Reinsurance balances risk over large groups that may be united only through the re-insurance link. By reducing the risk of random fluctuations in claims, reinsurance reduces the probability of insolvency in the ceding insurer.
The Social Re model of reinsurance proposes a relationships between Social Re and the MIU based on:
— how Social Re can stabilize the MIU;
— method of reinsurance;
— the MIUs attitude to risk (how much risk to cede and how much to retain).
Social Re will be solvent if the total premium income received from MIU suffices to cover all claims plus administrative costs. Setting premium levels requires estimation of:
— the risk that the MIU will submit a claim;
— the average claim that will be presented by the MIU;
— administration costs.
The first two depend on the financial management of the MIU, the last on Social Re's management. In order to assess the first two, Social Re has developed a Data Template to standardise data and reporting capacities.