Risk premium reinsurance

Discussion in 'SP1' started by nubian_actuary, Sep 15, 2012.

  1. nubian_actuary

    nubian_actuary Member

    I'm a little confused about how these work.

    Is reinsurance commission paid on these? In some past questions it says no commission is paid, but in another question it says that if used for financial reinsurance then the loan is paid as initial commission.

    Thanks for your help in advance.
     
    nubian_actuary, Sep 15, 2012
    #1
  2. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Under risk premium reinsurance, the risk premiums paid by the insurer are set by the reinsurer and the intention is that they will just represent the cost to the reinsurer of covering the risk (plus their expenses and profit). So, normally, no reinsurance commission is paid.

    Under original terms the insurer will also pass the reinsurer some of their expense and profit loading and so the reinsurer passes some of the premium back as reinsurance commission to compensate the insurer for this.

    If the insurer uses risk premium reinsurance financing, they receive a "loan" from the reinsurer. This loan is termed "reinsurance commission" (a payment from the reinsurer to the insurer), this way the loan amount doesn't increase the insurers liabilities but does increase their assets and so improves balance sheet solvency. The insurer repays the reinsurer by paying higher reinsurance premiums in the future.

    Hope this helps :)
     
    Sarah Byrne, Sep 18, 2012
    #2
  3. Alastair_in_SA

    Alastair_in_SA Member

    Hi Sarah

    You say that the "reinsurance commission" doesn't increase liabilities, but do we not have to reflect the future premiums we owe to the reinsurer (i.e. an expense) in our reserves? If this is so, then won't such an arrangement only benefit the insurer if the discount rate used for the reserves is greater than the effective interest rate on the "loan / reinsurance commission". Perhaps I am missing something with regard to how risk premium FinRe works.

    Thanks
    Alastair
     
    Last edited by a moderator: Mar 7, 2014
    Alastair_in_SA, Mar 7, 2014
    #3
  4. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Hi Alastair

    With financial reinsurance, because the loan repayments are contingent on future profits emerging from this block of business the insurer may not need to hold the reserve for this liability in its supervisory reporting.

    Thanks
    Sarah
     
    Sarah Byrne, Mar 10, 2014
    #4
  5. Alastair_in_SA

    Alastair_in_SA Member

    Thanks Sarah.

    So are all types of FinRe's repayments contingent on future profits? I thought surplus FinRe that was contingent on future profits, and risk premium FinRe's repayments were loaded into the risk premium charged by the reinsurer (the risk premium not being contingent on future profitability)?
     
    Alastair_in_SA, Mar 10, 2014
    #5
  6. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Your understanding of financial reinsurance is absolutely right. With risk premium reinsurance, the repayments are contingent on the policies that the insurer is paying higher premiums on staying in force. So the insurer's assets increase but not its liabilities.

    Sarah
     
    Sarah Byrne, Mar 11, 2014
    #6

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