C
cjpaine
Member
This arrangement seems so complex and I personally don't feel that it is explained clearly in the course notes or fully by any of the previous posts on this forum.
My first question is: How much insurance risk, say, is transferred to the reinsurer when the reinsurance premium is paid (before being deposited back)?
My understanding is that a reinsurance premium set equal to the reserves is paid to the reinsurer. So this would suggest to me that all of the risk on these policies is transferred to the reinsurer in the first instance.
The reinsurer then deposits back the reinsurance premium (in this case equal to the size of the necessary reserves from the insurers perspective) creating an asset and a liability on the insurers balance sheet (net effect 0).
Now I start to get even more confused. At this stage has there been any transfer of risk back to the insurer? If not, surely the reinsurer needs to keep that money for itself. If yes, then fine... but what was the point in transferring it to the reinsurer in the first place.
(Given that the whole amount deposited back becomes a liability on the insurers balance sheet I would guess that all of the risk remains with the reinsurer.)
The reinsurer also adds on a contingent loan which boosts the insurers assets as the loan doesn't need to be reserved for in Peak 1. OK fine... but why not just do this in the first place i.e. the reinsurer gives a loan in return for future profits without any of this passing to and fro of the reserves \ reinsurance premium beforehand.
Sorry, perhaps it is totally obvious to everyone else but I don't have much 'hands on' experience of reinsurance... I just don't get it !
My first question is: How much insurance risk, say, is transferred to the reinsurer when the reinsurance premium is paid (before being deposited back)?
My understanding is that a reinsurance premium set equal to the reserves is paid to the reinsurer. So this would suggest to me that all of the risk on these policies is transferred to the reinsurer in the first instance.
The reinsurer then deposits back the reinsurance premium (in this case equal to the size of the necessary reserves from the insurers perspective) creating an asset and a liability on the insurers balance sheet (net effect 0).
Now I start to get even more confused. At this stage has there been any transfer of risk back to the insurer? If not, surely the reinsurer needs to keep that money for itself. If yes, then fine... but what was the point in transferring it to the reinsurer in the first place.
(Given that the whole amount deposited back becomes a liability on the insurers balance sheet I would guess that all of the risk remains with the reinsurer.)
The reinsurer also adds on a contingent loan which boosts the insurers assets as the loan doesn't need to be reserved for in Peak 1. OK fine... but why not just do this in the first place i.e. the reinsurer gives a loan in return for future profits without any of this passing to and fro of the reserves \ reinsurance premium beforehand.
Sorry, perhaps it is totally obvious to everyone else but I don't have much 'hands on' experience of reinsurance... I just don't get it !