risk-limiting features
Hi Graham,
Does a risk transfer have to be absolutely risk-limiting features free in order to be considered as "reasonably self-evident"?
Say, a CAT treaty has a high loss limit of 100 billion? will it still not be considered as "reasonably self-evident" as it has a risk limiting feature even the potential loss is very high.
Thank you.
Comments
The concept of "reasonably self-evident" is meant to be intuitive. That means there are no strict rules for how to draw a conclusion. Every situation has different facts that have to be evaluated in relation to each other.
I understand what you're getting at with your example, having a limit so high that it would never be reached. In that case I believe it would pass the "self-evident" test. This assumes of course that the reinsurance premium is something much lower than the 100 billion cap.
In the wiki article for CIA.Reins, there is a section giving guidance for when a reinsurance transaction is self-evident and lists these 2 points:
But they are not strict rules. There can be risk-limiting features but if they aren't material then it doesn't matter. As in your example, risk transfer could still be regarded as self-evident because the risk-limiting feature is presumably not material.
Thank you for your reply, Graham !
What if the limit is 10m instead of 100 billion, assuming there is a 10% chance that the treaty limit will be exhausted every year? will it still be considered as "reasonably self-evident"?
Thanks again !
You can probably argue that this is self-evident because there is a significant chance of loss for the reinsurer. But I'm also assuming the reinsurance premium is something "reasonable" for this particular situation. The premium would have to be included in the reinsurer's overall loss.
Thank you Graham !