Hi, Can someone explain the gearing effect of reinsurance? It was briefly mentioned at a tutorial and I have also seen it mentioned in the ASET solutions. For example, in Q4 of the April 2021 sitting which was based around injury discount rates. Following a significant change in discount rates, "reinsurance will need to be reviewed, and the cost of it may increase, particularly so for XoL due to the gearing effect". Thanks
It's a generic term, just referring to the fact that an increase in a very large claim will hit the reinsurer 100% (as the claim is already large), whereas an increase in a smaller claim will hit an insurer but eventually will also hit the reinsurer and so may not turn out as bad for the insurer.
