10 - Odomirok.14 - Schedule F

Question 1

What info is shown in Sch F - Part 1?

Answer 1

assumed reinsurance

premiums, losses, commissions, collateral

Question 2

What info is shown in Sch F - Part 2?

Answer 2

premium portfolio reinsurance

premiums (original premiums and reinsurance premiums)

Question 3

What info is shown in Sch F - Part 3?

Answer 3

ceded reinsurance

provision for reinsurance

Question 4

What info is shown in Sch F - Part 4?

Answer 4

Issuing or Confirming Banks for Letters of Credit from Sch F Part 3

list of confirming banks

Question 5

What info is shown in Sch F - Part 5?

Answer 5

Interrogatories for Sch F Part 3

commission rates, loss recoverables

Question 6

What info is shown in Sch F - Part 6?

Answer 6

restatement of balance sheet (to identify net credit for reinsurance)

balance sheet information

Question 7

identify the groups or categories used in Schedule F, Part 1 (refers to row labels)

Answer 7

*affiliated insurers
- U.S. intercompany pooling
- U.S. non-pool
- other (non U.S.)
*other U.S. unaffiliated insurers
*pools & associations
- mandatory pools
- voluntary pools
*other non-U.S. insurers

Question 8

What are confirming banks?

Answer 8

Confirming banks are those that provide a guarantee on a letter of credit such that the confirming bank will pay if the original bank issuing the letter of credit does not.

Question 9

What information do certain groups of columns in Schedule F - Part 3 provide?

Answer 9

*The first 20 columns detail the ceded reinsurance balances
*Columns 21 through 36 calculate credit risk charge on ceded reinsurance (click link for brief forum discussion on credit risk charge and ‘special codes’)
*Columns 37 through 53 provide the aging of ceded reinsurance
*Columns 54 through 69 provide the calculation of the Provision for Reinsurance for Certified Reinsurance
*Columns 70 through 78 provide the Total Provision for Reinsurance (authorized, unauthorized and total)

Question 10

define the term reinsurance provision

Answer 10

the reinsurance provision is a minimum reserve (calculated under SAP) that reflects estimated uncollectible reinsurance recoveries

Question 11

which line items on an insurer’s balance sheet change if ceded reinsurance contracts are removed?

Answer 11

*assets: only these 2 line items change
item 3: reinsurance recoverable on loss and loss adjustment expense payment
item 6: net amount recoverable from reinsurers
*liabilities: only these 5 line items change
item 8: losses & LAE
item 9: unearned premium
item 12: ceded reinsurance premiums payable
item 13: funds held by company under reinsurance treaties
item 14: provision for reinsurance

Question 12

how do the quantities on an insurer’s balance sheet change if ceded reinsurance contracts are removed?

Answer 12

Removing the reinsurance contracts means restating the balance sheet to a gross of reinsurance basis.

Question 13

how can Schedule F be used to monitor the solvency of an insurer?

Answer 13

*Schedule F tracks reinsurance transactions, calculates a reinsurance provision, and shows the effect on the insurer’s balance sheet of canceling all reinsurance contracts.
*Quality of reinsurance impacts risk of uncollectability from reinsurer which impacts solvency of the insurer.
*(Note that an insurer faces many risk factors other than reinsurance, so monitoring solvency using only Schedule F is obviously going to have limitations.)

Question 14

identify strengths with using Schedule F as a solvency monitoring tool

Answer 14

strengths:
*RP is formulaic - easy to compare across years & companies
*RP is formulaic - hard to manipulate because inputs are numbers from financial statements
*RP accounts for reinsurer credit risk with penalties for unauthorized reinsurers (often this means foreign insurers)
*RP accounts for reinsurer credit risk with penalties for slow-paying reinsurers
*Schedule F shows impact to surplus if reinsurance contracts are canceled

Question 15

identify weaknesses with using Schedule F as a solvency monitoring tool

Answer 15

weaknesses:
*RP is formulaic - may mask management’s better informed estimate of collectability risk
*RP is formulaic - but no statistical basis for formula - may not represent true collectability risk
*RP penalizes unauthorized reinsurers regardless of their financial strength
*RP penalizes slow-paying reinsurers regardless of their financial strength and slow-payer threshold is arbitrary
*In General: Schedule F doesn’t directly measure reinsurer’s solvency which is the true source of uncollectability risk
*In General: Schedule F doesn’t measure the quality of an insurer’s reinsurance management

Question 16

how can Schedule F be enhanced to improve its capacity to monitor reinsurer credit risk?

Answer 16

*disclose details of reinsurance arrangements (Schedule F doesn’t measure quality of an insurer’s reinsurance)
*include management input of uncollectability risk (the formula may miss important risk factors)
*include reinsurer ratings (Schedule F doesn’t do this even though it is an important risk factor)
*replace 20% slow-pay threshold with a sliding scale and consider reasons for slow-pay

Question 17

“authorized reinsurer” means check for slow pay

Answer 17

slow paying ratio = Pn90 / (Pn + Recvd)

Pn90 = recoverable on paid loss & LAE > 90 days past due
Pn = recoverable on paid loss & LAE
Recvd = amount received prior 90 days

if slow pay ratio is >20% the reinsurer is slow paying

Question 18

RP formula if authorized reinsurer is slow paying

Answer 18

RP = 20% * max( T - C, Pn90 + Pu90)

T = total reins recoverable not in dispute + total reinsurance recoverable in dispute
C = collateral (letters of credit + ceded balances payable + other amounts due reinsurers)
Pn90 = recoverable on paid L+LAE > 90 days past due (not in dispute)
Pu90 = recoverable on paid L+LAE > 90 days past due in dispute

Question 19

what is an unauthorized reinsurer?

Answer 19

*An unauthorized reinsurer is one that does business where it is not legally permitted to do so.
*An example would be a reinsurer authorized to conduct business only in Maine selling reinsurance to an insurer in Texas.
*From a legal perspective, the insurer in Texas has no reinsurance coverage. The likelihood of not collecting on reinsurance recoverables is much higher, therefore the provision for reinsurance is also much higher.

Question 20

identify a criticism of the reinsurance provision with respect to unauthorized reinsurers

Answer 20

the financial strength of the reinsurer is not considered

Question 21

define ‘certified reinsurer’

Answer 21

*non-U.S. reinsurers domiciled in a jurisdiction designated by the NAIC as a Qualified Jurisdiction (i.e., Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom)
*one that would have been categorized as unauthorized prior to 2012
*one that has attained certification from the reporting entity’s domiciliary state

Question 22

what does a regulator consider when evaluating an unauthorized reinsurer’s application for certification?

Answer 22

*Jurisdiction of reinsurer
*Rating from a rating agency
*Regulatory history
*FinPos (Financial Position)
*C & S (Capital & Surplus)

Question 23

what are the benefits of a reinsurer being certified?

Answer 23

*the reporting entity is not penalized as heavily as for an unauthorized reinsurer so the reinsurance provision is lower (amount depends on the strength of the reinsurer)
*the reinsurer can post collateral of less than 100% of its U.S. claims (varies according to the financial strength of the reinsurer)

Question 24

Identify the 2 components of the reinsurance provision for certified reinsurers

Answer 24

RP64(CD): reinsurance provision for collateral deficiency related to certified reinsurers → appears in (Col 64) of Part 3

RP69(OR): reinsurance provision for overdue reinsurance related to certified reinsurers → appears in (Col 69) of Part 3

Question 25

Formula for RP64(CD)

Answer 25

RP64(CD) = A19(recov) - Cr63(recov)

Let A19(recov) = net Amount recoverable from reinsurer (Col 19)
Let Cr63(recov) = Credit allowed for net recoverables (Col 63)

→ Intuitively, it’s simply the shortfall between the amount recoverable and the credit allowed (recall that the reinsurance provision is an estimate of the uncollectible reinsurance)
→ the credit allowed uses the ratio between (collateral provided) and (collateral required)

Question 26

Formula for RP69(OR)

Answer 26

RP69(OR) = min [ 20% x MAX ( Pn90 + Pd90 , F ) , Cr63(recov) ]

Pd90 = recoverable on Paid loss loss & LAE > 90 days past due in dispute ← (Col 45)
Pn90 = recoverable on Paid loss & LAE > 90 days past due not in dispute ← (Col 47)
F = net unsecured recoverable for slow payers for which credit is permitted ← (Col 67)

Question 27

briefly describe the 2 tables in Schedule F Part 5

Answer 27

Table 1:
identifies 5 largest reinsurer commission rates (where ceded premium ≥ $50,000)
the purpose is to identify companies using reinsurance to conceal high operating leverage

Table 2:
identifies 5 largest loss recoverables from (Col 15) and whether the reinsurer is affiliated with the reporting entity
the purpose is to assess concentration of insurance risk