often used.
- Often, the assets/claims (balances) are not paid out during the term of the contract. The ceding company only pays a margin. At the end of the term, a final account is compiled and settled.
Recently, non-traditional reinsurance has come under increased pressure, because it can be used to illicitly gloss over results or misrepresent balance sheets. The abuse of this instrument cannot be tolerated. Abuse takes place primarily when the reinsurer falsely enters financing contracts as reinsurance contracts. In such as case, the reinsurer’s entry typically differs from the ceding company’s entry (not affecting net income in the case of the reinsurer, and affecting net income in the case of the ceding company).
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