Are reserves used as a reinsurance premium only for surplus relief or is this how normal reinsurance arrangements are set up? I've read that some reinsurance contracts have deposit back facilities, meaning the cedent gets to keep the reserves and earn interest on them which I assume means that the reserves and a little extra is given to the reinsurer at outset? Is this always the case? Can you give examples of when this would apply i.e. for QS, surplus relief, XL reinsurance? Thanks.
Yes, the reserves are used as the reinsurance premium for surplus relief. Different methods are used to set the reinsurance premiums for other types of RI. For original terms (either on a quota share or surplus basis) the reinsurance premium will be a proportion of the office premium. For risk premium (either on a quota share or surplus basis) the reinsurance premium will be a q_x factor multiplied by the amount reinsured. Yes, often the reinsurer's reserves are deposited back with the insurer. This reduces counterparty risk. With surplus relief the RI premium is equal to the reserve, but this is not true for other types of reinsurance. The RI premium may be bigger than the reserve the reinsurer sets up (reflecting the reinsurer's initial expenses and profit requirements). However, the RI premium may be lower than the reserve (reflecting the prudence in the reserve compared to the lower claims expected in the reinsurer's pricing). For example, consider a 50% quota share on original terms. The RI premium will be 50% of the office premium. The reserve the reinsurer sets up will be the expected present value of 50% of the claims, plus the reinsurer's expenses, less 50% of future office premiums - this may be higher or lower than the RI premium. Best wishes Mark
