I can't seem to understand what "arms-length" means for "Reasonably Self-Evident" case.
I understand what arms-length means and I understand what RSE is but I just don't understand why arms-length would be one criteria for RSE.
Straight Quota Share:
no risk-limiting features other than a loss ratio cap with negligible effect on the economics of the transaction. Single Year Property Catastrophe
little or no risk limiting features apart from a reinstatement premium common to these types of contracts. Treaty Per Risk Excess of Loss
arrangements with rates on line well below the present value of the limit of coverage, or without aggregate limits, sub-limits, or contingent features.
mostly: without limits, risk limiting features, etc.
It would be hard to tell on the surface if a non "arms-length" party had unstated/unwritten risk limiting features and would need a more careful review to ensure contracts are in fact transferring risk (or just a complicated loan).
arm's length principle (ALP)
The arm's length principle (ALP) is the condition or the fact that the parties to a transaction are independent and on an equal footing. Such a transaction is known as an "arm's-length transaction".
It is used specifically in contract law to arrange an agreement that will stand up to legal scrutiny, even though the parties may have shared interests (e.g., employer–employee) or are too closely related to be seen as completely independent (e.g., the parties have familial ties).
Opposite of "arms-length" is a "arm-in-arm" transaction:
arm in arm transaction. Deal in which the personal interests of the involved parties are intertwined, or prices or terms are based on non-commercial considerations. Transactions between parents and children, for example, are generally made arm-in-arm. See also arm's length transaction.
Please explain how you see this (arm-in-arm) as a good thing for risk transfer in a reinsurance agreement.
Thx chrisboersma. I've linked to this post from the wiki.
This arms-length principle, as well as the no risk-limiting features principle, is just a way making the concept of reasonably self-evident a little more precise. It gives the user guidance instead of leaving them completely on their own in trying to determine whether something is indeed self-evident (or not self-evident.)
It's more of an opinion rather than a hard fact. If a transaction is arms-length, there's a much better chance that it's a "valid" transaction because it reduces the opportunity for manipulation by one of the parties. But you could probably come up with other principles that would help the user. One that's discussed is quota-share treaties. Often it is reasonably self-evident that a quota-share treaty satisfies transfer of risk.
It's just that this arms-length concept is already familiar in terms of the law, so it was convenient for actuaries to borrow it when discussing reinsurance and transfer of risk.
Comments
Examples of Reasonably Self-Evident from AAA:
mostly: without limits, risk limiting features, etc.
It would be hard to tell on the surface if a non "arms-length" party had unstated/unwritten risk limiting features and would need a more careful review to ensure contracts are in fact transferring risk (or just a complicated loan).
arm's length principle (ALP)
Opposite of "arms-length" is a "arm-in-arm" transaction:
Please explain how you see this (arm-in-arm) as a good thing for risk transfer in a reinsurance agreement.
Thx chrisboersma. I've linked to this post from the wiki.
This arms-length principle, as well as the no risk-limiting features principle, is just a way making the concept of reasonably self-evident a little more precise. It gives the user guidance instead of leaving them completely on their own in trying to determine whether something is indeed self-evident (or not self-evident.)
It's more of an opinion rather than a hard fact. If a transaction is arms-length, there's a much better chance that it's a "valid" transaction because it reduces the opportunity for manipulation by one of the parties. But you could probably come up with other principles that would help the user. One that's discussed is quota-share treaties. Often it is reasonably self-evident that a quota-share treaty satisfies transfer of risk.
It's just that this arms-length concept is already familiar in terms of the law, so it was convenient for actuaries to borrow it when discussing reinsurance and transfer of risk.