Method 1 risk transfer testing
What is meant by each of these?:
i) transaction is done at arms length.
ii) there are no risk limiting features.
Can you give some examples?
I'm guessing ii) could be something like a deductible or individual/agg loss limit. But I'm not at all sure what i) means.
Thanks.
Comments
You're right about (ii).
A transaction being done at arm’s length means that the parties involved are independent and act in their own self-interest, without any pressure or influence from the other party. This ensures that the deal is fair and reflects market value.
The parties maintain a distance from each other.
Can you explain why swing premiums limit risk transfer? I don't think it was fully explained in the text.
The two risk transfer tests take premium as fixed. Having variable premium throws a wrench in them. You can still derive an expression of reinsurer's loss, but it won't be as straightforward as in these tests.