Cash Cushion for Primary Insurer
Hi I want to be clear on why there is a cash cushion. Is it just because the reinsurer will pay out the claims immediately? Thanks
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Hi I want to be clear on why there is a cash cushion. Is it just because the reinsurer will pay out the claims immediately? Thanks
Comments
Actually, if the reinsurer always paid claims immediately, there wouldn’t be a need for a cash cushion from that particular perspective. A cash cushion is more relevant when there's uncertainty or delay in receiving payments or when the primary insurer wants to ensure it has immediate liquidity for any future obligations after the reinsurer exits the contract.
In the context of commutations, the reinsurer pays a lump sum to settle all future claims obligations, which could eliminate the need for future payments from the reinsurer. However, the cash cushion would still be important to the primary insurer to ensure it can cover any claims beyond what was anticipated in the commutation settlement.
So, while immediate payments from the reinsurer reduce the need for a cushion to cover claims awaiting reinsurance reimbursements, the cushion remains important for the insurer's overall financial stability and risk management.