What does this line mean in chapter 24 page 8 in the solution to the question? “Also, such reinsurance would allow the reinsurer to set up its own reserves for its share of the risk, and so would allow the reinsurer to earn investment profits at the expense of the insurer.”
Hi Kimiko This question is comparing risk premium reinsurance written on the full sum assured compare to that written on the sum at risk. The line you quote is considering risk premium reinsurance written on the whole sum assured. The reinsurer would then charge a premium to allow it to pay its share of the sum assured, and so would receive a substantial sum from the insurer (to set up its own reserve) and so would be earning investment profits on this sum which would otherwise have gone to the insurer if it had used the sum at risk basis. Best wishes Mark
Hi Kimiko No, the situation described above is not a deposit back. We've said that the reinsurer keeps the reserves and so the reinsurer keeps the investment profit. But a deposit back could be used here so that the reinsurer passed the reserves to the insurer and this would have the advantage that the insurer keeps the investment surplus. Best wishes Mark
