Fall 2018 Q4
Hi,
For part b., I'm curious if you think my answer is valid:
Reinsurers with a strong rating have an easy time accessing collateral and can access it more cost-effectively. The reinsurers can then pass these saving on to insurers through lower premiums.
Thanks,
Comments
Collateral are the funds provided by the reinsurer against the credit risk of their obligations to the cedent, and reinsurer's rating has an effect on the size of this collateral. Reinsurer may "access" (or hold) collateral from retrocessionaires, but then, it is the rating of that party that determines the amount of collateral.
I thought reinsurers can get banks to provide letters of credit to cedants on the reinsurer's behalf? Surely there's cost to the reinsurer for that and the price would, at least in part, depend on the reinsurer's rating agency rating, no?
There is no impact of a rating on a letter of credit, mainly because letter of credit is mainly an accounting transaction where monies are deposited in the bank in return for the said letter of credit submitted to the cedent.
leads to less collateral needed." Based on the schedule F section, isn't this not true? I thought we learned that section F doesn't use reinusrers rating when calculating the reinsurance provision. I am not seeing how the rating of the reinsurer here would affect the amount of collateral they have to post. Also some drawbacks of schedule F is that it penalizes slow paying authorized reinsurers regardless of financial strength. Similarly unauthorized also get penalized regardless of financial strength. Can you please help me understand how the rating of the reinsurer impacts the amount of collateral they have to post?
Reinsurer's collateral serves to vouch for funds owed by reinsurer to the primary, and reinsurer's rating may impact this item. Reinsurance provision is capital that primary has to hold to cover for the risk of reinsurer defaulting. They are two different things.