Hi everyone, I’m confused about the (mainly financial) relationship between an insurer and reinsurer. Please can people shed some light on this. I’ve done CS2 and understand that claim amounts can partly be covered by the reinsurer. However, I don’t understand the premium and commission relationship between the two. Also, am I missing other final relationships between the two? Eg does the insurer give a proportion of their premium to the reins. Is the commission cost split between them? Thank you to everyone that replies
Hi, Is there any part of the notes you are reading which is causing you confusion about the financial relationship between an insurer and its reinsurer? If so, it will be easier to elaborate more what the notes say or to explain here how reinsurance is structured. Thanks.
It sounds like it might be the commission element that is confusing? At a high level: The insurer pays a reinsurance premium to the reinsurer, and in return the reinsurer is liable for part of the claims incurred. The reinsurer also might pay a reinsurance commission amount to the insurer (although this isn't always the case). This commission has different possible forms / purposes, which can vary according to the underlying type of reinsurance: - It could be a 'thank you for giving us the business' type commission, just like an insurer paying commission to a broker who has put a customer in their direction - It could be linked to a profit sharing type arrangement (see 'Profit commission' in the CP1 glossary) - It could be an amount designed to contribute towards a share of the initial expenses incurred by the insurer - It could be a financing commission arrangement, under which the payment made from the reinsurer to the insurer is fundamentally a loan that has to be repaid, contingent upon certain events happening (this is a type of financial reinsurance, and can improve the balance sheet position in some jurisdictions) Depending on your specialist area, you may learn more about this in the later subjects. However, for the purposes of CP1 just be aware that reinsurance commission exists, without being too concerned about the details of the different types or circumstances.
