The Cost of Mixing Reinsurance [Discussion]

In his 1986 paper, "The Cost of Mixing Reinsurance," Ron Wiser analyzed the consequences of mixing pro rata and excess of loss reinsurance. He concluded that such mixed reinsurance situations were always unfavorable to the ceding company, both in terms of financial cost and loss ratio stability. This paper refutes that conclusion and shows that Wiser proved his argument only for the special case of a particular, inefficient reinsurance structure. Some of his reported "cost of mixing" was actually a result of purchasing redundant reinsurance. The degree of inefficiency in a mixed reinsurance structure can be quantified as the "cost of overlap" between the types of reinsurance coverage. This should be measured separately from the cost of mixing per se. A case of negative cost of mixing is presented, and a relatively simple test of whether the mixing cost will be positive or negative is derived and demonstrated. Keywords: Reinsurance Research - Outward Program Design