GIM8250 - Reinsurance and other forms of risk transfer: financial reinsurance and alternative risk transfer (ART): over the counter products
A number of over-the counter derivative products may be used to transfer risk.
Insurance option contracts are like any other option contract. »Ê¹ÚÌåÓýapp prospective insured pays an option fee to the prospective insurer to secure the right to enter an insurance contract at agreed premium, terms and conditions. »Ê¹ÚÌåÓýapp purchaser can call the option if a loss occurs and secure coverage for the remaining period of the contract. »Ê¹ÚÌåÓýapp cost of conventional non-cancellable insurance might be double that of a policy cancellable at say 60 daysâ€� notice. An option contract purchased together with a linked cancellable policy will provide the same long-term coverage at lower cost. For insurers the advantage of such arrangements is that the option fee is not a premium and does not require any capital support.
Post event insurance contracts may be used where an insured loss exceeds the insurance cover for an event, for instance a large compensation claim. Having appointed its own legal advisers, an insurer may indemnify the insured against a single specific claim for a large premium. If the final award against the insured is less than expected, a proportion of the premium will be returned to the insured.