Unregistered Reinsurance Deduction from Capital Available
Hello,
Based on the formula provided in the source (A + B + C + D) - (E + F + G + H + I) I am a little confused as to why we C would increase the deduction. C is is the amount of cash outflows associated with the funds withheld collateral that are
included in (A) and (B) above. First off are these funds like transaction costs to hold collateral? Second off what is the intuition behind removing them from the capital available? All other forms of payables and non-owned deposits (E through I) decrease the deduction amount not increase it. So why does this particular outflow count as an increase in deduction?
Comments
With regards to this formula, the first thing that we should note in layman's terms is that there is a deduction to capital available when the total amount owing from the reinsurer is greater than the amount payable to said reinsurer.
Funds withheld is a mechanism whereby the insurer withholds premiums to the reinsurer, where the initial premium is known upfront but is only paid as claims are incurred. Since premium is usually > than claims, I would assume the insurer posts collateral with the reinsurer. This collateral is supposed to be returned to the insurer in the future and I am assuming outflows is from the reinsurer's perspective but it is not very clear from the text