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How should the evaluation of whether a reinsurer can handle a significant loss be based?
Answer: The evaluation of whether the reinsurer can incur a significant loss should be based on the PV of cash flows between the ceding and assuming companies. The same interest rate must be used to discount all cash flows In the event where the reinsurer is found not to be exposed to the possibility of realizing a significant loss, the contract can still be considered reinsurance if substantially all of the insurance risk related to the reinsured portion ha been retained by the reinsurer.
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