Reinsurance Reserving

Hi

I'm studying for ST7 and I'm a little stuck in the topic of outwards reinsurance reserving. The core reading provides details of 5 methods of reserving for reinsurance from the perspective of a direct insurer. The methods covered include 'gross less net', 'application of standard techniques to reinsurance data', 'use of appropriate factors' etc.

My first question is why a direct insurer needs to reserve for reinsurance recoveries? I get why an insurer would need to reserve for future claims but since the reinsurance premium is know and recoveries are a positive cash flow , where does the need to reserve apply?

My second question relates to the methods covered. The detail given in the core reading is very concise and does not give examples illustrating the various approaches. I've looked through past exam questions (of which there is only 1), Aset, questions bank etc. and there's nothing in the way of a clear explanation of the approach through an example. Does anyone know any resources that might illustrate by way of examples the various methods of outwards reinsurance reserving.

There is an article called 'reinsurance reserving' by Michael Radtke in the 'Encyclopedia of Actuarial Science' published in 2006 but I don't have access to it - does anyone know of any good resources in this area as I'm pretty lost! Thank you in advance.

 

On your first question:

1. Reinsurance premiums are not necessarily known in advance for a number of reasons, e.g. adjustment premiums, reinstatement premiums, swing rating, etc.
2. Depending on the accounting rules, reinsurance recoveries may be regarded as a deduction from the technical provisions or entered on the assets side. Either way, the value of the cashflow is uncertain and needs to be estimated in order to construct the financial statements.

On the second question, I'm not sure what questions you're hoping the illustration will clear up. I think the part of the Core Reading you're referring to is simply suggesting that you obtain an estimate of future reinsurance recoveries using standard methods, e.g. chain ladder, Bornhuetter-Ferguson, etc. and then obtain the net liabilities by deducting the reinsurance recoveries from the gross.

 

The core reading references 5 different approaches to estimating reinsurance reserves and gives advantages/disadvantages to each. An example of each approach would be very helpful as if you don't work in the area a description of an approach is not enough to really hammer the point home. A numerical example I find always helps.

 

How do you differentiate these method among statistical method, factor-based, and individual- based approaches?