Pool Expense Allowance
From my understanding, this pool allows company to keep some of the ceded premium (as payment for acquisition costs, handling claims, etc).
However, if every member company receives this allowance, is the premiums actually received by the RSP considerably less than total premium ceded to the pool?
For example, in the FA practice problems, in Question 1 company A receives 21% of the 67,000 they ceded. However, every other company would also get 21% of what they ceded.
Then company A receives 14% (their participation ratio) of the total ceded premiums of 413,000. But if the RSP allows every insurer to retain 21% of this, are the premiums available to 'allocate' back to participating members not less?
Comments
Yes, from my understanding, your above point is right, due to the allowance, the total premium received by the pool is less than what is originally ceded.
Not sure if I understand the 2nd bit but the participation ratio of 14% Company A gets back, it should be the ceded premium net of the allowance meaning the premium available to allocate back should be less. I guess you are asking from just a theoretical perspective? Thanks!
Thanks for the response. Yeah I was mostly asking from a theoretical perspective. This is likely outside the scope of the syllabus but I figured the fund wouldn't be sustainable if they allocate premiums to participating insurers in addition to allowing the expense allowance.