Hi Graham,
On battlecard #10, pre-set limits on timing of payments is listed as a risk limiting feature. However, on battlecard #12 (2018.Fall #5a), 'premium paid quarterly' is classified as a 'non risk-limiting feature'.
Would you please clarify if it is actually a risk limiting feature? Thanks!
Comments
Yes, I see how that's confusing. In BattleCard 10, I'm referring to loss payments from the reinsurer back to the insurer. (This is reimbursement for ceded losses.) But in BattleCard 12, the non-risk-limiting feature refers to premium payments from the insurer to the reinsurer. I have edited BattleCard 10 to make that more clear. Thanks!
In general, you must have both timing risk and U/W risk for risk transfer to have occurred. That means the reinsurer can't schedule when they're going make the reimbursements for ceded losses back to the primary insurer. That would remove timing risk. But the premium payments from the primary insurer to the reinsurer have nothing to with timing risk so those payments can be scheduled.
hi, in Fall2018 q18, it is saying "Loss is paid when it occurs" is not a risk-limiting features. Why? Loss paid when it occurs specified timing of loss payment, right?
You're right that "Loss is paid when it occurs" specifies the timing of loss payment, but it's not a risk-limiting feature because it does not restrict the amount of risk transferred.
Risk-limiting features in reinsurance contracts typically include mechanisms that reduce the reinsurer’s exposure, such as terms set in advance or experience-based renewals.
In contrast, stating that "Loss is paid when it occurs" simply clarifies when the payment is made—it does not alter the financial exposure of the reinsurer. The reinsurer still bears the risk of the loss, regardless of whether payment is immediate or delayed. Therefore, it does not qualify as a risk-limiting feature.
Thanks for the clarification. If the contract specifies loss will be paid within 1 year. It might be a risk limiting feature for long tail line. Am I interpret this "timing of loss payment" feature right?
Well yes it might be - But I don't think I have seen a policy like that in real life
To add on to Staff-T1's real-life experience, here is what I understand purely from the material @CatherineGao:
In general, there needs to be timing risk or U/W risk for risk transfer to have occurred. I think an example of eliminating timing risk would be having all losses paid out quarterly.
Specifying the payment of losses within 1 year for long-tailed lines might reduce some of this risk. By requiring losses to be paid within one year, the contract reduces the insurer’s exposure to delayed claim development and long-tailed uncertainty in payments. This makes cash flow more predictable, hence possibly affecting the timing risk.