Can anyone explain... (a) How a profit-sharing arrangement works and... (b) How/why it would impact on underwriting? [Came across this a few times but can't find an explanation] Thanks, Conall
Saw no-one had replied to this yet... Insurers try and negotiate best terms with their reinsurers, obviously to try and get their risk protection (or whatever) at the lowest price. But the reinsurer wants to have confidence in the risks that it is taking on. If it doesn't have this confidence, it will have to charge higher risk premiums to its client (the insurer). One way to square the loop is by having a profit share. So the reinsurer can charge higher premiums to cover the risk, but then if the reinsurer makes a good profit on the business (so it has been over-cautious in its pricing and really the insurer was a good risk after all) then a good proportion of the profits are given back to the insurer at the end of the day. So its a kind of retrospective pricing, that keeps both parties happy. The level of underwriting directly affects the insurer's risks and therefore the price that the reinsurer would be happy to charge for the business. Without a profit sharing agreement the reinsurer needs a lot of convincing about the insurer's underwriting (ie the unserwriting would need to be strict) in order for lower reinsurance premiums to be charged. But WITH a profit share you are more likely to have higher reinsurance premiums and so the reinsurer is likely to accept a less strict level of underwriting. At least, I think that's it! Hope this is not too late to help.
