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sep 2014 q2

D

dimitris13

Member
the answer mentions that
"the risk premium will reflect the expected cost of re recoveries. an increas in retentiom could lead to relative higher risk premium" why is that?
if i increase my retention limit my exp recoveries would go down . also the sum to be reinsured goes down. so why higher and not lower risk premium?

thanks
 
Hi Dimitris,
I think the key word in this is "relative". If retention increases, then the insurer will be ceding relatively more uncertain / volatile experience to the reinsurer, which might be relatively more expensive, eg the margins included when calculating the risk premium might be greater. The absolute risk premium is likely to go down, but that's not what the above statement says!
I hope that helps,
Anna
 
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