Funds Held (tangential to 2017 Q#14) Question.
What is the difference between:
"Funds held by OR deposited with reinsured companies"
* Assets in Fall 2017 Q#14
* Odomirok p 118 (p 119 of the pdf) defines this as
"Funds held by or deposited with reinsured companies (column 12) represent an asset to the
reinsurance company and a liability to the ceding company. It represents a provision within a
reinsurance contract under which a portion of the premium due to the reinsurer is withheld by
the ceding company to pay claims. There is usually a limit to the funds-held balance; however,
it is replenished as (or when) it is absorbed." key word here is that it is a LIABILITY to the ceding company
&
"Funds held by company under reinsurance treaties"
* Liabilities in Fall 2017 Q#14
* Odomirok 124: "...the liability for
funds held enables the insurance company to mitigate its liability for unauthorized, certified
and overdue authorized reinsurance."
Is "Funds held by company under reinsurance treaties" the one that links to bank notes?
--Chatterjee
Comments
The first is funds due to the reinsurer that are currently held by the reinsured. The second is funds held by the reinsured under the terms of the reinsurance treaty. An entity can assume the roles of reinsurer and reinsured simultaneously, on different contracts. Schedule F Part 6 adjusts the Balance Sheet by grossing the ceded reinsurance amounts. The first item is related to assumed reinsurance, so it does not partake in this grossing. The second item is related to ceded reinsurance, so it is adjusted for in Part 6. Bank letters of credit can be used to collateralize either of these items.
Pretty basic question here but where can I go for a precise difference between assumed and ceded reinsurance? (would love an example as I've just been googling).
My interpretation is a reinsurance company can ASSUME risks from a CEDING insurer.
Thanks for the quick follow up.
Cj
Your interpretation is correct. But an insurance company can do the same, via a reinsurance line. "Direct" is the term used for insurance transactions. These are the premiums you collect from policyholders, in return for the promise of claim payments. "Assumed" and "ceded" are terms used for reinsurance transactions. If you're assuming it, you're collecting a portion of direct premium, in return for the promise of partial claim payments. If you're ceding it, you're paying a portion of your direct premium, in return for the right to partially transfer your claim liabilities to the payee.