In Sep 2023 SP7 Exam, Question 1ii, the answer stated that: Depends upon how big the changes to the reinsurance covers have been [1⁄2] Motor OD is usually a short-tailed line of business [1⁄2] It is likely the company has only purchased proportional covers for these policies [1⁄2] So if a company is using a chain ladder method, change in % ceded should not impact the IBNR estimation I am OK with the idea that short tail biz should purchase proportional cover. But I don't understand why the %ceded does not impact the IBNR estimation. Is the conclusion oversimplifing the reinsurance? reinsurance can be loss-occurring basis or claim made or risk attaching, that might complicate each Origin Year/ Dev Year pair?
Proportional reinsurance is normally written on a risks-attaching basis. As motor insurance is a relatively homogeneous class of business, the insurer is likely to have purchased quota share reinsurance. What they are really saying here is that the development patterns gross and net of reinsurance are unlikely to be impacted by a change in the quota share cession percentage. This is because the reinsurer simply takes a share of the insurer's gross claims. So although the net IBNR amount will change if the quota share percentage changes, it will not invalidate the use of the chain ladder method here (as the development is unchanged).
