Funds Held when evaluating if underwriting risk is transferred.
Given the mutual benefit of funds held to both the ceding entity & reinsurer, when evaluating whether a reinsurance contract transfers risk what exactly is considered in regards to funds held?
Comments
I don't think funds held is considered when assessing whether risk transfer has taken place. The key to risk transfer is that there's both U/W risk and timing risk, but funds held relates to collectibility which is in a different category of risk (credit risk).
On page 114, "Given the benefit, this is one provision that is considered in the evaluation of whether a reinsurance contract transfers underwriting risk."
I guess I worded my question a little ambiguously, but if funds held is considered for determining UW risk transfer, then it indirectly is considered when evaluating whether a reinsurance contract transfers risk, right?
Even so, I'm a little confused as to how funds held would relate to UW risk because I thought the same thing in that funds held primarily corresponds to credit risk as opposed to reinsurer loss potential
That's very interesting. I kind of forgot about that when I read Odomirok. I also looked in the Freihaut & Vendettit reading to see what they said (since that's the reading specifically about risk transfer analysis) and I found this from section 3.2.3.
So there is a difference of opinion between these 2 sources. Maybe the authors of Odomirok were drawing on personal experience when they made the statement about funds held being considered in risk transfer. There is always judgment involved in the determination of risk transfer and this may be one those things they keep in the back of their mind.
But technically, I believe it should not be formally considered. On the exam, you'd be safe to say funds held is part of credit risk and therefore should not be considered in determining risk transfer.