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Ch 17 Reinsurance Applications

A

Alan2007

Member
Can somone please explain to me why the insurer would want to reduce the net premium written relative to the free reserves if the premiums written is large in comparison to the free reserves.

Cheers :)
 
Hi Alan2007

Notice you're posting a lot of ST3 questions and thought I'd recommend a tutorial to you - a lot of the questions you're asking are covered there...

Pede
 
I take no joy in sounding like a teacher... but why do you think?

What are the free reserves? What are they there for?

What happens if claims are way more then the technical reserves, what kinds of loss ratios would you get. Then how much would this bite in to the free reserves?
 
Hi

I think this answers your question some bit though there may be a bit more involved that i'm not too sure about so maybe someone can add to the below:

Generally insurance companies like to reduce their premiums relative to their free reserves as this increases the solvency ratio of their company. The higher this ratio, the more securer they look, the cheaper it may be to raise capital and they get a higher credit rating etc.

Solvency ratio = free reserves/premium. So the lower the premium the higher the ratio. Using reinsurance, reduces net premiums due to paying for the RI.

I'm sure of the above, but here is where i'm a little iffy:
R/I actually will also reduce total claims so the freeeserves are actually higher due to paying less claims, so liabilities reduce(can someone confirm due to reinsurance, on the claims side, technical reserves will reduce and so free reserves increase - or can you allow for this in the reserves). If so, free reserves increase so both this and the premium effect increase the companies solvency margin.

Leala
 
more ratios

Solvency ratio (usually based on net of reinsurance premium and technical reserves) is only one ratio which would provide information on the soundness of a non-life insurer.
Obviously this depends on the method of assessing assets and liabilities.
Other ratios of interest may include:
Assets/Liabilities
Outstanding claims reserves/Paid in year at year end
Technical reseves /Written premium

Whether net or gross of reinsurance, these ratios are also worthy of consideration.
 
Free reserves - a possible definition

Remember that all liabilities and financial obligations of an insurer should have provisions for them if they have not already been paid.
Free reserves ( or capital as the banks may call it) are the funds available to meet in the future those obligations which have been underprovided for, and that includes any statutory requirments.
 
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