Franchise Cover

What Is a Franchise Cover?

A franchise cover is a reinsurance plan by which the claims from several policies are aggregated to form a reinsurance claim. Franchise covers are otherwise called loss trigger covers. Different types of non-relative reinsurance with aggregate covers are aggregate stop-loss reinsurance and catastrophe covers.

Understanding Franchise Covers

The franchise cover is a type of threshold utilized in reinsurance contracts to limit the amount of reinsurance gave to a ceding insurer. Insurance contracts frequently require the insured to hold losses up to a certain threshold, with the insurer just covering losses that surpass this threshold.

The amount of losses that the insurer will eventually pay for is set by the policy's coverage limit. Reinsurance contracts can have comparative elements, implying that the reinsurer isn't responsible for losses until a certain threshold is met.

Franchise and Excess of Loss

Franchise decides the base threshold of the insurance organizations' financial responsibility. A few insurers feel that to thoroughly bar an amount from a claim is somewhat unforgiving and embrace an alternate approach by applying a franchise. A franchise will apply to the policy similarly and for similar reasons as an excess of loss, yet if a claim surpasses the franchise, the full amount of the loss will be paid.

Assuming a claimant has a small claim that is underneath the policy franchise, there is no difference in how the two systems are applied — in neither one of the cases will any amount be paid. Notwithstanding, in the event that the loss is over the franchise limit, the amount is paid in full.

Franchise Covers in Practice

Franchise covers are triggered when a loss benchmark surpasses a foreordained threshold, at which point the reinsurer will cover the ceding insurer's losses. The benchmark might be set to losses experienced by a specific line of business ceded by the insurer, or it could be set to losses experienced by the more extensive market. Assuming the threshold is set to the experience of the more extensive market, the reinsurer and ceding insurer will settle on the specific benchmark to utilize and demonstrate this in the reinsurance contract.

Illustration of Franchise Covers

For instance, a property insurance company goes into a reinsurance contract with a franchise cover. The trigger depends on losses experienced by the more extensive market, with the reinsurer demonstrating that it will cover the ceding insurer's losses assuming the market experiences $15 million in losses. The attachment point — the place where the insurer will initially pay — is set at $10,000. In the event that the market experiences $20 million in losses, the reinsurer will cover the ceding insurer's losses in excess of $10,000.

Features

• Franchise covers are triggered when a loss benchmark surpasses the foreordained threshold set by a line of business or the experience of the more extensive market.
• A franchise cover, or trigger cover, is a reinsurance plan in which the claims from several policies are aggregated to form a reinsurance claim.
• The franchise cover limits the amount of reinsurance gave to a ceding insurer.