Q24
In part c., I don't understand the answer saying it would be " More PAA elligible" , why is the likelihood being PAA increased?
In p.26 of the source text: ( https://www.cia-ica.ca/publications/222129e/) it is mentioned: Some contractual cancellation provisions of reinsurance contracts may shorten the contract boundary to the extent that they are available to both parties (reinsurer and cedant). such cancellation provisions would generally increase the likelihood of the reinsurance contract being PAA eligible
A little further it then mentions that when it's non-contractual cancellations,PAA eligibility would not be affected.
But why is this the case, why would eligibility for PAA increase just by having it mentioned in the contract? Thanks.
Comments
I'll give an example: Imagine a reinsurance contract initially set for three years. If both parties can cancel it at the end of each year with a three-month notice, then at the start of the contract, the reinsurer is only firmly committed to providing coverage for the first year. After that, either party could terminate the contract, meaning the reinsurer is not obligated to continue coverage beyond year one. In this case, the contract boundary is effectively shortened to one year because the reinsurer’s obligation ends at the point where cancellation could take effect. In that sense, the contract now becomes PAA eligible because the contract duration has been shortened from 3 to 1 year
Got it thanks!