Why are reinstatement premiums regarded as extra premiums and not deductions from claims? Surely the latter strategy would be more tax efficient under any industry compensation scheme that collects levies in proportion to premiums? Or are there rules against circumventing the schemes in this way?
As a student, my thinking is that the effect is the same (it's a deduction), but it makes more sense to think in terms of reinstatement premiums as it can increase with more claims & there can be limits to how many resinstatements are allowed. As for tax, I don't believe reinsurance is subject to tax or levies. Open to correction on the above!
Another reason is that the reinstatement premium will distort the true loss if being considered as a reduction of the loss. When doing the analysis of the losses in the future, we cannot see the true losses any more due to the distortion caused by the reinst premium.
But as long as the reinstatement premiums can be split out they can be treated however the actuary wants to in any given analysis. Why do you think treating the reinstatement premiums as additional premiums gives a truer picture and that treating them as reductions in losses gives a distorted one? Why do you think this is true of reinstatement premiums and not deductibles? My real question was more about why the contracts are worded the way they are. Most people find it intuitive that the insurer pays the insured when the latter incurs a loss. A reinstatement premium works the other way round and so seems strange.
But the reinstatement premium is there to buy extra cover. It's not the same thing as a deductible at all (which is effectively there to reduce the claim amount). You could take your argument to the limit and ask why the original premium is split out and not just counted as a negative claim amount - but I think you would agree that this wouldn't really make much sense. So, just as the original premium is counted as an outgo (to the cedant), so should the reinstatement premium be. I think what happens in practice is that just one physical payment would be made, of the net amount between the claim and the reinstatement premium (rather than two separate payments) but the split between the two items would be clear.
