Hi, I don't fully understand the concept of reinsurance deposit back and would appreciate any help. I understand that the first step in a surplus relief Fin Re arrangement is that the insurer transfers the reserve for the reinsured business to the reinsurer, and that the reinsurer typically deposits this back with the insurer. The second step is that the reinsurer advances a capital sum to the insurer in return for first call on the surpluses arising on the reinsured business. I can see how the second step improves the insurer's solvency as assets go up (due to capital advance) but liabilities are unchanged due to contingent nature of future surpluses arising. However, I don't see what the role of the first step is. Thanks
The deposit back is a straightforward loan given to the insurer and it's paid like any other loan. so it's reserved for in the balance sheet so this part doesn't lead to increase in available solvency capital. Core reading says its done for purpose of controlling credit risk and investment control.
Thanks for your reply Given that the initial deposit back acts like a straightforward loan and doesn't impact available capital, what is the motivation for carrying this step out? I'm also a bit unclear on how the deposit back helps to mitigate credit risk and investment control. Thanks
Deposit back = the resevres the reisurer holds in respect of the liabilities ceded are deposited back to the cedant. It is not a loan. It helps with credit risk because now the insurer sits with the reserves so if the reisnsurer goes under they (insurer) already have the money they would have expected from the reinsurer.
