Finite Risk Reinsurance

Concept

Finite risk reinsurance is a form of alternative reinsurance in which the technical risk component assumed by the reinsurer is significantly more limited than in classic reinsurance, with the timing of cash flows and financing aspects taking center stage instead.

Distinction from Classic Reinsurance

While classic reinsurance primarily serves to pool technical risk, finite risk reinsurance is aimed more at smoothing result fluctuations across multiple years and providing liquidity; typical contract features include a multi-year term, limited risk assumption by the reinsurer, and profit-sharing or repayment clauses that leave a significant portion of the economic result with the cedent.

Accounting and Regulatory Sensitivity

Due to the limited actual transfer of risk, finite risk contracts are subject to particular regulatory and accounting scrutiny, since they have historically sometimes been used to shape insurers’ reported results; accounting standards therefore regularly require demonstration of significant risk transfer before a contract may be accounted for as reinsurance at all, rather than as a pure financial instrument.