Allowing for reinsurance costs

[tojyouso]

Hi guys,

Apologies if this has already been asked (I did try the search).

Anyway, I'm having trouble understanding the difference between the two methods of allowing for reinsurance when pricing a product (net vs gross).

Could you please explain how these two aren't the same?

Also, the notes makes a reference that gross risk premium + net RI cost is good for where a small proportion of the risk is ceded to the reinsurer, while net risk premium + gross RI cost is good for high level XL.

Does a high level XL mean a high excess? If so, in that case, doesn't that mean a small proportion of the risk will be ceded just like in the gross risk premium basis.

I hope this makes sense!

Thanks in advance.

 

[StartedThinking]

I would let you know the way I understood this:

Net cost of reinsurance is generally used for a small proportion of cession like India having an obligatory cession to government owned reinsurance company for every policy written since you can atleast estimate the recovery from the re-insurer.

The second approach of gross cost of reinsurance is for non proportional cases and higher proportional cessions like a commercial property business because the loss amount is very high and estimating the recovery is not straightforward, so the second approach is more applicable.

 

[tojyouso]

Thanks for the quick reply.

So my understanding of what you've said is that it has to do with the ease and credibility of estimating the reinsurance recoveries? Or maybe whether the claims data you have is gross or net of recoveries.

I understand what the notes were implying now, thanks again for your help.