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in BUS 4027W - Actuarial Risk Management by
Hi 

What is reinsurance commission? Is it only for proportional reinsurance?

The notes just mention that it can be used as a source of capital.

Thanks 

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This is an exert from my study notes on reinsurance to hopefully give you some context about how this arrangement works.

 

Financial reinsurance (Swap future profits for certain cash now)

  • Aim: improve apparent accounting or solvency position of cedant
    • If regime where credit already taken for future profits (or ) where a realistic liability has to be held with respect to loan payments, then not effective
  • Methods:
    • Risk premium method -> Loan is presented as a reinsurance commission (repayments added to reinsurance premiums)
    • Contingent loan -> provides a loan contingent on stream of future profits generated by the business (may not need a reserve repayment)

 

So the main idea of this arrangement is to swap the future profits of the insurer for certain cash now. So the reinsurance commission is "a loan" paid to the insurer at the start of the term. This is then "paid back" over the term of the reinsurance contract. 

 

This "repayment" is paid back in one of two ways (in theory). The first is Risk premium method where it adds them to the reinsurance premiums and the second is the contingent loan which is, in simple terms, the insurer pays back the loan from any profits arising in the future from the contract. If there are no profits, no payment is made to the reinsurer.

 

With regards to the reinsurance commission paid to the insurer (or "loan" if you want to think of it that way), that can be used to help alleviate new business strain (and pay off many of those initial expenses). It allows the insurer to swap an uncertain future cashflow (in profits) for a certain cashflow now (which can be very valuable if you are looking at a very unstable future experience and why reinsurers won't just provide these arrangements without making certain that they will receive a return on this arrangement as per all reinsurance contracts).

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