2018.Fall 18b
Q: Describe the "self-evident" method for assessing the existence of risk transfer.
A: May apply if reinsurance premium is low and/or the potential loss is high.
I can understand that when the potential loss is higher, the existence of risk transfer becomes more evident.
However, if reinsurance premium is low, wouldn't that indicate very little risk being transferred under the reinsurance contract, since the premium presumably more or less reflects the amount of risk being transferred? Why is that an indication of self-evident risk transfer? It seems counter-intuitive to me.
Comments
Not necessarily. Just because the reinsurance premium is low, it could just be reflecting the fact that the expected loss is low. However, that does not mean that the loss given an event occurs is low. A simple example would be earthquake reinsurance that covers 5% of your premium. The premium is low, but it is very obvious that there is risk transfer as the reinsurer will suffer massive losses should an earthquake occur.