All doubts from Chapter 25

Discussion in 'SP2' started by Kamal Sardana, Jul 30, 2021.

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  1. Kamal Sardana

    Kamal Sardana Active Member

    Just one ques from Ch23, rest from 25
    Ques-1. In Chapter 23 -> There are North American and Conventional methods? Has it been deleted from the syllabus ??

    Ques-2. Topic: Deposits back. Core reading says," deposits back are sometimes done so that the cedant gets the benefit of reinsurance, whilst at the same time being able to maintain a reserve for the whole contract and hence maximise the funds it has to invest. This therefore makes the arrangement generally more profitable to the direct writing company, as it will retain all of its potential investment profit"
    (a) How it will maximise the funds for insurer to invest?
    (b) What is the logic behind Investment profit for insurer only here?

    Again core reading says," The arrangement can also be an advantage to the reinsurer. For example, on with-profits business, an original terms arrangement would normally leave the reinsurer with a significant investment risk, because it would have to match the insurer’s bonus rates on maturity claims. By depositing back reserves it will avoid this investment risk.
    (C) Now i get the point that if insurer announced recurring bonus, it will increase the overall liability and hence investment risk will be increased for reinsurer as well. But how by depositing back the reserves will avoid the investment risk for reinsurer?

    Ques:3    : How does reinsurance - original terms works in case of unit linked along with deposits back?
     
    Last edited by a moderator: Jul 30, 2021
    Kamal Sardana, Jul 30, 2021
    #1
  2. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hello Kamal

    Q1. Yes, North American and conventional methods are no longer explicitly mentioned in the syllabus.

    Q2 (a) If there wasn't a deposit back then the fund to invest would be smaller as the reinsurer would be holding these funds.

    (b) As the insurer holds the assets then any investment surplus will accrue to the insurer rather than the reinsurer.

    (c) Thanks for pointing this out. This is an error in the notes - I don't think deposit back would remove the risk to the reinsurer of matching the bonus rate (at least not without adding further clauses to the treaty as well).

    Q3. Let's say the reinsurer takes 30% of the premium and so pays 30% of the claims. Without a deposit back the reinsurer would have to hold 30% of the unit fund to pay for the maturity and surrender claims, and part of the death claims too. If it deposited back its 30% of the unit fund, then the reinsurer would only need to pay 30% of any claims in excess of the unit fund.

    Best wishes

    Mark
     
    Mark Willder, Jul 30, 2021
    #2
  3. Vatsal Gupta

    Vatsal Gupta Made first post

    Hi Mark,
    This is regarding ques2 point c.

    As per my understanding, In deposit back the entire reserve related to a contract lies with the direct writer and hence maximizes the funds it has to invest. Insurer has the right to invest those funds as per their investment strategy. Based upon the return earned and other factors(related to investment assumption), Insurer declares the bonus arising form investment surplus. Insurer was holding the reinsures funds as well and it earns the same return as Insurer funds did. Then in this I believe the risk of matching the bonus for reinsurer is mitigated.

    Please let me know your thoughts on this. Where I went wrong which let me believe that this risk was mitigated ?

    Thanks
    Vatsal Gupta
     
    Vatsal Gupta, Sep 2, 2021
    #3
  4. Mark Willder

    Mark Willder ActEd Tutor Staff Member

    Hi Vatsal

    What you have written is correct if the insurer declares bonuses based on its investment surplus. However, the insurer might not declare bonuses that exactly match the investment surplus, eg it may smooth the bonuses, in which case there is still some residual bonus risk from the deposit back.

    However, if we have a deposit back and a requirement to calculate bonuses that exactly match the investment surplus then deposit backs would work (this is an example of adding a further clause to the treaty that I mentioned).

    Best wishes

    Mark
     
    Mark Willder, Sep 2, 2021
    #4
    Vatsal Gupta likes this.

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