Swing-Related Policies

wilsonchan18

Hi Graham,

I see in the Components of Premium Liabilities, there is one item called Premium Adjustment for Swing-Related policies.
Whereas I understand how the Retro-related policy works, would you mind to share more about what Swing-Related policy is?

Thanks and Cheers,
Wilson

graham

Note that the term is "swing-rated" (not swing-related.) It's basically a specific type of retrospectively rated policy. This concept is discussed more in the reinsurance reading by Freihaut. Here's a link to the relevant section of the wiki article:

• https://battleactsmain.ca/wiki6c/Frei.RskTrans#Section_3ab_.26_4:Pitfalls.26_Practical_Considerations_in_Reinsurance

As a simple example, suppose an insurer underwrites a $1,000 policy then purchases a swing-rated reinsurance contract with the following features:

• provisional reinsurance rate = 8% or $80
• The provisional rate can vary, or swing between 7% and 9% depending on the loss ratio of the policy
• If the loss ratio is 75%, then the rate stays at 8%.
• If the loss ratio is 76%, then the rate increases to 9%
• If the loss ratio is 74%, then the rate decreases to 7%

So the idea is that if the loss ratio is worse than the pre-arranged target of 75%, the cost of reinsurance goes up, and if the loss ratio is better than the target, the cost of reinsurance goes down. Another way of saying this is that the premium swings back and forth depending on the underlying loss ratio.

wilsonchan18

Thank You so much Graham for the clarification. Now I know, so it is basically L/R related, like a Sliding Scale.

graham

Yup!