Fall 2019 Q6a)

I'm a bit confused about how reinsurance is accounted for in ratemaking (for the exam and in real life).

Exam-wise: When doing "primary ratemaking", my understanding is that the rate is calculated using expenses, premium, etc. net of reinsurance. And because reinsurance is typically just for premiums and losses (as opposed to expenses), they are saying the other elements of the indication would not be affected by proportional reinsurance. If doing an indication net of reinsurance, quota-share/proportional reinsurance would not affect the indication calculation, and the other types of reinsurance would require losses to be net of reinsurance to get the final indication.

In real life: However, technically would the expense ratios be affected by proportional reinsurance? E.g. would one calculate the variable expense ratio based on premiums net of reinsurance and thus get a higher variable expense ratio compared to no reinsurance? Also, when an insurer does a rate indication, do they ever do indications gross of reinsurance in order to - say - protect theirs and their reinsurers' financials (if that even makes sense)? Or are indications generally calculated net of reinsurance in order to put the insurer in the best financial position for themselves, and then the reinsurers are meant to price the reinsurance accordingly? I.e. it is not necessarily mutually beneficial for the insurers to do indications gross of reinsurance, which would cause them to become uncompetitive in the markets due to high prices, and thus be less valuable financial partners to their reinsurers in the end