RSPs allowance and actual cash flow
I'm trying to understand how RSPs works and got stuck in the allowance and actual cash flow.
Let's have a simple example set up (numbers are rounded for simplification).
Suppose in one RSP there are only 3 carriers, A, B and C. And their sharings are like the following:
- Unceded EE:A-90, B-100, C-110, Total-300
- Ceded EE: A-1, B-1, C-1 (this actually doesn't matter in the calculation so I simplified it)
- Ceded EP: A-100, B-150, C-135, Total-385,
- Ceded IL: A-150, B-200, C-175, Total-525
- Expense allowance=25%
The participation rate for each carrier is: A-30%(90/300), B-33%(100/300), C-37%(110/300).
Based on the participation rate, their share of the loss in the pool would be: A-158(30%x525), B-175(33%x525), C-193(37%x525)
The LR of each carrier in the pool: LR(A)=158/((385x30%)x(1+25%)), LR(B)=175/((385x33%)x(1+25%)), LR(C)=193/((385x37%)x(1+25%))
LR(A)=LR(B)=LR(C)=109% (losses are equally shared within the pool)
Here are my questions:
- How does the risk sharing in EP work in terms of cash flow? Does each of the carriers pay the ceded EP to the pool and then make up the difference? For example, for carrier B, does it pay 150 first and then get 22 (=150-33%*385) back from the pool? (Like a re-allocation of the total EP pooled)
- How does the risk sharing in IL work in terms of cash flow? Does the carrier A and C make extra contribute of 8 (=158-150) and 18 (=193-175) into the pool to compensate carrier B? (Like a re-allocation of the total IL pooled)
- When calculating the LR in the share of the pool, an expense allowance is added. Is it real cash flow or just for calculation purpose? If it is a real cash flow, where does the money come from?
- Why there's an extra loading of expense allowance since the EP from the carrier is already expense inclusive?
Comments
I have already answered this question here: https://battleactsmain.ca/vanillaforum/discussion/1615/how-to-win-the-rsp-game#latest
Hi T1, I've read that post before I start this new discussion. In your answer, the "expense" is a bit ambiguous. In the point #2 of your answer, the "expense" in the second bullet point, I guess it means claim expenses, as also mentioned in the end of the 3rd bullet point. However, in the 3rd bullet point, there's another "expense" considered as "cost" along with premium. That's what get me confused.
In the RSP's calculation, the expense loading is calculated based on the EP. So I assume that means the expense loading in the premium, which I don't think you clearly explained in that answer.
Also, you briefly mentioned that how the losses are re-allocated. However, there's no description of how EP are re-allocated nor how expense allowance works.
Another thing that answer didn't explain is the actual cash flow between carriers and the pool.
Hi T1. Thanks for the further explaination. For your 3rd explanation "Its an actual cash payment from the pool based on the EP. It comes directly from the ceded EP". I'm not sure I understand why there would money in the pool other than EP. Using my example, firstly the carrier A, B, C put 100, 150 and 135 into the pool and the pool has a total of 385. Then according to each of their own PR, carrier A, C would make extra payment of 16 and 6 into the pool and the total 22(16+6) would be refunded to carrier B, with a net cash inflow to the pool equal to 0. So the pool still has a totall of 385. Now the total 385 has 116 from A, 128 from B and 141 from C. Do you mean the expense allowance comes from this 385? When calculating the LR of a carrier's pool share, the expense loading is added to the EP in the denominator. In the example, the expense loading for A, B and C are 29(116x0.25%), 32(128x0.25%) and 35(141x0.25%), with a total of 96.Currently we only have 385 total in the pool, which comes from ceded EP, where does the extra 96 comes from?
Perhaps EP returned to cedants would be net of the expense allowance? Or the loss shared with industry would include the expense allowance? I agree with czs as its not so clear how this expense allowance is funded when the full premiums are returned to participating insurers and losses shared do not include an expense provision.
Yes, I believe the expense amounts come from the 385. The material doesn't go into too much detail about this but I believe the expense allowance would be reimbursed first to allow for insurers to service their policies. The remaining premium net of expenses and the losses would then be shared by the insurers.
However, looking at Fall 2015a) the examiners report is saying what you are saying above: i.e. that the expenses are in addition and not included in the collected premium.
There's two possible options here:
There's no clear cut answer here and I think only someone who has worked in the FA directly on this will be able to give you a 100% accurate answer