Maintainence Cost & Expected Net Reinsurance Cost
Hi,
May I know whether it is conventional that we should use Gross basis to times the Expense Ratio for sorting out the Maintenance Cost, although the multiplier can ne Gross Written Premium, Gross Earned Premium, or even I saw from historical exam paper using Gross UPR...
The other thing I want to confirm is what "Net" means for the Reinsurance Cost.
Does that mean it take into account both Inward Reinsurance and Outward Ceding Out Reinsurance Cost?
I recalled that from one of the Battle Quiz: One of the component of Premium Liability is Reinsurance Cost but writing "Net Only". Would you mind to share with us more on this?
Many Thanks,
Wilson
Comments
The source text states that maintenance expenses are a percentage of gross unearned premium. This is demonstrated in this recent exam problem:
Regarding reinsurance, the general formula is:
where D = Direct business, A = Assumed business, C = Ceded business. Note that here "Direct" is the same thing as "Gross".
For calculating premium liabilities on a gross basis, there is no reinsurance cost because on a gross basis, there is no reinsurance. The cost of reinsurance is only considered when calculating net premium liabilities. You can see this from the Excel exhibit provided in the syllabus:
Thanks Graham! I see, so the Maintenance Expense is the same no matter Gross or Net then. And As you said Gross means Direct, whereas the Inward Ceded In and Ceded Out are all called Reinsurance.
Right, there is no "gross" or "net" for maintenance expenses.
Inward ceded would be "assumed" and outward ceded would be "ceded". (On the exam, it's probably safer to use the terms assumed and ceded rather than inward and outward.)