Finite Risk Insurance

A non-life insurance arrangement in which the limit of coverage, the time period involved, and the premium paid are based on the time value of money. Finite risk contracts, although they must involve some transfer of risk, are multiyear contracts that spread risk over time. Premiums are invested in an experience fund, often based offshore to avoid taxation, that accrues interest and pays losses. The experience fund reverts to the insured at the end of the transaction period. For example, an insurance company might use a finite insurer to reinsure a medical malpractice claim where the harm caused may not be evident for some time and the final claim not determined for years. The key risk in this instance would be the time element, since with enough time, the experience fund would pay the claim and leave a profit. In the mid-2000s, finite risk (or "loss-mitigation") insurance was abused by some primary insurers to disguise under-reserving for losses stemming from the World Trade Center disaster.

Type of insurance that provides a single aggregate limit of coverage within the insurance policy terms, thereby limiting the insurance company's liability for a Risk transferred to it. The insurance coverage is tailored to the requirements of the Insured company to reflect the insured's actual coverage needs. If the insured's losses are favorable, the insured receives the return of a portion of the premium paid. The insured's premium costs are based on the insured's own loss experience, rather than the overall loss experience of a pool of similar insureds. In essence, through this type of insurance, the insured pays for exposure to loss and if there is not a substantial loss, the insured receives the return of a portion of the premium paid in. This insurance mechanism is ideal for insureds who exhibit a frequency distribution of high severity loss or an unusual loss frequency. See also Financial Reinsurance.