Abstract
Current methods for evaluating risk transfer, such as the ‘10/10’ rule, suffer from a few problems: They are by nature ad hoc and thus are not a direct consequence of risk transfer; they do not properly evaluate some treaties with obvious risk transfer; and they may be gamed. This paper provides alternative methods for assessing risk transfer. The primary technique is to require that the purchase of reinsurance reduces the coefficient of variation of the reinsured’s net retained losses. In many situations, a second requirement, that the reinsurer’s net profit and expenses be less than the cost (in interest) of obtaining enough additional capital to replace the proposed reinsurance, is suggested.
Volume
Summer
Year
2022
Keywords
reinsurance, risk transfer, rate of return
Description
Current methods for evaluating risk transfer, such as the ‘10/10’ rule, suffer from a few problems: They are by nature ad hoc and thus are not a direct consequence of risk transfer; they do not properly evaluate some treaties with obvious risk transfer; and they may be gamed. This paper provides alternative methods for assessing risk transfer. The primary technique is to require that the purchase of reinsurance reduces the coefficient of variation of the reinsured’s net retained losses. In many situations, a second requirement, that the reinsurer’s net profit and expenses be less than the cost (in interest) of obtaining enough additional capital to replace the proposed reinsurance, is suggested.
Publications
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