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What is reciprocal reinsurance and securitisation?

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

What exactly is reciprocal reinsurance and securitisation with regard to alternative risk transfer?

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answered Nov 22, 2017 by Landi (300 points)

Reciprocal reinsurance is very simply an arrangement between two (likely non-reinsurance companies) to cover part of the other's risk, for instance, Company A only sells mortality risk, Company B only sells annuities, both want to diversify their risk exposure, thus Company A "reinsures" part of its life business with Company B, and vice versa. The exact terms will depend on the agreement reached, it could by that Company B comes up with the premium it requires for taking the life business and Company A with the premium it needs for the Annuity business, or that they, argumentatively, swap an amount of risk exposure resulting in equivalent present value of liabilities. Although this seems somewhat similar to SWAPS (which is part of ART) SWAPS is a wider concept which includes the trading on non-insurance cashflows and risks, whilst reciprocal insurance are specifically insurance risks.

Securitisation (ART), as the notes explain it is turning an insurance risk into a tradable commodity.. think Derivatives learned in Intros. Instead of getting reinsurance cover against a potential catastrophe, a security is created which pays out a certain amount in case a certain event happens, and is traded in the market, thus even non-insurance companies can "provide cover" by trading in such securities.