2019 Spring Q14 APV(PL)

wilsonchan18wilsonchan18
in CIA.PrLiabs

Hi,

I just want to understand why the APV need to calculate the ELR on (Net UPR-Future Reinsurance).
What is the rationale here behind too adjust the Net UPR?
Can anyone shares?

Thanks and Warm Regards,
Wilson

Comments

  • Staff-T1Staff-T1

    Do you mean why we need to subtract future reinsurance? This is because we expect there to be a "cost" to have reinsurance on the unearned portion of the premium. Basically what we expect to receive from a reinsurer is less than the premium we pay. This cost has to be removed from the UEP.

  • wilsonchan18wilsonchan18

    So what it means is that the Future Re (Expect Reinsurance Premium Cost) should be part of the Ceded Premium, so that we need to adjust higher the Ceded UPR to include this cost.

    And it will lead us to have less Net UPR after adjustment?
    Can I understand that in this way? Thanks.

  • wilsonchan18wilsonchan18

    Yes, it kind make sense. While Gross PV is the same, Ceded PV will take the ELR on both the Ceded UPR and Expect Reinsurance Cost, making the Net PV lower as a result! :)

  • Staff-T1Staff-T1
    edited March 2022

    Okay so I've thought about it and went back to the source material to refresh my memory. My initial answer is not correct. Basically what we have is that Future reinsurance is actually:

    • Expected reinsurance costs based on anticipated contracts that are not yet
      underwritten

    I think the material explains it really concisely here:

    Expected Reinsurance Costs

    For the net policy liabilities in connection with unearned premium, in addition to the above
    considerations, the AA would also consider expected reinsurance costs. The manner to properly reflect reinsurance costs will depend on the type of reinsurance treaty and its terms and conditions. For example, for a line of business covered by a proportional reinsurance treaty, the net unearned premium will be lower than the gross unearned premium and the loss ratio will be the same on a gross and net basis. For a line covered by an excess of loss treaty expiring at the valuation date, the gross and net unearned premium are the same and the ceded unearned premium is $0 at the end of the contract period. However, the cost of reinsurance in relation to the unexpired portion of the policies would be taken into account. The assumptions used would reflect the reinsurance rates and expected recoveries consistent with the reinsurance structure in place over the exposure period of the unearned premium

  • wilsonchan18wilsonchan18

    I see, so it is basically the Rate on Limit (XOL Layers). That align to what we discussed. Whereas QS Cost already been taken from the Ceded UPR, those XL or SL cost will be reflected from the formula, and by multiplying the L/R will be adjusting the Reinsurance Recovery from those agreements when calculating the Net Policy Liab. . :)

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