Question

1-Why is time value of money analysis used in risk management decision making?

2-Distinguish between facultative reinsurance and treaty reinsurance?

Answer 1

Answer : 1) Time value of money analysis used in risk management decision making as the time value concept incorporates the interest earning capacity.Actually Time value of Money used in risk management analysis leads to optimum decision making as it incorporates the interest earning capacity on money. The same amount have different values when received or paid in different period dur to time value. Failure to consider time value of money can sometime lead to bad risk management Decision making. In most of the cases when a firm is taking capital budgeting decision time value of money concept is considered important because the initial outlay is in period 0 but the benefits or cash flows are realised for several periods.Therefore Time value of money analysis is used in risk management decision making for optimal decision making.

Answer :2) Facultative Reinsurance is the type of reinsurance where contract relates to particular risk and is expressed in reinsurance policy .Each Transaction has to be negotiated individually. In facultative reinsurance the insurer company that passes the risk (ceding company) can offer single risk or package of risks to a reinsurer. But both parties ceding company or reinsurer company are free to accept or reject .Basically this type of reinsurance is done for large amount hazardous risks as it can be modified for sharing of risk between ceding company and reinsurer.

Under Treaty Reinsurance ,unlike faculatative reinsurance , a treaty type of coverage is in effect for specified period rather than per risk or contract basis. For the duartion of the contact , the reinsurer agrees to cover all or portion of the risks that may be incurred by the insurance company being Covered.