Spring 2015 Question 15
Hello,
I have a question on one of the answers in the examiner report. For part b the answer "require more collateral; impact: lowers reinsurance liability." was given and I am trying to figure out how this would be true in this problem. Because this reinsurer is slow paying the formula for the provision is 0.2*max(T-C, Pn90+Pd90). Because the question asks how the insurer could modify the terms of the reinsurance agreement to reduce the provision of reinsurance I am assuming they mean the particular agreement in the problem. Since they are slow paying, if we just increase the collateral, that would just make the left hand side of the items in the max function smaller, so the max would still be the right side and the provision would not change. Am I missing something here? Does having more collateral somehow reduce overdue paid reinsurance as well?
Comments
That answer goes this way:
"Require more collateral; impact: the unsecured reinsurance would be lower."
I think you understood it this way, because you referenced the correct part of the provision formula.
Yes, this answer is for the case where T-C remains the max, even after increasing C. That way, you reduce the provision by increasing the collateral.
Having more collateral does not reduce overdue paid reinsurance.
Sure, good luck.