An interesting topic raised in Tuesday’s lecture was that of financial reinsurance. This was raised as an alternative source of capital.
The article explains that it can be used to alleviate the costs of new business strain or the cost of in-force policies being realised earlier than had been expected. This would therefore allow the reinsurer to use their available capital to “finance growth initiatives” at any point in time.
It states that the type of reinsurance agreement is that of a quota share treaty. The insurer will receive an upfront payment from the reinsurer. This amount is based on the expected future earnings of the policies covered in the treaty. The reinsurer will receive premiums from the insurer contingent on the future earnings of those policies.
According to this article, the contract is similar to that of a standard quota share treaty contract but further clarity will need to be provided from the insurer in terms of the profitability of the policies covered in the treaty. This could be information regarding the cashflow models and their sensitivities, the plans of the business and any operational processes that the reinsurer should be made aware of.