GB2412454A - Coverage of claim expenses in an insurance policy - Google Patents

Abstract

A contract providing collateral loss coverage that enables an exchange of money between two parties using a method that defines this coverage as a function of the recovery on an insurance policy. It may provide coverage for loss expenses when a contract of insurance or reinsurance is in force. Standard insurance does not restore the policy holder to the same exact position that existed before loss due to associated costs, limits, deductions. The invention provides a means of financing expenses that are associated with insured loss.

Description

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COLLATERAL COVERAGE

BACKGROUND OF THE INVENTION--FIELD OF INVENTION

This invention relates to providing coverage for loss expenses when a separate contract of insurance or rensurance Is n-force.

BACKGROUND OF THE INVENTION

Insurance is a means by which the risk of loss is contractually shifted from the insured to the insurer. Under this contractual arrangement, the insured pays a premium to the insurer for agreeing to bear some potential loss that the insured faces.

Underwriting Not all potential losses are insurable and an insurer must expend significant efforts to ensure that applicants have met its standards. This process is known as underwriting.

Although such standards encompass many elements, there are two elements that are of particular importance. The causes of loss that are covered by an insurance policy must be defined and the policy must carry a premium that is reasonable in relation to the potential for loss.

Because the terms of insurance are relatively complicated and the coverage definition is critically important to both the insurer and insured, extensive consideration is warranted.

Since insurers have much greater expertise in this area, most insurance buyers use insurance agents and brokers to help them make good purchasing decisions.

Loss Adjustment Substantiating insurable losses can be very expensive for both insureds and insurers. The costs that insurers have in determining whether losses occurred and to what extent they are covered under the insurance policies that they issue are known as loss adjustment expenses. a

In instances where coverage exists, claimants must spend considerable effort identifying and substantiating their losses. For large claims, it is not unusual for individuals and companies to hire their own adjusters and accountants to ensure that they get the most out of their insurance.

Loss Definition and Valuation Insurance works best in instances where the definition of loss is obvious and the amount of loss is clear. If a loss is not easy to define or prove, it should not be insured because it will result in unduly complex coverage terms, disagreements over coverage interpretation, and difficulties in proving and quantifying losses. Because insurance is based on the principle of indemnity, it is impossible to obtain a reimbursement for a loss without substantiating the amount of the loss. For most losses this is problematic, and for many losses this is impossible.

To be eligible to receive insurance payments, insurance buyers must be able to prove that they had losses and that those losses fit within the coverage definition of their insurance.

Losses can be categorized in many different ways such as life, health, property, casualty, etc. More generally, losses can be categorized as being direct or collateral.

A direct loss is essentially the loss itself. A collateral loss, sometimes referred to as an indirect or consequential loss, is engendered by the same event that produces the direct loss or by the direct loss itself. For example, the direct loss of a factory that is destroyed due to a fire would be the cost of rebuilding the factory. The collateral losses would be all of the costs associated with the inconvenience of not having a workable factory, including losses to the factory owners as well as third parties that may have some direct or indirect economic relationship to the success of the factory such as suppliers and customers.

Direct losses, such as the physical cost of the buildings in this example, are typically much easier to estimate than collateral losses such as lost income or extra expenses that may result from such an event. Management and employees must spend time trying to recover from this event, and this event may adversely affect third parties too. In the end, there is always a significant amount of opportunity cost that can never be adequately assessed.

Consider for example the loss of an automobile. Since it is a physical thing, it should be obvious that there was a loss and the extent of that loss. Nevertheless, the collateral costs (for example lost time and other expenses) associated with fixing or replacing the car are not typically covered by insurance. Similarly, insurance may cover the direct cost of paying for and defending against a liability claim, but it typically would not cover the costs necessary to restore an entity's reputation via an advertising program or to institute new practices and procedures.

While collateral losses vary in size depending on the specifics of the loss, it is clear that they occur with every type of insurable loss. In most cases, companies and individuals are not insured against collateral losses because these losses are too difficult to define in advance or prove after the fact to make an insurance transaction viable for both insurers and insurance buyers.

Furthermore, policyholders often have considerable discretion over collateral losses, making them impossible to quantify and subject to significant moral hazard. Since collateral losses are becoming an ever larger part of most companies' loss experience, it is no wonder that companies are increasingly frustrated with insurance.

Moral Hazard Because insurance limits are often over a hundred times more than insurance premiums, the insured's personal habits, morals, and attitude toward losses are very important. Insurers attempt to reduce moral hazard by instituting deductibles and coinsurance clauses, and reducing insurable limits. This may dissuade applicants who are more predisposed to losses from selecting a given insurer, and it helps change attitudes toward potential losses by forcing insureds to retain a larger share of those losses.

Unfortunately, each of these measures also means that the insured is never fully compensated for a loss. While insurers may have reduced moral hazard, they have done so at the cost of making insurance less valuable to the insured.

Agreed Value Even when it is relatively easy to substantiate that a direct loss has occurred, it is not always easy to determine the value of that loss. In relatively simple cases, the insured must show receipts, appraisal documents, or other evidence that would substantiate value. Often appraisers must be called in to provide their opinions about value.

In many cases, the value of something may be open to interpretation. One technique that insurers have employed in circumstances where losses are relatively easy to substantiate but difficult to value, is to objectify the loss value at the time a policy is written.

Life policies operate on the principal of agreed value. Rather than attempt to dispute how much a life is worth after it is over, insurers and insureds agree to a certain value up-front and base premiums on that value. This principle is also employed for certain very special risks such as the value that was placed on Betty Grable's legs or the successful launch of an Ariane rocket.

Inventory insurance is another example of this principle. With inventory it is generally accepted that different types of companies have incurred costs that are greater than the purchase price of the goods they own. From an economic perspective, the value is not the invoice cost but the replacement cost of the inventory at a particular stage in the production and retailing process.

Rather than dispute this point, insurers and insureds often agree to a stated percentage above the purchase price of the goods. Under this arrangement, the insurer and the insured increase the limit of the insurance to some commercially reasonable amount, and the price of this coverage is increased to take account of the higher loss valuation. Thus, if the insured chooses to buy this extra coverage in an amount of 10% and has a loss, the insured will be paid the invoice amount for the goods that were lost plus an additional 10%.

Transaction Costs Selecting coverage, defining losses, and meeting other insurance requirements can be very burdensome for both insurers and their customers. In the year 2001, US property and casualty insurers spent more than $133 billion dollars in brokerage commissions, underwriting, and loss adjustment expenses. This amount represents approximately 39% of the premium dollars that they earned in that year.

Moreover, this amount does not reflect the significant costs that insurance buyers expended in getting coverage, substantiating their losses, and proving that those losses were covered under their insurance policies. The amount of time and expense that is involved in buying insurance and collecting on it can be very discouraging to insurance buyers, and it places new burdens on them when they are least able to deal with them.

Furthermore, it is not unusual for there to be disputes about what was covered, after a loss has occurred, and many claimants initiate litigation proceedings against their insurers to force them to pay. The inability to define in advance all the losses that will be covered by the policy makes it difficult for the insurance buyer to assess the value of the insurance policy and makes it difficult for insurers to determine a fair premium.

The high cost of underwriting and loss adjusting are also huge deterrents to companies that would like to finance insurable risk. In effect, the large transaction costs associated with insurance represent a huge barrier to entry that discourages third parties from offering coverage and increases the cost of capital that is necessary to finance risk.

Reinsurance Reinsurance is essentially insurance for insurance companies, and it is reasonable to think of reinsurance as a special form of insurance. In practice, reinsurance faces all of the same issues that insurance does, and a significant amount of time and resource is spent underwriting, defining covered losses, and in the loss adjustment process. Also, it is often difficult to make a clear distinction between insurers and reinsurers since many of the largest insurance and reinsurance companies have business units that write both insurance and reinsurance.

Reinsurance enables insurers to buy protection against certain potential losses by paying premiums to another insurer called a reinsurer. Using this mechanism, an insurer can reduce its risk of loss by ceding risk on an individual basis (facultative reinsurance) or on a large number of risks (automatic reinsurance).

Reinsurance can be classified as either proportional or non-proportional in relation to the underlying insurance policies. Under proportional reinsurance, a reinsurer agrees to assume some proportionate share of the premiums and losses of the underlying insurance policies.

Quota share reinsurance is a type of reinsurance that is both automatic and proportional.

Under this arrangement, a reinsurer agrees to accept a given percentage of every risk within a certain defined category that an insurer writes in return for the same percentage of premium. Thus, in the case of 30% quota share, a reinsurer must pay 30% of any loss that is sustained on exposures within a given risk class in return for receiving 30% of the premiums for that same class of risk.

By employing a coverage mechanism that is proportional and automatic, insurers and reinsurers can reduce the underwriting and loss adjustment expenses that would otherwise be a part of their reinsurance agreements. However, this technique is only used to share risks between insurers and reinsurers. It does not increase the amount of risk that has been underwritten on an overall basis. The original insured is not involved in reinsurance transactions and gains no additional coverage as a result of it. Moreover, the insurer is obligated to pay the insured regardless of whether the reinsurer pays the insurer.

Retrocession Retrocession is the term that describes the reinsurance of a reinsurer. Retrocession is used by reinsurance companies to reduce their exposures to certain types of risk.

Derivatives Derivatives are financial contracts whose pay-offs are based on the performance of an underlying asset, index, or reference rate. They include options, futures, forwards, and swaps. Derivatives may be used to speculate, by permitting investors to assume additional risk, or to hedge risk, by allowing entities to transfer risk to other market participants.

As a risk management tool, derivatives are commonly used to reduce marketbased risks such as interest rates, currency rates, or price levels of commodities and financial assets.

Because these types of risk are exogenous to any particular entity, they have certain qualities such as transparency and non-manipulability that permit them to be traded in a standardized and highly efficient way.

Generally speaking, companies can use financial contracts to hedge against changes in market rates and prices but not against their own idiosyncratic risk. Companies must manage these risks by themselves or, to the extent they can, buy insurance.

Securitization Attempts have been made to standardize certain types of insurable risks, embed those risks in financial instruments, and trade them. During the 1990's, a number of efforts were made to develop catastrophe indices and related financial contracts that could be used to transfer the more exogenous parts of the insurance industry's loss experience. The most notable of these efforts were undertaken by the Insurance Services Office, Property Claims Services, and IndexCo. These companies produced and published catastrophe indices that were the basis for derivative contracts that were traded on the Chicago Board of Trade and the Bermuda Commodities Exchange, respectively.

Such large-scale efforts to standardize insurable risk have largely been abandoned.

However, a number of insurers and reinsurers have had some limited successes in creating bond instruments and other types of securities that have enabled them to transfer a portion of their insurable risks to others. These transactions typically involve transferring catastrophic risks such as earthquake and hurricane losses that are considered to be substantially outside of any particular insurer's and reinsurer's ability to control or influence.

These transactions share some similarities to reinsurance, and it is not uncommon for reinsurers to be some of the largest investors in these deals. However, these types of transactions have never been based on a single insurance or reinsurance policy. In addition, there is no standard functional relationship between the coverage that was offered and the underlying insurance policies. Also, the price that was charged for these instruments did not bear any standard functional relationship to the premium that was paid for the underlying insurance or reinsurance policies.

Instead, the price of a securitization is a function of how well a given transaction is received by the market at the time a deal is executed as well as the coverage that is provided.

Although coverage may be described in a variety of ways, it often begins at some relatively high loss threshold and typically includes multiple provisions that must be satisfied before any payments are due. Furthermore, securitizations are often "funded" to eliminate credit risk. This necessitates the inclusion of a large interest rate component that is typically absent in most insurance or reinsurance transactions which are often highly levered.

Problems that Insurers and Reinsurers Face Insurance and reinsurance companies face many of the same choices and problems that individual insureds confront. They can either do without some form of risk protection from other parties or purchase some form of coverage to help mitigate their potential losses. Like primary insurance, the risk financing mechanisms available to insurers and reinsurers involve very high transaction costs, typically in the range of 30% to 40% of every dollar of reinsurance premium, and the collateral costs of the losses they sustain are not typically covered.

The most obvious and significant of the collateral costs that an insurer or reinsurer might confront is the cost of collecting the funds that they are due under a reinsurance treaty or other risk financing mechanism. This involves substantial work on the part of the insurer or reinsurer and often necessitates a legal battle before a dispute can be resolved. Also, resolution often involves accepting some amount that is considerably less than what the insurer or reinsurer believes it is owed under the contract. Thus, a large part of the collateral costs that insurers or reinsurers bear when buying coverage is related to their counterparties' credit worthiness and willingness to pay.

Because these costs are difficult to define in advance or prove after the fact, and because they are incurred at the discretion of an insurer or reinsurer, they do not meet the classical definition of insurable losses. Although it is impossible to obtain overall market statistics that describe the total collateral costs of insurers and reinsurers, it is reasonable to believe that this amount is in the billions of dollars annually.

Problems that Reinsurance Advisors Face Reinsurance brokers and other third-party advisors that are connected to the reinsurance industry are subject to boom and bust periods as the fortunes of the reinsurance industry change and as business volumes rise and fall with particular market conditions. These changes can cause significant volatility in earnings as advisors and other third parties find that they either have too much or too little capacity. The property catastrophe business is a

good example.

Most of the time, there are no catastrophes so the reinsurance intermediary is content to have a relatively small staff of claim experts and processors. When there is a catastrophe, they are deluged with work, and their expenses increase dramatically as they struggle to honor their commitments to process and prosecute their clients' catastrophe claims.

Because these extra costs are difficult to define and prove and are to a large degree incurred at the discretion of the intermediary, they do not meet the classical definition of losses that are insurable. Thus, reinsurance advisors are stuck with a substantial business risk that is collateral to the reinsurance transactions that they help place.

New Approach Needed Given high transaction costs and the necessity of defining and proving losses, it becomes clear that insurance and reinsurance are risk financing solutions with significant limitations.

Insurance and reinsurance proceeds are supposed to restore the policyholder to the same exact position that existed before the loss occurred. In practice, this is impossible.

Collateral losses, deductibles, coinsurance, and coverage limits mean that the insured will never be fully recompensed for its losses.

Clearly another approach is needed. Such an approach would permit more of the uncertainty associated with insurable losses to be objectified and would reduce the transactional burdens that are placed on the parties to an insurance or reinsurance contract.

BACKGROUND OF INVENTION-OBJECTS AND ADVANTAGES

The object of the invention is a means of financing expenses that are associated with insured loss events. Collateral loss expenses include loss of income due to productivity impairment and other types of expenses that are currently either expensive or impossible to insure such as claim, administrative, management, accounting, legal, and reputation maintenance. Because such losses are difficult or impossible to define or prove, they are not generally economic to insure.

Collateral Coverage does not require a detailed coverage definition or involved underwriting and loss adjustment processes the way insurance or reinsurance does. As a result, it eliminates more than 75% of the transaction costs that insurers would typically have if they offered such coverage. These cost include sales, underwriting, and loss adjustment expenses and amount to approximately forty percent of property/casualty premium dollars in the United States. Reducing these costs increases profits for coverage sellers and enables them to reduce premiums for coverage buyers.

Collateral Coverage is extremely versatile from a contractual perspective and may be structured as an insurance policy or as some other type of contract. This is important lO because it enables companies and individuals that are not licensed as insurers to provide this coverage.

By substantially eliminating the underwriting and loss adjustment processes that are necessary to provide insurance-type coverage and by reducing the licensing limitations of insurance regulation, Collateral Coverage reduces barriers to entry and enables companies other than primary insurers to finance the risk of collateral losses. This gives insurance buyers access to new sources of risk capital and is particularly valuable in "hard" insurance markets when prices are high and coverage is difficult to obtain.

There are an infinite variety of ways to define and structure the loss coverage and the premiums of Collateral Coverage. This is useful because it enables coverage buyers and sellers to create risk transfer products that are tailored to their own specific needs.

Collateral Coverage also permits access to cheaper sources of capital than any other existing financial alternative. This is because individual insurers exhibit much greater loss volatility than does the insurance industry as a whole. By offering Collateral Coverage to the insureds of many different insurers, a coverage provider can mimic the loss experience of the industry and reduce its loss volatility. This will diminish the amount of capital that is needed to finance this risk while making the coverage providers significantly more attractive to investors since higher returns and lower profit volatility is exactly what investors want.

These benefits can then be shared with coverage buyers in the form of lower premiums.

Furthermore, Collateral Coverage permits entities to gain coverage based on insurance that someone else has. This might make sense, for example, in a situation where one company is highly dependent on another and desires some collateral loss protection if the company that it is dependent on sustains an insurable loss.

Further objects and advantages are to provide a cheap, efficient, and convenient means of providing insurance and reinsurance buyers with an effective means of loss expense coverage. Other objects and advantages will become apparent from a consideration of the

ensuing description and drawings. 1\

SUMMARY

Collateral Coverage is a new class of financial contract that enables certain types of loss to be financed by defining loss coverage as a function of the recovery on an insurance or reinsurance policy or group of such policies.

DETAILED DESCRIPTION -- PREFERRED EMBODIMENT

Product Overview The following description illustrates how an entity could use Proportional Collateral Coverage to eliminate most of the work that is currently required to underwrite loss coverage and to adjust claims while providing an entirely new type of loss coverage. A Proportional Collateral Coverage contract has two functional relationships to an insurance or reinsurance contract. One relationship defines the losses covered by the Collateral Coverage contract in terms of the losses that will be recovered under an insurance policy, and the second relationship defines the premium of the Collateral Coverage contract in terms of the premiums paid for an insurance contract.

The coverage seller would communicate its willingness to offer coverage on these terms to potential buyers. One simple means of accomplishing this would be to develop a schedule that would be shown to potential buyers indicating the amount of coverage being offered and the price relative to the insurance or reinsurance contract. The following is an example of such a schedule.

Coverage Price 10% of insured loss recoveries 10% of insurance premiums 15% of insured loss recoveries 15% of insurance premiums 20% of insured loss recoveries 20% of insurance premiums 25% of insured loss recoveries 25% of insurance premiums 30% of insured loss recoveries 30% of insurance premiums Based on this information, a buyer would select the most appropriate coverage amount based on his expectation of how much additional loss expense he might have over his insurance coverage and would submit a proposed contract to the coverage seller for execution.

The coverage seller would review the buyer's coverage submission request along with proof of the underlying insurance policy and payment. If the coverage submission is incomplete or incorrect in some way, the seller may reject it and send an explanatory note back to the buyer. Assuming the coverage submission is accepted, the coverage seller would send an executed contract to the buyer that could be issued in the form of an insurance policy or some other type of contract.

If the Collateral Coverage buyer has a loss event, the buyer would submit proof of the payment that it received from its separate insurance contract to the Collateral Coverage seller, and the coverage seller would pay the buyer in accordance with the Collateral Coverage contract's terms. If the buyer does not receive a payment under its insurance policy, the Collateral Coverage seller would make no payment to the buyer.

Cost/Benefit Analysis The following discussion illustrates the cost and benefit of Collateral Coverage in relation to an insurance policy. In this example, an insured is concerned about insured losses that might range from $0 to $1000. The insured recognizes that there are likely to be collateral losses that are uninsurable over this range of loss experience and would like to obtain coverage for them if possible.

The insured has three choices: buy no insurance and suffer losses as they occur; purchase an insurance policy for a premium of $30 that contains a deductible of $50 and an insured limit of $1000, or buy the insurance policy and supplement it by purchasing Collateral Coverage equal to 30% of the insurance policy on a proportional basis. This would cost \S 30% of the insurance policy's premiums, or an additional $9, and would pay 30% of any losses that are recovered under the insurance policy.

1 200,,, C-2001 e 8400 i_ -800 _ \_ -1200 - , , , / , 1, , 1 1 0 -100 -200 -300 -400 -500 -600 -700 -800 900 -1000 Insurable Losses 1000 Insurance Limit with 50 Deductible 30% Proporbonal Collateral Coverage Losses Without Insurance _ _ _. = _ _=_. _. = _. _ _ Net CosVBenefit 1000 Insurance Limit, Deductible, 30% 1000 Insurance Limit, Proportional Net CosVBenefit of No Insurance 50 Deductible Collateral Coverage Transurance 0 -30 -39 9 -100 -80 -74 6 -200 -80 44 36 -300 -80 -14 66 -400 -80 16 96 -500 -80 46 126 -600 -80 76 156 -700 -80 106 186 -800 -80 136 216 -900 -80 166 246 -1000 -80 196 276 The graph above shows the net cost or benefit of each of these options over the relevant range of loss experience. The total cost or benefit equals the loss amount minus premiums and deductibles, plus any insurance and any Collateral Coverage recoveries.

The $30 cost of insurance premiums and the $50 deductible prevent any net recovery until there has been at least $80 of insurable loss. This net recovery point for insurance could be higher to the extent that there are collateral losses that are not insurable. Putting aside the issue of collateral losses, the cost of the insurance premium and the presence of an insurance deductible make it impossible for the insurance buyer to ever be made whole by insurance. As a result, the line representing the option of buying insurance will always be below the $0 line in the chart regardless of the specifics of a particular insurance policy.

Similar to the insurance, the 30% proportional Collateral Coverage also provides significant benefits to the insured for insured losses that are greater than $80. However, as the loss experience gets worse, Collateral Coverage not only makes up for the premiums and the deductible that theinsured paid, but also offers the ability to cover the additional collateral losses that the insured is concerned about. These losses cannot be covered in an economically feasible way by traditional insurance because they are too difficult to define in advance or to prove after the fact.

The Value of Collateral Coverage The value of Collateral Coverage is always established provided that the price of this coverage is the same as or less than the separate insurance coverage on a dollar of premium for dollar of insured limit. In essence, an insured has indicated that this coverage has value at this price by its willingness to pay this premium for the underlying insurance.

Thus, if the underlying insurance coverage is $10 million and cost $1 million, Collateral Coverage can be sold at a ratio of $10 of limit to $1 of premium and provide value to a protection buyer. In certain circumstances, Collateral Coverage may be of much greater value than this relationship suggest. In which case, a higher Collateral premium could be charged and still provide value to the buyer. For example, in "hard market" conditions or in cases where loss costs are particularly difficult to determine, Collateral Coverage may be significantly more valuable to coverage buyers than the ratio of insured limit to premium on the underlying insurance policy.

By defining collateral coverage using a functional relationship to the loss recovery of an insurance or reinsurance policy, losses that would otherwise be impossible to define, become insurable. This produces an added benefit because it eliminates much of the underwriting and loss adjustment costs that insurance typically involves. These transaction costs can be reduced further, as in this example, by charging premiums that bear a functional relationship to the premiums paid for the underlying insurance. In combination, these techniques enable collateral losses to be defined and underwriting and loss adjustment expenses to be reduced by more than 75%.

Thus, Collateral Coverage can be sold at a substantial discount to an underlying insurance policy and still provide value to both coverage buyers and coverage sellers. Assuming that underwriting and loss expenses are approximately 40% of insurance premiums, as they typically are for most US property/casualty insurance, a Collateral Coverage seller could reduce its premium rate by 30% in relation to the underlying insurance and still earn the same rate of return that the insurance company would earn on the underlying insurance policy. Using this assumption, the coverage provider in the example above could offer this coverage at a ratio of $10 of limit for $0.70 of premium.

Because Collateral Coverage substantially eliminates traditional insurance transaction costs, it reduces important barriers to entry in the insurance market and allows new entities to offer this type of coverage. Since Collateral Coverage piggybacks off of the underwriting and loss adjustment practices of the underlying insurance, an entity can provide this coverage without necessitating the underwriting and claim personnel that a typical insurance company needs.

Additional Embodiments Although the basic methodology for Collateral Coverage remains the same as described above, there are numerous embodiments of this concept. This method can be applied to all types of insurance and reinsurance policies including, but not limited to property, casualty, health, and life insurance coverages. Moreover, this method of underwriting and loss adjusting can be applied to a single insurance or reinsurance policy or to collections of such policies.

Collateral Coverage can be offered by the primary insurers or reinsurers or by third parties such as other insurers, reinsurers, banks, or other types of entities. Furthermore, Collateral Coverage can be offered in the form of an insurance or reinsurance policy or take many other contract forms. Collateral Coverage may be offered in amounts that are directly 1Q proportional or indirectly related to the premiums paid and the losses that are recovered from an underlying insurance policy. Moreover, a Collateral Contract may be constructed so that its premium bears no functional relationship to the premium of the insurance policy used to determine the contract's losses because the Collateral Contract's premium is determined by using some other underwriting methodology.

Advantages From the description above it should be clear that this process satisfies many purposes that can not be accomplished via traditional insurance or any other financial technique, operation, or type of contract that is currently in use to fund additional loss expenses. By simplifying the insurance process, this method reduces the costs that are currently part of the insurance process by as much as 75%, eliminating the need: (a) To define coverage in terms of loss events; (b) To separately underwrite each risk; (c) For an extensive and cumbersome sales process; (d) To establish proof of actual losses, and (e) For a lengthy or disputatious claims adjustment process by the coverage provider.

This methodology also: (f) Permits buyers to receive coverage for losses that are currently difficult or impossible to insure; (g) Allows entities to select the amount of coverage and relationship to underlying loss experience that best suits their needs; (h) Allows insurers to offer a new form of coverage to their customers; (i) Permits the coverage to be structured as insurance or as some other type of financial contract, (j) Gives insurance buyers access to new sources of capital by permitting third parties to offer them coverage; (k) Reduces the costs of coverage for both providers and insurance buyers permitting significant premium reductions; (1) Permits non-insurers to offer loss coverage; and (m) Introduces more price competition to the insurance market by reducing the huge infrastructure costs that have been necessary to offer coverage to insurance buyers.

Although the description above contains certain specifics, these should not be construed as limiting the scope of the invention but as merely providing illustrations of some of the presently preferred embodiments of this invention. Clearly this methodology can be applied in many ways to all types of insurance and can be structured as insurance or as other types of financial contacts or separate provisions of other contracts. Thus the scope of the invention should be determined by the appended claims and the legal equivalents, rather than by any particular example described above.

Claims (14)

1. CLAIMS: We claim: 1. A contract for providing collateral loss coverage

   that enables an exchange of money between two parties: (a) using a method that defines said collateral loss coverage as a function of the recovery on an insurance or reinsurance policy.
2. 2. The contract of claim 1 that is structured as one or more provisions in any type of contract.
3. 3. The contract of claim 1 where said contract's loss coverage is directly proportional to the losses recovered under said insurance or reinsurance policy.
4. 4. The contract of claim 1 where said contract's loss coverage is not directly proportional to the losses recovered under said insurance or reinsurance policy.
5. 5. The contract of claim 1 where said contract's premium bears a functional relationship to the premium charged for said insurance or reinsurance policy.
6. 6. A contract for providing collateral loss coverage that enables an exchange of money between two parties, where the coverage buyer is someone other than an insurer or a reinsurer: (a) using a method that defines said collateral loss coverage as a function of the recovery on an insurance or reinsurance policy.
7. 7. The contract of claim 6 that is structured as one or more provisions in any type of contract.
8. 8. The contract of claim 6 where said contract's loss coverage is directly proportional to the losses recovered under said insurance or reinsurance policy. i]
9. 9. The contract of claim 6 where said contract's loss coverage is not directly proportional to the losses recovered under said insurance or reinsurance policy.
10. 10. The contract of claim 6 where said contract's premium bears a functional relationship to the premium charged for said insurance or reinsurance policy.
11. 11. A contract for providing collateral loss coverage that enables an exchange of money between two parties: (a) using a method where said exchange is determined by two functional relationships to an insurance or reinsurance policy, where one said functional relationship defines loss coverage as a function of the recovery under said insurance or reinsurance policy and the other said functional relationship calculates the premium of said contract as a function of the premium paid for said insurance or reinsurance policy.
12. 12. The contract of claim l l that is structured as one or more provisions in any type of contract.
13. 13. The functional relationships of claim 1 la where said contract's premium and loss coverage are proportional lo the premium charged and the losses recovered under said coverage parts of an insurance or reinsurance policy.

    13. The functional relationships of claim 1 1 where said contract's premium and loss coverage are directly proportional to the premium charged and the losses recovered under said insurance or reinsurance policy. I
14. 14. The functional relationships of claim 1 1 where said contract's premium and loss coverage are not directly proportional to the premium charged and the losses recovered under said insurance or reinsurance policy.

    15. A contract for providing collateral loss coverage that enables an exchange of money between two parties, where the coverage buyer is someone other than an insurer or a reinsurer: (a) using a method where said exchange is determined by two functional relationships to an insurance or reinsurance policy, where one said functional relationship defines loss coverage as a function of the recovery under said insurance or reinsurance policy and the other said functional relationship calculates the premium of said contract as a function of the premium paid for said insurance or reinsurance policy.

    16. The contract of claim 15 that is structured as one or more provisions in any type of contract.

    17. The functional relationships of claim 15 where said contract's premium and loss coverage are directly proportional to the premium charged and the losses recovered under said insurance or reinsurance policy.

    18. The functional relationships of claim 15 where said contract's premium and loss coverage are not directly proportional to the premium charged and the losses recovered under said insurance or reinsurance policy.

    Amendments to the claims have been filed as follows 1 A contract for providing collateral loss coverage that enables an exchange of money between two parties: (a) using a method that defines said collateral loss coverage as a mathematical function of the recovery on one or more parts of an insurance or reinsurance policy.

    2. The contract of claim 1 that is structured as one or more provisions in any type of contract.

    3. The contract of claim I where said contract's loss coverage is proportional to the losses recovered under said parts of an insurance or reinsurance policy.

    4. The contract of claim 1 where said contract's loss coverage is nonproportional to the losses recovered under said parts of an insurance or reinsurance policy.

    5. The contract of claim 1 where said contract's premium bears a functional relationship to the premium charged for said parts of an insurance or reinsurance policy.

    6. A contract for providing collateral loss coverage that enables an exchange of money between two parties, where the coverage buyer is someone other than an insurer or a reinsurer: (a) using a method that defines said collateral loss coverage as a mathematical function of the recovery on one or more parts of an insurance or reinsurance policy.

    7. The contract of claim 6 that is structured as one or more provisions in any type of contract.

    14. The functional relationships of claim 1 la where said contract's premium and loss coverage are nonproportional to the premium charged and the losses recovered under said coverage parts of an insurance or reinsurance policy.

    15. A contract for providing collateral loss coverage that enables an exchange of money between two parties, where the coverage buyer is someone other than an insurer or a reinsurer: (a) using a method where said exchange is based on predefining acceptable mathematical functions of loss coverage and premiums for said coverage based on the losses paid by and the premiums paid for one or more coverage parts of an insurance or reassurance policy, (b) using a means of communicating this information to potential counterparties that may want to ente; into said contract.

    16. The contract of claim is that is structured as one or more provisions in any type of contract.

    17. The contact of claim 15 where said mathematical functions of loss coverage and premiums are proportional to said losses paid by and the premiums paid for one or more coverage parts of an insurance or reinsurance policy.

    18. The contract of claim 15 where said mathematical functions of loss coverage and premiums are nonproportional to said losses paid by and the premiums paid for one or more coverage parts of an insurance or reinsumnce policy.

    19. The contract of claim 15 that is based on functional relationships to said coverage parts of a property or casualty insurance policy.

    8. The contract of claim 6 where said contract's loss coverage is proportional to the losses recovered under said parts of an insurance or reinsurance policy.

    9. The contract of claim 5 where said contract's loss coverage is nonproportional to the losses recovered under said parts of an insurance or reinsurance policy.

    10. The contract of claim 6 where said contract's premium bears a functional relationship to the premium charged for said parts of an insurance or reinsurance policy.

    11. A contract for providing collateral loss coverage that enables an exchange of money between two parties: (a) using a method where said exchange is predetermined by two functional relationships to one or more coverage parts of an insurance or reinsurance policy, where one said functional relationship defines loss coverage as a mathematical function of the recovery under said coverage parts of an insurance or reinsurance policy and the other said functional relationship calculates the premium of said contract as a mathematical function of the premium paid for said coverage parts of an insurance or reinsurance policy, (b) using a means of communicating this information to potential counterparties that may want to enter into said contract.

    12. The contract of claim 11 that is structured as one or more provisions in any type of contract.