Capital Management Ch

Hi

Reinsurance commission may (in some circumstances) be paid from the reinsurer to the insurer at the start of the reinsurance arrangement. There are several potential reasons for this payment, and you may learn more about it in the later subjects, depending on which one you study.

One way to think about it is in the same way as a normal commission payment being made as a type of 'thank you' from an insurer to the broker (or whoever) who found the business for them. Here, the reinsurer is giving the insurer a 'thank you' payment for placing the business with them.

However, a main reason for the payment is normally as part contribution (from the reinsurer) towards the acquisition / initial expenses incurred by the insurer. The insurer will be passing on to the reinsurer a proportion (say 50%) of all premiums that it receives from the policyholder, and will receive back a proportion (50% again) of any claim payments. But part of each premium is an amount which contributes towards the recovery of the initial expenses (commission to the broker, underwriting etc) incurred by the insurer - and the insurer has to pay out 100% of those expenses. So the insurer in this example is giving 50% of the premium loadings for initial expenses to the reinsurer, but incurring 100% of those expenses. The reinsurance commission is a means by which the reinsurer can return to the insurer part or all of those loadings.

Don't worry if that sounds a bit too technical at this point - it is more something for the Specialist level exams. However, hopefully that gives you a bit more background as to what this payment is.

As stated in the course, you can think about it simply as a payment from the reinsurer to the insurer, which contributes towards the initial expenses incurred by the insurer - and therefore helps to reduce capital strain.

 

Turning to this second question, let's think about the additions to benefits method, whereby surplus can be distributed by regular bonus (RB, declared each year) and by terminal bonus (TB, added only at the time of claim).

Deferring bonus distribution would mean giving less each year as RB, and holding more back to give at the end as TB: i.e. a lower RB and a higher TB.

RB, once added to the policy, is guaranteed - whereas the amount of TB is not guaranteed.

Therefore lower RB and higher TB (through deferral) means lower guarantees.

The example in the ActEd course notes in Chapter 6, Section 15.2 might help with understanding this.

Hope that helps.