Modified Coins & Funds Withheld Coins - Grp Hlth Spl

Can someone explain the benefits and differences between these two types of reinsurances? I get that set-up of Mod-Co, but why would any company want to do this? For Mod-Co, the ceding company holds the funds, so I guess they can invest it and they get to keep the returns on the investment. That would be a small benefit. Can they count this towards their overall economic capital though? I’m guessing only the returns portion. Not the amount backing reserves because that would be due to the reinsurer.

And lastly, how is Funds Withheld Coins different from Mod Co? Only explanation, I found on Google is that it is very similar to Mod-Co.

This is probably not a very important part of the exam. I’m mostly curious why there is a distinction between the two. Please correct any errors I made above. Appreciate the help!

Main reasons to do ModCo and FW-ModCo typically resolve around not having to transfer assets between companies. That allows the assets to remain invested and not have to post capital gains or loses based on current market conditions. Avoids the IRS.

There can be other reasons depending on the companies involved. Perhaps the ceding company does a particularly good job with its investments department. The return on investment is generally ceded to the reinsurer although contracts can be designed to have a set return and the ceding company essentially retains significant investment risk/reward in that case.

It also improves the RBC ratios for the ceding company by reducing required reserves.

Thanks! That’s a good point about not transferring reserves and avoiding the IRS.

I’ll follow up later about the improved RBC ratio. Need to re-read that portion.

Any thoughts on the difference between Mod-Co and FW-ModCo?