Financial Reinsurance

[SpringbokSupporter]

The notes refer to 2 types of FinRe - Asset enhancing and Liability Reduction. In asset enhancing, future VIF is capitalised and given to the insurer and the insurer will pass on future vif arising to the reinsurer. Would the insurer also pass on "actual vs expected experience" profits to the reinsurer?

 

[mkone]

The notes refer to 2 types of FinRe - Asset enhancing and Liability Reduction. In asset enhancing, future VIF is capitalised and given to the insurer and the insurer will pass on future vif arising to the reinsurer. Would the insurer also pass on "actual vs expected experience" profits to the reinsurer?

I don't think the insurer would want to pass all of the "actual vs expected" profits to the reinsurer because there would be no incentive for them to manage the book properly if that was the case. The reinsurer also want to be paid back, and so needs the insurer to have an incentive to make good profits to be able to pay back the loan. But I suppose it would depend on the agreement between the two.

 

[Rosencruz]

In general I believe that actual vs expected is passed on to the reinsurer. However, as not all of the book will be reinsured, the company will still have an incentve the manage the books properly.
This is why it would be done using original terms reinsurance

 

[TM123]

Fin Re Type 2 - Liability Reducing

Been trying to wrap my mind around Liability Reducing Financial Reinsurance

First off does financial reinsurance always apply to a block of business and not to a single policy?

The core reading says:
"The basic concept that the reinsurer agrees to pay all the claims over and above (100+x)% of what would be expected."

So for a block of business the insurer would expect to say have, say, $10m, of claims. If x = 10, and actual experience on the block of busines is $15, would the reinsurer then pay $4m ($15m - $10m x 1.1)?

Is it also correct to say that the $10m would be the realistic reserve but supervisory reserves would be, say, $18m and thereby using this reinsurance, the supervisory reserves reduce to $11m?

The core reading also goes on to state that:
"As the VIF emerges as cashflow, then the cedant recaptures the risks over time."

Is the VIF they talking about, basically the $1m ($11m - $10m), in my above example?

And I'm not quite undertanding what they mean by "the cedant recaptures the risks over time."?

Thanks to anyone that can help clear this up for me!!

 

[Lynn Birchall]

Hi TM123

First off does financial reinsurance always apply to a block of business and not to a single policy?

Yes

The core reading says:
"The basic concept that the reinsurer agrees to pay all the claims over and above (100+x)% of what would be expected."

So for a block of business the insurer would expect to say have, say, $10m, of claims. If x = 10, and actual experience on the block of busines is $15, would the reinsurer then pay $4m ($15m - $10m x 1.1)?

Yes

Is it also correct to say that the $10m would be the realistic reserve but supervisory reserves would be, say, $18m and thereby using this reinsurance, the supervisory reserves reduce to $11m?

Yes again

The core reading also goes on to state that:
"As the VIF emerges as cashflow, then the cedant recaptures the risks over time."

Is the VIF they talking about, basically the $1m ($11m - $10m), in my above example?

And yes again

And I'm not quite undertanding what they mean by "the cedant recaptures the risks over time."?

As the $1m emerges over time, it will appear in the assets on the balance sheet. These extra assets the insurance company has will reduce its need for financial reinsurance, ie it will have less need for the liability reducing financial reinsurance. So, the treaty would be set up so that the x% (which started off as 10% in your example) would reduce a little every year (as every year the company only needs less of a reduction in its liabilities as it has these extra assets appearing).

Hope this helps
Lynn