Hi, I was wondering if we had the following situation: Direct writer (A) writes unit linked contracts with a death benefit equal to 101% of the underlying fund value. Company A, say, reinsures the additional death benefit to a company B. As the 0.3% of the capital at risk needs to be applied in respect of the demographic risk, does it then mean that the capital required is then 0.3% * 101% of fund value - less reserve required for additional death benefit [which should be small]? If this is the case, it doesn't make much sense to reinsure this business? Thanks
I agree, I don't think it makes much sense to reinsure this business. The insurer's non-unit fund will only need to pay out 1% of the unit value for each death (the rest comes straight out of the unit fund). This is going to be quite small in most cases (and will certainly be small compared to the sum at risk on a without-profits term assurance or early death on an endowment). Also the probability of death will be quite small as unit-linked contracts of this type are generally sold as savings rather than protection products. It would also be difficult to arrange reinsurance because the reinsurer's liability would depend on the fund value and hence the insurer's investment strategy. Best wishes Mark
