Logic/Intuition Behind 50/50 Split of Reinsurance Recoverable between R3 and R4
The textbook states this as a fact without any kind of justification. Does anyone have a reason why this makes sense? To be clear, I mean the split between R3 and R4 not necessarily the split being 50/50 vs. 30/70, etc.
From an R3/Credit Risk perspective it makes sense in that there is a risk that the reinsurer is unable to pay the insurer the recoverables it is expecting.
From an R4/Reserve Risk perspective, I suppose if the insurer realizes that the reinsurer will not pay the insurer for the claims paid out, maybe the insurer might feel the need to stock up more than it otherwise might on reserves should the claims experience adverse development.
Is there a better explanation?
Comments
No, you've got it, this is sufficient. I would just say that it is not for adverse development in R4, but rather for the risk of what the reporting entity considered ceded coming back to them.