Hi Explain why deposit back generally only applies to original term and net level premium arrangements? Under normal risk premium arrangements, where reinsurance premium operates as recurring single premium the insurer hold all of policy reserve anyway and so there will be no reserve to deposit back. Can you please explain why insurer here hold all of policy reserve, Can't the deposit back be made for per year basis. Reinsurer will have to deposit its share of reserve(part of reinsurance premium will be left with reinsurer which contains some margins, expenses and profit loading) at beginning of year. During the year the whole reserve will be maintained by insurer and in the meantime they can settle the claim amount as per experience
Hi Rajat To help other students understand the post, this query refers to the question at the bottom of page 16 in Chapter 25. We're not saying here that the reinsurer has no reserves at all. Under a normal risk premium arrangement with recurring premiums the reinsurer will have a reserve to cover claims over the coming period. But the reinsurer will not be holding a reserve for future premiums. So there's not much of a reserve to deposit back. It would be administratively very complex and not worth the extra work to have a deposit back here. Note also that risk premium reinsurance is often written on a sum at risk basis, so only the claim amount in excess of the reserve is being reinsured. Contrast this with the first paragraph of the solution where original terms reinsurance involves the insurer building up a reserve in the early years to pay the claims in the later years. o here there is a significant reserve to deposit back. Best wishes Mark
