CSM for Reinsurance
The wiki states that:
CSM which now represents the net cost or gain from purchasing the reinsurance contract and can now be negative or positive (Recall it is not possible for an insurance contract to have a negative CSM). A negative CSM represents a net gain on purchase of reinsurance
I am confused as to why a negative CSM represents a net gain on the purchase of reinsurance. Would a negative CSM not be released into insurance services results as a loss since it is negative? Any clarifications would be great here.
Comments
You are thinking of it from a direct insurance point of view, where a negative CSM (not possible and is instead called a loss component) would be a loss as that means premiums < Expected Losses. However, this is flipped with reisnurance since you are now paying premiums, and receiving recoveries. If premiums paid > recoveries, then your CSM is positive which is a net cost for you while the converse is a net gain.
A negative CSM on the reinsurance side will be released as coverage is provided and increases the insurance service result