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Ruin Theory and Reinsurance

C

Cathy

Member
Hi,

I'm confused about the use of proportional reinsurance in the ruin theory chapter. It talks about the reinsurance premium and the reinsurer's loading. But I thought that in proportional reinsurance the premiums were split in the same proportions as the claims (ie alpha) so the insurer's net premium would be alpha * expected claim cost * loading and the reinsurer's premium would be (1-alpha) * expected claim cost * loading. But that the loading will be the same for the insurer and reinsurer and be based on the insurer's loading. I didn't think the reinsurer had any scope to apply a different loading (since if they did, the premiums wouldn't be split in the same proportion as the claims). Can anyone help explain?

Thanks
 
You're absolutely right, the whole thing is theoretical and doesn't really make sense in the real world. To be fair, some of the rest of that section talks about the times when the insurer's loading is the same as that of the reinsurer, so maybe that part has more relevance.
 
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