2019 Fall 14

sx1sx1
in CIA.PrLiabs

Could you please explain the difference between Q. Ceded unearned premium and R. Expected reinsurance premium?

Comments

  • grahamgraham

    Sure,

    • Ceded unearned premium refers to policies written by the primary insurer on a direct basis. Premium is collected by the primary insurer from the insured but if this policy is then ceded to a reinsurer, then both the premium and unearned premium would also be ceded. (And of course losses related to this policy would also be ceded in accordance with the reinsurance contract.)
    • Expected reinsurance premium is premium collected by the reinsurer from the primary insurer for reinsurance coverage and is completely separate from ceded earned/unearned premium.
  • sx1sx1

    I am still confused about why the reinsurer would need to collect reinsurance premium in addition to ceded premium?

  • grahamgraham

    The ceded premium is what the primary insurer collected to cover their own losses and expenses and that does gets passed on to the reinsurer. But the reinsurance policy itself has a cost that is potentially different from the premiums the primary insurer collected.

    For example, the reinsurer may have a different expense structure or a different profit margin from the primary insurer and the ceded premiums may not cover it. You can think of the reinsurance contract as just a normal insurance policy that the primary insurer has to pay for. The price of that policy might be lower than it otherwise would be because the reinsurer is going receive the ceded premiums, but it is still a separate cost.

  • sx1sx1

    Thanks Graham that makes more sense!

  • CalendarYrCalendarYr

    I wonder if the solution has problem for Discount factor @ i and i' ? 60% and 40% seems to be other way around. Incremental should be 40%/(1+i)^0.5 and then 60%/(1+i)^1.5: that would give us: PV factor @ i% 0.972891061
    PV factor @ I'% 0.97508404 => match solution close enough to 5 decimals at least

    Otherwise(0.6 x 1.03^‐0.5 + 0.4 x 1.03*‐1.5) it's: PV factor @ i% 0.978659189
    PV factor @ I'% 0.980388652 => doesn't even match the solution provided in 3 decimals!!!

  • grahamgraham

    You are correct. This has been noted in footnote 6a in the BattleTable here:

  • valeriyak18valeriyak18

    Hello,

    I have a question regarding part e. Why do we include the FutRe when we calculate the net premium liabilities for the MCT required capital calculation? Isn't it supposed to be net of reinsurance?

    Thanks,
    Val

  • Staff-T1Staff-T1
    edited April 2022

    Yes it's precisely because it is net that's why we need to add FutRe. It represents the cost of reinsurance not yet purchased on the unearned premium

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