Glossary

Captive Insurance Companies

 

Captive insurance companies are insurance companies established with the specific objective of insuring risks emanating from their parent group or groups, but they sometimes also insure risks of the group’s customers. This is an alternative form of risk management that is becoming a more practical and popular means through which companies can protect themselves financially while having more control over how they are insured.

 

Equalization of Reserve

 

An account where an insurance company deposits funds to use in an emergency. That is, if an insurer finds itself in a position where it needs to pay more claims than it had anticipated, it may use funds from the equalization reserve to ensure that it fulfills its contractual obligations. An equalization reserve helps prevent any potential cash flow problems for the insurance company. It is especially useful in the event of an act of God where many policyholders live in the affected area. These catastrophes can include floods, earthquakes, or fire and they can significantly deplete an insurance company’s equalization reserve amount. An insurance company’s long term amount of reserve that is kept in order to prevent the depletion of cash flow if an unforeseen disaster were to occur.

 

Facultative Reinsurance

 

Facultative Reinsurance is negociated separately for each insurance policy that is reinsured. Facultative reinsurance is normally purchased by ceding companies for individual risks not covered, or insufficiently covered, by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks. Underwriting expenses, and in particular personnel costs, are higher for such business because each risk is individually underwritten and administered. However as they can separately evaluate each risk reinsured, the reinsurer’s underwriter can price the contract to more accurately reflect the risks involved. Ultimately, a facultative certificate is issued by the reinsurance company to the ceding company reinsuring that one policy.

 

Financial Risk Management

 

Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk, particularly credit risk and market risk. Other types include Foreign exchange, Shape, Volatility, Sector, Liquidity, Inflation risks, etc… Similar to general risk management, financial risk management requires identifying its sources, measuring it, and plans to adress them.

Financial risk management can be qualitative and quantitative. As a specialization of risk management, financial risk management focuses on when and how to hedge using financial instruments to manage costly exposures to risk.

In the banking sector worldwide, the Basel Accords are generally adopted by internationally active banks for tracking, reporting and exposing operational, credit and market risks.

 

FINMA Swiss Financial Market Supervisory Authority

 

FINMA Swiss Financial Market Supervisory Authority is the Swiss government body responsible for financial regulation. This includes the supervision of banks, insurance companies, stock exchanges and securities dealers as well as other financial intermediaries in Switzerland

FINMA is an independent institution with its own legal personality based in Bern. It is institutionally, functionally and financially independent from the central federal administration and the Federal Department of Finance and reports directly to the Swiss parliament.

 

Reinsurance

 

Reinsurance is insurance that is purchased by an insurance company (the “ceding company” or “cedant” or “cedent” under the arrangement) from one or more other insurance companies (the “reinsurer”) directly ot through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons. The ceding company and the reinsurer enter into a reinsurance agreement which details the conditions upon which the reinsurer would pay a share of the claims incurred by the ceding company. The reinsurer is paid a “reinsurance premium” by the ceding company, which issues insurance policies to its own policyholders.

 

Self-Insurance

 

Self-insurance is a risk managment method in which a calculated amount of money is set aside to compensate for the potential future loss. If self-insurance is approached as a serious risk managment technique, money is set aside using actuarial and insurance information and the law of large numbers so that the amount (similar to an insurance premium) is enough to cover the future uncertain loss.