Which of the following is NOT a stated benefit of funds held or deposited with reinsured companies as collateral?

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Multiple Choice

Which of the following is NOT a stated benefit of funds held or deposited with reinsured companies as collateral?

Funds held as collateral are set aside to secure the reinsurer’s obligations, so they act as a cushion if the reinsurer can’t pay claims. That setup directly cuts the counterparty credit risk faced by the ceding company, since there is a guaranteed source of funds available to cover losses. Having collateral also streamlines how payments are settled; with a pre-arranged pool of funds, claim settlements can proceed without chasing funds from the reinsurer, reducing administrative hassle. In many collateral arrangements the collateral is invested and earns interest, which provides a return on those funds and is viewed as a benefit in the arrangement. In contrast, the idea of increasing liquidity exposure goes against what collateral is meant to do. Tying cash up as collateral reduces available liquidity, since those funds are earmarked and not freely usable for other purposes. That characteristic is not a benefit, so it is the statement that is not a stated benefit.

Funds held as collateral are set aside to secure the reinsurer’s obligations, so they act as a cushion if the reinsurer can’t pay claims. That setup directly cuts the counterparty credit risk faced by the ceding company, since there is a guaranteed source of funds available to cover losses. Having collateral also streamlines how payments are settled; with a pre-arranged pool of funds, claim settlements can proceed without chasing funds from the reinsurer, reducing administrative hassle. In many collateral arrangements the collateral is invested and earns interest, which provides a return on those funds and is viewed as a benefit in the arrangement.

In contrast, the idea of increasing liquidity exposure goes against what collateral is meant to do. Tying cash up as collateral reduces available liquidity, since those funds are earmarked and not freely usable for other purposes. That characteristic is not a benefit, so it is the statement that is not a stated benefit.

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