Retention Limit-Fronting-Captive Insurance

[Sanchit Aggarwal]

Hello everyone

"The higher the retention limit, the lower the reinsurance costs. Lower retention limit may lead to a phenomenon called fronting wherein the insurers will cede the total risk to the reinsurer which is often a captive of the primary insurer."

Can you help me understand the highlighted part?

On a separate note, on deciding a Retention limit what all things an insurer factors in?
Few I can think of is (i) Size of the firm (ii) Average policy size (iii) Firm's view on new business

Stay Safe & Healthy

 

[Mark Willder]

Hello Sanchit

Please could you let me know where you saw this quotation, as the context will help me to comment. I can't see any references to fronting or captives in the course notes.

I would say that the most important factors in setting the retention limit would be the free assets and risk appetite of the insurer. Reinsurance helps to protect the insurer from downside risks, but it also passes on profit to the reinsurer. So an insurer with large free assets may feel that it can retain more of the risk, and hence more of the profit. The more risk averse the insurer, the lower the retention limit it will want.

Best wishes

Mark

 

[Sanchit Aggarwal]

Thank you, Mark.
The above quotation is not from the course notes. I came across the same on the internet (https://economictimes.indiatimes.com/definition/retention-limit) as a description of the Retention limit.

Just wanted to understand mainly from a more general point of view. Don't think these terms are used for SP2 (used maybe in SA2).

 

[Mark Willder]

Thank you, Mark.
The above quotation is not from the course notes. I came across the same on the internet (https://economictimes.indiatimes.com/definition/retention-limit) as a description of the Retention limit.

Just wanted to understand mainly from a more general point of view. Don't think these terms are used for SP2 (used maybe in SA2).

Hello Sanchit

Thanks for the reference. This article starts with a good definition of the retention limit. The last sentence though doesn't really follow on and moves into a rather different situation than that described in the course.

These are topics that go well beyond SP2, and are not even covered in SA2. If you want to learn more about the use of fronting by captives then you can look at:

https://www.captive.com/news/2018/1...-arrangement-why-do-captive-insurers-use-them

However, I suggest you don't spend too long on this as it's not going to be examinable.

Best wishes

Mark