What is the definition of Finite Risk Reinsurance?
Finite Risk Reinsurance refers to a reinsurance contract that has prescribed limits when it comes to the reinsurer's liabilities. Also, all investment income expected from the policy is part of the underwriting process in setting the premiums.
This kind of agreement enables the insurance company to improve or protect its bottom line by protecting the loss reserves of the company. It does this by transferring some of the risk to the reinsurer.
Finite Risk Reinsurance is characterized by a cap on the reinsurer's part (a limit on just how much of the risk it will assume) and a low risk margin (since reinsurers have the ability to recover its paid losses). But, in the vent that a policy provides a favorable loss experience, the reinsurer may provide profit commissions to the insurance company that ceded the risk.
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