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Reinsurance - risk premium

K

Kiran

Member
Hi

Think im abit confused. I assumed that Risk premium reinsurance wwould reduce the overall capital requirements and new business strain by lowering the reserves and SCR that the company are required to hold, by retaining less of the sum at risk.

However the answer to a question I'm doing states
"Reinsurance helps to reduce new business strain e.g. through provision of financing commission to enable the company to grow faster and reach critical mass by writing more new business"

I assumed that financing or "raising capital" from the reinsurer (which i assume as part of a loan from the reinsurer) didn't have anything to do with risk premium method of reinsurance? Or would this be a separate point that the question answer is trying to raise. (Sept 2014 Q3 ii)
 
Kiran said:
Hi

Think im abit confused. I assumed that Risk premium reinsurance wwould reduce the overall capital requirements and new business strain by lowering the reserves and SCR that the company are required to hold, by retaining less of the sum at risk.

However the answer to a question I'm doing states
"Reinsurance helps to reduce new business strain e.g. through provision of financing commission to enable the company to grow faster and reach critical mass by writing more new business"

I assumed that financing or "raising capital" from the reinsurer (which i assume as part of a loan from the reinsurer) didn't have anything to do with risk premium method of reinsurance? Or would this be a separate point that the question answer is trying to raise. (Sept 2014 Q3 ii)
Click to expand...
Hi Kiran

Don't worry too much about this question, the syllabus has changed a little since it was written, your understanding of reinsurance is good.

The solution is referring to using risk premium reinsurance as a type of financial reinsurance. The concept is similar to the contingent loan you mention, except that the loan takes the form of higher reinsurance commission and is repaid through higher reinsurance premiums. See the risk premium section under Section 1.4 of Chapter 24 for further details.

The current Core Reading mentions that financial reinsurance is not so effective in some regimes (such as Solvency II used in the EU and UK). Your answer sounded like it was more based on a Solvency II regime (given your mention of SCR). However, SP2 didn't cover Solvency II style reserves/capital when the question was set which is why there is no mention in the solution. When answering SP2 questions now, you should cover the possibility of using financial reinsurance in some regimes, but also the possibility that it might not apply, that way you've covered off all the possibilities.

But finally, yes, I'd agree that risk premium reinsurance could reduce reserves and capital requirements as you suggest. I'd definitely want to write this in answer to current SP2 questions. Again, the reason why it's not mentioned in the exam solution here is just that SP2 didn't have the material on capital requirements at the time.

Best wishes

Mark
 
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