Adv of Surplus Allocation Method - not distorted by reins

annie123

You mention that one of the advantages of the surplus allocation method in this chapter is that it is not distorted by reinsurance. Could you further clarify this? My understanding is that the the figures used to calculate the surplus ratio and surplus allocation (i.e., surplus, reserves, EP) are all NET of reinsurance. Then this would imply that the reinsurance does factor into the calculation of the surplus ratio and consequentially the surplus allocated to LOB, so it would be distorted by reinsurance?

graham

I see what you mean because the surplus ratio is obviously affected by reinsurance. The advantage I included in the wiki for this surplus allocation method came directly from the examiner's report answer to 2015.Fall Q13(b) but here's a more detailed explanation:

• If the surplus ratio were calculated using data gross of reinsurance, but some lines of business had reinsurance and some didn't, that could cause a distortion. Lines of business that had significant reinsurance and therefore lower net losses would receive an excessive allocation based on gross loss values. That means using loss net of reinsurance actually eliminates that distortion.