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Insurance risk is the risk arising from (a) uncertainties about the ultimate amount of net cash flows from premiums, commissions, claims, and claim settlement expenses paid under the contract (i.e., underwriting risk) and (b) the timing of the receipt and payment of those cash flows (i.e., timing risk). An entity may purchase reinsurance for its insurance risk for a number of economic reasons, including to:
  • reduce its exposure to the variability of particular risks or classes of risks;
  • obtain financial capacity to accept risks and policies involving amounts larger than could otherwise be accepted;
  • protect against accumulations of losses arising out of catastrophes (e.g., a single natural event);
  • protect against accumulations of losses in excess of an entity’s risk appetite;
  • facilitate the growth of new product lines or otherwise leverage a reinsurer’s expertise;
  • exit a line of business (e.g., through reinsurance of 100% of the risks and rewards of the line of business);
  • help fund product development and acquisition expenses; or
  • accomplish tax and/or regulatory (e.g., capital management) objectives.
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