2016.Fall 25 iii)
Could you elaborate on the examiner's report answer "Contract doesn’t qualify due to lack of underwriting risk."
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Could you elaborate on the examiner's report answer "Contract doesn’t qualify due to lack of underwriting risk."
I don't follow. Thanks!
Comments
The reason there's no U/W risk is that it is 100% certain the reinsurer will have to pay out the full $5m every year. (If the ceding company is certain to have $10m in ceded losses and the reinsurer covers the first $5m, they will always have to pay out $5m.)
A specific way to change the contract so that is does have U/W risk is to specify that the reinsurer pays the $5m of losses in excess of $10m (instead of just the first $5m.) Then if there are only $10m in losses, the reinsurer wouldn't pay anything. If there $12m in losses, the reinsurer would pay $2m. And if there are more than $15m in losses, the reinsurer would max out at $5m.
So for the modified contract, the reinsurer would pay somewhere between 0 and $5m, but it could vary from year to year. That's what's meant by U/W risk.