Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): financial/finite insurance and reinsurance
The terms financial or finite (re)insurance are generally used to describe contracts which are (or purport to be) contracts of insurance which have the characteristics that
- the time value of money is an integral (and often explicit) part of the pricing of the contracts, and
- their terms are such that the discounted value of the premiums to be paid under them is similar to the discounted value of the payments that are likely to be made by the insurer or reinsurer, whether in response to claims or otherwise.
Whereas conventional insurance involves the spreading of the losses of the few among the many, financial insurance is rather the spreading of one’s own losses across a series of fiscal periods.
Such contracts may be prospective or retrospective.