Risk Premium Reinsurance

Hi - I am not sure where you get this statement from, and am not sure that it is correct: it probably needs to be softened.

You may be confusing risk premium reinsurance with 'sum at risk' reinsurance? Although there is a relationship, they are not exactly the same thing.

Because an insurer is only exposed to mortality risk on the 'sum at risk' (excess of sum assured over reserves held), it is most efficient to purchase reinsurance only on that sum at risk and not on the whole sum assured. Otherwise the insurer is just wasting money paying for reinsurance on something that it doesn't really need to reinsure.

However, if the reserves are very small (eg for term assurance business), then there is little difference between the sum assured and the sum at risk. And because the sum at risk is messier to calculate (varies as the reserves change), the insurer might as well reinsure the sum assured in such a situation: simpler and more practical.

The sum assured can be reinsured either on an original terms (insurer's own premium rates) or risk premium (reinsurer's premium rates) basis. However, the sum at risk can only be reinsured on a risk premium basis. [This is because under original terms the insurer passes across to the reinsurer the relevant % of the policyholder's premium, and this premium is based on the whole sum assured, not the sum at risk.]

Therefore if an insurer wishes to reinsure the sum at risk (eg if reserves are material), then a risk premium approach would have to be used. To reinsure the sum assured (eg if reserves are small), original terms might be more commonly used - but that doesn't mean that risk premium reinsurance is 'not suitable'.

Hope that helps.