The course notes in chapter 5 say: "Here, the reinsurer is paying some money to the insurance company to improve its cash balance. This payment is effectively a loan but is ‘disguised’ as a commission payment for the reinsurance. In return, the insurer will repay the loan out of the profits it makes on the underlying business." I understand that the reinsurance commission is a cash inflow to the insurer, which can be used to cover new business strain but how will this money be paid back to the reinsurer?
Remember commission is paid on proportional reinsurance. With proportional reinsurance the insurer shares its premiums and claims experience with the reinsurer. This will therefore include a share of any profit made on the business.
