Note that this was also an exam question and you can see the offical CAS question and answer by clicking the yellow "E" in the "Section" column of the BattleCard.
Anyway, the question is asking for examples of "risk-limiting" features in a reinsurance contract. The first answer is:
future terms based on past experience in such a way that the reinsurer is guaranteed to recover losses
The first part of that is ok because rates are usually based on the insurer's claims history, but the part in bold is where the problem lies. Here, the reinsurer raises rates to a level where they recover everything they paid out in the prior term. In other words, there is no risk to the reinsurer because they always recover their losses in the next renewal cycle. That's why it's called a "risk-limiting" feature. And in this case it's really a "risk-eliminating" feature.
The second answer has similar reasoning:
the insured is forced to renew if the reinsurer is in deficit
"In deficit" means the reinsurer has paid out losses in excess of the premium taken in. And if the insured is forced to renew in this case, then the reinsurer can't lose money. (The insured is forced to renew until the reinsurer is no longer in deficit.)
Comments
Note that this was also an exam question and you can see the offical CAS question and answer by clicking the yellow "E" in the "Section" column of the BattleCard.
Anyway, the question is asking for examples of "risk-limiting" features in a reinsurance contract. The first answer is:
The first part of that is ok because rates are usually based on the insurer's claims history, but the part in bold is where the problem lies. Here, the reinsurer raises rates to a level where they recover everything they paid out in the prior term. In other words, there is no risk to the reinsurer because they always recover their losses in the next renewal cycle. That's why it's called a "risk-limiting" feature. And in this case it's really a "risk-eliminating" feature.
The second answer has similar reasoning:
"In deficit" means the reinsurer has paid out losses in excess of the premium taken in. And if the insured is forced to renew in this case, then the reinsurer can't lose money. (The insured is forced to renew until the reinsurer is no longer in deficit.)