Subject 403 - April 2000 - Paper 1 - Qn 6

[TheArtfulDodger]

In the Examiners' Report for this question, under the 'Synergies' section of the solution, the first point says "The insurer should see a reduction in reinsurance fees - profit element no longer required".

Not sure exactly what they mean by this. Is it:-

a) the insurer can now reinsure some of its risks with the reinsurer it's purchasing and hence make some savings, or

b) the reinsurer it's purchasing can have lower profit loadings on its premiums due to economies of scale of being part of a larger group, or

c)something else....??

 

[shyguy]

In the Examiners' Report for this question, under the 'Synergies' section of the solution, the first point says "The insurer should see a reduction in reinsurance fees - profit element no longer required".

Not sure exactly what they mean by this. Is it:-

a) the insurer can now reinsure some of its risks with the reinsurer it's purchasing and hence make some savings, or

b) the reinsurer it's purchasing can have lower profit loadings on its premiums due to economies of scale of being part of a larger group, or

c)something else....??

I would guess that the reinsurer purchase would mean more if not all of the insurer's risks being retained or managed internally with reinsurance expertise. (Ie internally "reinsured" if you want to look at it in another sense. Internal transfers mean that profits are retained within the consolidated entity - remember your accounts.)
The reinsurer would continue to charge other insurers the appropriate market rate with profit margin for reinsurance.

Another incorrect way to think of this might be to imagine the reinsurer operating as a 100% subsidiary at arm's length. Any profits made by the reinsurer effectively belong to the group when reinsuring other group insurers

 

[TheArtfulDodger]

Many thanks.