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Chapter 25: Flashcard 9

Discussion in 'SP1' started by Phani Vasantarao, Jul 4, 2017.

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  1. Phani Vasantarao

    Phani Vasantarao Very Active Member

    In this flashcard, with regards to the first part of the question, I can't see any meaningful difference between the answers to the first two options. Essentially, we seem to be saying in both cases that financial assistance is where the reinsurer lends money to the cedent against expected future profits. While that is true enough, why do we have different worded explanations, and why doesn't the answer for the second point even address the specific aspect of free assets?
     
    Phani Vasantarao, Jul 4, 2017
    #1
  2. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    This card is trying to cover the material in Section 1.6 of Chapter 25 in the Course Notes.

    The first point about new business strain is saying that, when an insurer writes new business that will incur high new business strain, it may be possible for it to receive capital via reinsurance commission at inception of the policy to help cover this strain. It may then have to 'repay' this from future surplus on that policy. So, this is a payment made at policy inception, which will appear as a regular stream of payments to the insurer (assuming it writes multiple policies covered by this reinsurance contract each month).

    The second point about improving free assets relates to an insurer using an existing block of business that it expects to be profitable. The reinsurer will pay the insurer a lump sum payment now (referred to as initial commission) to help the insurer's solvency position. In return, the reinsurer will receive some of the surplus that emerges on this block of business. So, this is a lump sum payment.

    You're quire right that both are paid for by the insurer in the same way, from surplus that emerges on the business.

    Sarah
     
    Sarah Byrne, Jul 5, 2017
    #2
    Phani Vasantarao likes this.
  3. Phani Vasantarao

    Phani Vasantarao Very Active Member

    Thanks again, Sarah :) I seem to have a lot of questions for you these days :)
     
    Phani Vasantarao, Jul 5, 2017
    #3

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