This refers to a provision in a reinsurance contract that allows the final premium to swing up or down depending on the insured's actual loss ratio. This is covered more in a different reinsurance wiki article here:
In the exam problem you referenced, the "provisional rate" the insurer has to pay for coverage is 14% of $20 million or $2.8 million. Now, the swing ratio is 75% so if the loss ratio on the insured's contract turns out to be greater than 75%, let's say 78%, then the provisional rate also increases by 3% from 14% to 17% of $20 million, or $3.4 million. So the insured must pay an extra $3.4 - $2.8 = $0.6 million within 3 years according to the contract features given in the statement of the problem.
If the insured's loss ratio is lower than 75%, say 74%, then the provisional rate the insured has to pay also decreases by 1% and the new premium is 13% of $20 million, or $2.6 million, and the reinsurer would return $0.2 million to the insured because of their better than expected loss ratio.
But this swing L/R seems fair, and may be actuarially sound.
To me it not really limiting the Reinsurer Limit, but yes Risk Transfer is less comparing to no such additional premium to be paid to reinsurer...
So the definition of Risk Limiting Feature is any terms limiting the Reinsurance Limit Taking or any term making the Risk Transfer smaller? I m bit confused
@graham does the ceded loss ratio have anything to do with the reinsurance premium swings? The insurer's loss ratio being bad doesn't necessarily mean the ceded loss ratio will be bad. Ex. they can have an XOL policy and they accumulate losses that never go above the attachment point, so the insurer's LR would be bad, but would the insurer still have to pay a greater Reinsurance premium?
Intuitively I would think the swing loss ratio should be based on the ceded LR since the reinsurer wants to encourage writing good risks. Thoughts?
@wilsonchan18 : A risk limiting feature is any feature that makes it less likely for an insurer to receive sufficient recovery basically @suomi : Indirectly. (usually) the premium only starts swinging after the attachment point has been breached. In that sense, it is a ceded loss ratio. But I don't think it makes sense to do it by ceded loss ratio just because your denominator is a varying premium itself - So it would be complicated to calculate? Also, with a swing loss ratio, a reinsurer doesn't really care if you are writing good risks or bad risks since they are protected by the swing ratio itself
1) Whether I am paying the premiums quarterly or annually, I am still receiving the full coverage
2) You shouldn't include reinsurer expenses in calculating a risk transfer because only CFs between cedant and reinsurer are taken into account
Minimum Rate is the minimum amount of premium that the insurer has to cede to the reinsurer and the Maximum Rate is the maximum amount of premium that the reinsurer has to ceded to the reinsurer. The minimum premium can limit risk transfer if the underlying contracts have a very low ELR as most of the time it will not be possible for the reinsurer to incur a loss. The maximum premium will not limit risk transfer as it exposes the reinsurer to unlimited risk if the experience of the underlying policies deteriorates severely.
We have that reinsurer expenses should not be included in the analysis for risk transfer.
We are told that the reinsurer expenses are 20% of the premium. How can the CAS solution say that the reinsurer expenses are not included in the risk analysis?
I'm not sure I follow - Reinsurer expenses are not part of the analysis for a risk transfer, which is what the solution says. What is the discrepancy here?
Comments
This refers to a provision in a reinsurance contract that allows the final premium to swing up or down depending on the insured's actual loss ratio. This is covered more in a different reinsurance wiki article here:
In the exam problem you referenced, the "provisional rate" the insurer has to pay for coverage is 14% of $20 million or $2.8 million. Now, the swing ratio is 75% so if the loss ratio on the insured's contract turns out to be greater than 75%, let's say 78%, then the provisional rate also increases by 3% from 14% to 17% of $20 million, or $3.4 million. So the insured must pay an extra $3.4 - $2.8 = $0.6 million within 3 years according to the contract features given in the statement of the problem.
If the insured's loss ratio is lower than 75%, say 74%, then the provisional rate the insured has to pay also decreases by 1% and the new premium is 13% of $20 million, or $2.6 million, and the reinsurer would return $0.2 million to the insured because of their better than expected loss ratio.
But this swing L/R seems fair, and may be actuarially sound.
To me it not really limiting the Reinsurer Limit, but yes Risk Transfer is less comparing to no such additional premium to be paid to reinsurer...
So the definition of Risk Limiting Feature is any terms limiting the Reinsurance Limit Taking or any term making the Risk Transfer smaller? I m bit confused
@graham does the ceded loss ratio have anything to do with the reinsurance premium swings? The insurer's loss ratio being bad doesn't necessarily mean the ceded loss ratio will be bad. Ex. they can have an XOL policy and they accumulate losses that never go above the attachment point, so the insurer's LR would be bad, but would the insurer still have to pay a greater Reinsurance premium?
Intuitively I would think the swing loss ratio should be based on the ceded LR since the reinsurer wants to encourage writing good risks. Thoughts?
@wilsonchan18 : A risk limiting feature is any feature that makes it less likely for an insurer to receive sufficient recovery basically
@suomi : Indirectly. (usually) the premium only starts swinging after the attachment point has been breached. In that sense, it is a ceded loss ratio. But I don't think it makes sense to do it by ceded loss ratio just because your denominator is a varying premium itself - So it would be complicated to calculate? Also, with a swing loss ratio, a reinsurer doesn't really care if you are writing good risks or bad risks since they are protected by the swing ratio itself
Hi, can you please explain why the following two are "not-limiting" features in RT
1-premium payable quarterly
2-Reinsurer expense not included in RT
1) Whether I am paying the premiums quarterly or annually, I am still receiving the full coverage
2) You shouldn't include reinsurer expenses in calculating a risk transfer because only CFs between cedant and reinsurer are taken into account
what are the minimum rate and maximum rate about? how would they limit or not limit risk transfer ?
Minimum Rate is the minimum amount of premium that the insurer has to cede to the reinsurer and the Maximum Rate is the maximum amount of premium that the reinsurer has to ceded to the reinsurer. The minimum premium can limit risk transfer if the underlying contracts have a very low ELR as most of the time it will not be possible for the reinsurer to incur a loss. The maximum premium will not limit risk transfer as it exposes the reinsurer to unlimited risk if the experience of the underlying policies deteriorates severely.
does that mean the higher the 'minimum rate', the less risk transferred?
In a nutshell, yes
Can you clarify why higher minimum rate the less risk transferred? Why does a forcing a minimum amount of premium to be ceded going to limit risk?
I explained it above re low ELR
Hello,
We have that reinsurer expenses should not be included in the analysis for risk transfer.
We are told that the reinsurer expenses are 20% of the premium. How can the CAS solution say that the reinsurer expenses are not included in the risk analysis?
Thanks,
Andrew
I'm not sure I follow - Reinsurer expenses are not part of the analysis for a risk transfer, which is what the solution says. What is the discrepancy here?