Insurance Risk Transfer and Categorization of Reinsurance Contracts
Despite the existence of numerous quantitative approaches to the categorization of financial reinsurance contracts, often insurance regulators may find the practical implementation of the task to be technically challenging. This research paper deve...
| Main Authors: | , , |
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| Format: | Policy Research Working Paper |
| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2013
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2012/12/17124490/insurance-risk-transfer-categorization-reinsurance-contracts http://hdl.handle.net/10986/12205 |
| Summary: | Despite the existence of numerous
quantitative approaches to the categorization of financial
reinsurance contracts, often insurance regulators may find
the practical implementation of the task to be technically
challenging. This research paper develops a simple,
affordable, and robust regulatory method that can help
insurance regulators to categorize financial reinsurance
contracts as reinsurance or financial instruments. By
reviewing real examples of different categorization methods,
this paper explains how the proposed method standardizes
such categorization. It also summarizes the existing
pertinent literature on the subject with the view to helping
insurance regulators to first apply some simple indicators
to flag the main issues with financial reinsurance contracts
that may need further reviews. Having identified the
suspicious reinsurance contracts, supervisors may consider
several solutions provided by the authors and, in some
cases, requiring further quantitative testing of risk
transfer contracts for categorization purposes, supervisors
may also consider adopting the Standardized Expected
Reinsurer's Deficit approach to contract testing
presented in this paper. The approach advocates the use of a
simple standardized stochastic method that would allow
market participants and regulators to perform robust
quantitative tests quickly and at an affordable cost.
Besides addressing the obvious drawbacks of the
"10-10" test, the proposed alternative method
allows a great reduction in the technical challenges posed
to the users of the Expected Reinsurer's Deficit
approach based on full stochastic models with only a minimum
loss of predictive accuracy. |
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