• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Reinsurance premiums

C

craufujy

Member
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.
 
Are reserves used as a reinsurance premium only for surplus relief or is this how normal reinsurance arrangements are set up?

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.

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?

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
 
Back
Top