A7. Odomirok 14

Question 1

Main purpose of schedule F.

Answer 1

Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance

Question 2

List 2 things that the actuary can refer to when opining on the collectability of reinsurance recoverables.

Answer 2

1. indications of regulatory actions or reinsurance recoverable over 90 days overdue
2. listing of reinsurers / liability amounts ceded to each reinsurer/ the collateral held by the insurer

Question 3

How does a change in the Provision impact surplus?

Answer 3

An increase in the provision results in a direct decrease to surplus

Question 4

How is the Provision for Reinsurance treated in the Annual Statement

Answer 4

Liability (in the balance sheet)

Question 5

List the 8 parts of Schedule F

Answer 5

1. Assumed Reinsurance
2. Portfolio Reinsurance
3. Ceded Reinsurance
4. Aging of Ceded Reinsurance
5. Unauthorized Reinsurance
6. Overdue Authorized Reinsurance
7. Slowpaying Authorized Reinsurance
8. Restatement of Balance Sheet

Question 6

What should the insurer do if it believes that it is necessary to book a higher amount than what is being indicated by the Provision formula

Answer 6

It should hold an additional reserve. It should record this additional amount on the Income Statement by reversing the accounts that had been used to establish the reinsurance recoverable.

Question 7

How are reinsurers grouped in Part 1?

Answer 7

• Affiliated insurers: US Intercompany Pooling/ US Non Pool/Other (Non US)
• Other US Unaffiliated insurers
• Pools and Associations: Mandatory Pools/ VoluntaryPools
• Other Non-US Insurers

Question 8

List the components of the Balance Sheet that are populated from Schedule F data

Answer 8

• Assets: Amounts recoverable from reinsurers
• Liabilities: Reinsurance payable on paid losses and LAE/Funds held by the company under reinsurance agreements/Provision for reinsurance

Question 9

Why do reinsureds like the Letters of Credit (LOC) form of collateral

Answer 9

It is not part of the estate of the insolvent reinsurer, and therefore will not be tied up/ subject to degradation in the event of a bankruptcy

Question 10

List the benefits of the “Funds held or deposited with reinsured companies” form of collateral

Answer 10

• reduces credit risk
• reduces administrative burden of having to continually collect money from reinsurer to make payments
• reinsurer gets paid interest

Question 11

3 reasons that insurers may enter into Portfolio Reinsurance arrangements:

Answer 11

They want to:

1. Exit a certain type of business
2. Remove the risk/ uncertainty associated with the liability off their books
3. Obtain surplus relief (via the discounted premium)

Question 12

2 reasons that LOCs are expensive to the reinsurer

Answer 12

1. banks charge a fee, which will be higher during uncertain economic times
2. the LOC is a reduction to reinsurers line of credit

Question 13

Rules to determine the due date of the reinsurance recoverables (to populate Part 4)

Answer 13

Use the following hierarchy:

1. Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified; or
2. Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified; or
3. The date at which the amount recoverable from a certain reinsurer exceeds $50K, and is entered into the insurers account as a paid recoverable

Question 14

Transactions that are exempt from disclosure in Part 3 (whether the contract cedes 75% or more of the Direct Premium Written)

Answer 14

-Intercompany cessions with affiliates

-Cessions to a pool/ group/ association/ organization of
insurers that underwrite jointly, which:
>is subject to examination by any state regulatory authority,
or
>operates pursuant to any state or federal statutory or administrative authorization (such as Workers Compensation, or auto assigned risk pool)

• Those where under 5% of the gross annual premium is ceded
• Cessions to captive insurers that are regulated in their domiciliary state

Question 15

Formula for Provision for Reinsurance for Unauthorized Reinsurer:

Answer 15

Provision= Unsecured total recoverables + 20% (recoverables over 90 days overdue) + 20%(amounts in dispute).

Question 16

When determining the age of reinsurance recoverables, what should be done if no dates have been mentioned, and also if the recoverable is under $50K:

Answer 16

Record the amount as “currently due”

Question 17

Formula for Provision for Reinsurance for Authorized Non Slow Paying
Reinsurer:

Answer 17

Provision = 20% (recoverables over 90 days overdue)

Question 18

Formula for Provision for Reinsurance for Authorized Slow Paying
Reinsurer

Answer 18

Provision= max [ 20% (unsecured total recoverables), 20%(recoverables over 90 days overdue) ]

Question 19

Liabilities that need to be adjusted to 0 in Part 8

Answer 19

• Ceded reinsurance premiums payable (Line 14)
• Funds held by the company under reinsurance treaties (Line 15)
• Provision for Reinsurance (Line 17)

Question 20

2 assets that need to be adjusted in Part 8

Answer 20

1. Reinsurance recoverable on loss and LAE payment (line 3)

2. Net amounts recoverable from reinsurers (line 6)

Question 21

2 Changes that the NAIC made to Schedule F in 2012:

Answer 21

1. it added a new Part 6, and

2. it shifted the original Parts 6-8 to 7-9 respectively

Question 22

Liabilities that need to be adjusted to values other than 0 in Part 8:

Answer 22

• Losses and LAE (Line 9)

- Unearned Premiums (Line 11)

Question 23

What do the 2 sections of the “new” Part 6 contain:

Answer 23

• Section 1: Provision for Reinsurance for certified reinsurers due to collateral deficiency
• Section 2: Provision for Overdue Reinsurance ceded to certified reinsurers

Question 24

Items that regulators consider when determining whether to certify a
reinsurer:

Answer 24

• Jurisdiction
• Financial Position
• Capital and Surplus
• Regulatory History
• Financial Strength Ratings

Question 25

List some criticisms of Schedule F:

Answer 25

• The Provision is formulaic, and therefore ignores management input
• The formula has no statistical, historical or actuarial basis. It may therefore underestimate the credit risk
• Unauthorized reinsurance may provide higher quality protection and/ or lower prices
• Slow payers that are financially strong may eventually pay, whereas a reinsurer that is current may not be able to withstand a stress event
• The multitude of calculations and level of detail may lead to a false level of precision
• The costs of collateral requirements will be passed from the reinsurers to insurers, ultimately increasing the costs to consumers
• The Provision may limit the amount of competition in the US, due to the penalty associated with unauthorized European reinsurers
• Schedule F does not reveal anything about the reinsurers solvency

Question 26

List some functions of Schedule F (in addition to assessing the net reserves):

Answer 26

• Identifies the portion of the gross losses that are from assumed reinsurance transactions
• Helps estimate the significance of the assumed and ceded transactions to the surplus balance
• Allows further investigation into the financial strength of the insurers and reinsurers
• Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated