With today's vast array of risk finance offerings, an investment institution is just as likely to accept a company's risk as an insurer. To protect their interest, traditional insurers are beginning to fight back with blended financial and traditional risk programs. Finite risk insurance is closer in format to traditional insurance with added features, as compared to the traditional investment products.
Risk
management has taken a new dimension since
the 1990s. a wide expansion has taken place in terms
of the products and transaction deals with respect
to finite risk insurance. The basic tenet on which
finite risk insurance is based is that of financial
insurance. The process involves the transfer of financial
responsibilities. This may be associated with either
the known or the unknown losses that are paid over
a specific period of time. Any company can opt for
transferring the liabilities of the payments that
are to accrue in times to come, for the losses. Initially,
this type of insurance was used for high severity
losses that characterized low frequency that lacked
the adequate coverage at the time of incurring the
loss. Finite risk insurance is a form of coverage
that couples the transfer of a finite limit of risk
with a profit-sharing relationship between the insurer
and the client. The basis of this argument is that
the client will not only pay most of its losses (through
premiums and investment income) but will also share
in the profits on its book of business when loss experience
is on a positive side. It is to be remembered that
the cost of these insurance products is much lower
than that of the traditional products. The main reason
is that the pricing of these products is experience-based
and the amount of risk transferred is limited which
results in their lower costs. Normally, at the inception
of the finite risk arrangement, an account is maintained
as per a specific formula and this is carried on throughout
the life of the contract. With the passage of time,
this account fluctuates based on the experience under
the contract including the investment income. Based
on the formula that has been chosen, the insurer discounts
all or a part of the account to the client when the
deal is commuted. Here, it is worthwhile to mention
that coverage under the finite risk insurance is very
broad, which also takes into account all those products
that fall under the traditional products. This may,
sometimes, even be multiyear. Thus, this type of product
is ideally suitable to those clients who are uncertain
about their future losses. Added to this, the broad
coverage helps in the overall administration process. |
