Franchise Covers: Definition, Application, and Risk Management Strategies

In the world of finance and insurance, understanding the intricacies of reinsurance plans like franchise covers is crucial. This article delves into the concept of franchise covers, shedding light on their function, application, and significance in the insurance industry, providing valuable insights for professionals in finance and insurance sectors.

Franchise covers, also referred to as trigger covers, play a vital role in the realm of reinsurance. They operate by aggregating claims from multiple policies to create a reinsurance claim, thereby setting thresholds that insured parties must meet before the reinsurer intervenes.

Franchise covers establish the minimum threshold of financial responsibility for insurance companies, similar to excess of loss mechanisms. However, unlike excess of loss, franchise covers pay the full amount of the loss once the threshold is surpassed, providing a nuanced approach to managing risk.

In practice, franchise covers are activated when specific loss benchmarks exceed predetermined thresholds. These benchmarks may be based on losses experienced by particular lines of business or the broader market, offering flexibility and tailored risk management solutions for insurers.

Franchise covers are designed to limit the amount of reinsurance provided to a ceding insurer and are activated when specific loss benchmarks exceed predetermined thresholds.

While both franchise covers and excess of loss set thresholds for financial responsibility, franchise covers pay the full amount of the loss once the threshold is surpassed, whereas excess of loss excludes any amount below the threshold.