Reinsurance covering losses already incurred, aimed at transferring the volatility of prior-year reserves, the core of the run-off market.
Retrospective reinsurance covers liabilities already incurred, through a loss portfolio transfer or an adverse development cover, and is the central tool of the legacy market. Its ambiguity is that it does not extinguish the cedant's obligation to its policyholder, it swaps a claims risk, known and reservable, for an unpriced counterparty risk correlated with the peril transferred, since the acquirer defaults precisely when the liabilities develop badly. The product moreover tends to bear less on dead lines than on the prior years of live books, where stripping volatility while retaining profit describes an accounting effect more than a risk transfer.
An adverse development cover that leaves the cedant most of the profit and strips the reported volatility raises the significant-risk-transfer test, which neither auditor nor supervisor applies with consistency.
couverture de développement défavorable, adverse development cover, legacy