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Gearing Effect of RI

G

GIstudent57

Member
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.
 
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