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Difference between Insurance swap & reciprocal quota share

+1 vote
asked Oct 12, 2018 in BUS 4027W - Actuarial Risk Management by rohin_jain (980 points)

From the readings in chapter Ch 44, 45, these seem to be the same thing?

Is the difference perhaps the following:

1) reciprocal quota shares are between insurer & reinsurer (while insurance swaps are between insurer & insurer)

2) Insurance swap could be structured in a non-proportional way of sharing risk. Reciprocal quota share may perhaps be dividing the risks in the same proportion?

1 Answer

+2 votes
answered Oct 16, 2018 by Rowan (4,010 points)

Hi Rohin

While reciprocal quota share and insurance swaps can appear to be similar, they are not the same thing. The possible reasons you give are not quite correct.

The main differences between the two arise due to the different aims which the agreements are trying to achieve. Reciprocal quota share (rqs) is used when an insurer is trying to diversify their book by ceding a portion of their business to another insurer. In exchange they agree to take on a portion of the other insurer's business. This does not have to be between insurer and reinsurer. Insurance swaps (IS) are used when an insurer is exposed to a specific risk which they want to reduce their exposure to. They then find another company (not necessarily an insurer) who is exposed to a risk which is either not correlated or negatively correlated with their risk and swap a specified number of units of risk with said party.

While the difference between these two aims is subtle, it means that the implementation and outcomes of the two agreements are different.

For example, with rqs, the business which is exchanged may be the exact same risk ie a motor insurance policy, but the insurers use the agreement to gain access to a more diverse pool of policy holders. With an IS agreement, the risks swapped won't be the same as this would not give the offsetting position which both parties want.

Another example is that the quota share style agreement for rqs means that it cannot be used to share risks with companies which are not insurers, IS, however, can be used in this manner.

All this being said, there are still situations in which an rqs or IS could be used to achieve the same outcome due to their similarities, but this will not always be the case, hence their distinction as separate risk management solutions.