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How does reinsurance act as a source of capital?

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asked Nov 9, 2017 in BUS 4027W - Actuarial Risk Management by Rowan (4,010 points)

Reinsurance can reduce the amount of capital that an insurer holds AND acts as a source of capital. How does it act as a source of capital? Is this the reinsurance commission insurance companies can get from reinsurers to help them finance their new business strain?

1 Answer

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answered Nov 9, 2017 by ErichMaritz (500 points)

EM: Yes. Also called Financial Reinsurance, as explained in section 3.1 of that chapter.

LdT: Life insurance companies need a lot of capital as reserve, it is usually the minimum of an amount required relative to their liabilities or a fixed Rand amount (this used to be R10m when I was at SR), for new companies it is likely the second amount that will kick in as they wont have liabilities yet, Swiss Re in once such instance had a loan agreement with a startup company, loaning them the R10m capital, the company then paid this back from profits as and when emerged. Of course some sub-rules, but this is the best example of a source of capital that I can think of.