Reinsurer expected return as interest rate
For pitfall I - interest rate (considerations in selecting discount rate), the battle cards states: (Note that reinsurer's expected investment rate is IRRELEVANT in a risk transfer test)
However, for practice consideration parameter selection, reinsurer expected investment return is an alternative that better reflects the reinsurer's operations and is a more accurate estimate of loss.
Do these two statements contradict each other, or am I misinterpreting them? Thanks!
Comments
Sorry for the delay in answering:
The reinsurer's expected investment return rate really shouldn't be part of a risk transfer test because then you could get different answers for whether risk transfer occurred depending on the reinsurer chosen.
But then the problem is what discount rate should you use when doing a risk transfer test that requires a discount rate. The practical answer is that you might want to use the reinsurer's expected investment return. It seems like these statements contradict each other, but the first statement about irrelevance is the "theoretical best solution" but the second statement about using the reinsurer's investment return is the "practical solution".