C - CIA Reinsurance Treatment Flashcards
CIA REINSURANCE TREATMENT
CIA’s 4 key principles for ASSESSMENT of RISK TRANSFER
1) MANY APPROACH can be used
2) PROFESSIONAL JUDGMENT is required
3) the ENTIRE AGREEMENT (written/oral agreement, correspondence) must be considered
4) must be ASSESSED AT INCEPTION of contract, and every time there is a significant change to expected future CF of contract.
CIA REINSURANCE TREATMENT
2 examples where a risk transfer reassessment is required
1) reinsurance rate change
2) revision of coverage level
CIA REINSURANCE TREATMENT
Define
REASONABLY SELF-EVIDENT RISK TRANSFER
When OBVIOUS that reinsurance contract protects insurer from future event that could affect financial position
CIA REINSURANCE TREATMENT
Define
EXISTENCE OF RISK TRANSFER
When reinsurance contract protect the insurer from negative financial impact from adverse events
CIA REINSURANCE TREATMENT
(1)
Question that must be asked to assess risk transfer
(2)
Question that must be asked to assess if risk transfer is self-evident
(3)
2 questions that should not be asked when assessing if risk transfer is self-evident?
(1)
does the reinsurance contract protect the insurer from financial impact from adverse event?
(2)
if the reinsured event happens, is protection afforded?
(3)
How probable the event is?
How much risk is transferred?
CIA REINSURANCE TREATMENT
2 criteria that must be met before performing a “Reasonably Self-Evident” Qualitative Assessment on a contract
1) must have NO risk transfer LIMITING FEATURES
Truc : quand tu es Raisonnable, tu as des limites
2) must be done on ARMS-LENGTH terms
Truc : Selfie-vident, on prend un selfie à une longueur de bras
CIA REINSURANCE TREATMENT
What kind of risk comprises most of the Reasonably Self-Evident Class of contract?
Low-Frequency high-severity risks
CIA REINSURANCE TREATMENT
Why ACTUARY PREFERS A QUALITATIVE APPROACH to assess risk transfer even when not reasonably self-evident?
For quantitative approach:
HISTORICAL DATA MAY NOT BE AVAILABLE
RISK MAY NOT LEND ITSELF TO MATH MODELS
COMPUTER MODELS MAY LEAD TO INCONCLUSIVE RESULTS
CIA REINSURANCE TREATMENT
Explain whether the presence of risk limiting features in reinsurance contract means that the risk has not been transferred?
No.
it only means additional work is required to assess the existence of risk transfer
CIA REINSURANCE TREATMENT
2 broad categories of risk limiting features in reinsurance contract.
1) TERMS SET IN ADVANCE
2) EXPERIENCE BASED RENEWALS
CIA REINSURANCE TREATMENT
6 examples of risk limiting features in reinsurance contract where “terms are set in advance”
PROFIT SHARING
ADJUSTABLE PREMIUM/COMMISSION
PRE-SET LIMITS TO TIMING OF PAYMENTS
EXPECTED DURATION OF CONTRACT
(commutation clause)
HIGH FRONT-END REINSURANCE COMMISSION
COUNTERPARTIES
CIA REINSURANCE TREATMENT
3 situations where actuary would need to be careful when assessing risk transfer when there is a Profit Sharing Limiting Feature
1) PREDETERMINED EXPECTATION OF LARGE PROFIT SHARING
may indicate insufficient risk transfer
2) ABSENCE of LOSS CARRY-FORWARD PROVISION.
may reflect reinsurer’s expectation that the chance of loss in one accounting year is really small
3) NEGATIVE EXPERIENCE REFUND
may negate risk transfer to the reinsurer
CIA REINSURANCE TREATMENT
Examples of
“ADJUSTABILITY OF REINSURANCE PREMIUM OR COMMISSION” limiting feature of risk transfer
for proportional contracts (3)
for non-proportional contracts (1)
–proportional–
ADJUSTABLE COMMISSION BASED ON EXPERIENCE
LIMITS OR CAPS ON LRs
LOSS CORRIDOR PROVISION
–non-proportional–
SWING RATE
CIA REINSURANCE TREATMENT
2 examples of
“PRE-SET LIMITS TO TIMING OF PAYMENT” limiting feature of risk transfer
PAYMENT SCHEDULE
FUNDS WITHHELD PROVISIONS
CIA REINSURANCE TREATMENT
2 examples of “EXPERIENCE BASED RENEWALS” risk limiting feature
FUTURE TERMS BASED ON PAST EXPERIENCE
FORCED RENEWALS
CIA REINSURANCE TREATMENT
Purpose of Forced Renewals
How FORCED RENEWALS can limit risk transfer.
Purpose
Required by reinsurer so that insurer is forced to renew until at least losses are eliminated.
If future business ceded is at market terms, risk transfer may not be limited.
CIA REINSURANCE TREATMENT
2 considerations in determining whether there is a limit in risk transfer when FUTURE TERMS are BASED ON PAST EXPERIENCE
1) if reinsurance is annually renewable (without obligation to renew), then risk transfer is not limited
2) if obligation to renew (multi year contracts) and renewal premium recovers prior year losses, then risk transfer is limited
CIA REINSURANCE TREATMENT
Define
SIDE AGREEMENTS in a reinsurance contract
One special case of side agreement that can limit risk transfer
Agreement (written or verbal) subsequent to original effective date of reinsurance contract.
Side agreements REQUIRING INSURER TO ENTER INTO FUTURE REINSURANCE CONTRACT WITH REINSURER, IF CONTRACT TRANSACTED ABOVE MARKET RATES
CIA REINSURANCE TREATMENT
AMF and OSFI’s position on reinsurance side agreements
Both strongly discourage the use of side agreements
CIA REINSURANCE TREATMENT
Define
Mirroring (or mirror reserving) in reinsurance
When ceded liabilities determined by insurer = assumed liabilities determined by reinsurer
Implies that insurer and reinsurer have the same view of risk being transferred
CIA REINSURANCE TREATMENT
About MIRRORING,
2 safeguards ensuring that insurer and reinsurer’s actuaries have a similar view of the risk being transferred
1) data integrity
2) communication between insurer and reinsurer’s actuaries.
CIA REINSURANCE TREATMENT
Define
reinsurance BIFURCATION.
Breaking reinsurance contract in parts, to identify parts that are non-risk-transfer and could be subject to non-insurance accounting
Reinsurance contract should not be bifurcated (only valid in their entirety)
CIA REINSURANCE TREATMENT
Why reinsurance expose the insurer to credit risk
Because the reinsurer may be unable to pay claims
Because the amount reimbursed may differ from expectation
CIA REINSURANCE TREATMENT
3 considerations when determining reinsurance counterparty risk
Reinsurer’s rating from rating agency
Whether reinsurer is in runoff
Expertise of reinsurer
Diversification of reinsurer
History of disputes on claims
Quality of reinsurer retro-cession
MCT/BAAT ratio
CIA REINSURANCE TREATMENT
Contrast
CONCENTRATION RISK
vs
REINSURANCE COUNTERPARTY RISK
–concentration risk–
risk of excess of exposure to a single reinsurer
–reinsurance counterparty risk–
risk of default from reinsurer
CIA REINSURANCE TREATMENT
Define
Commutation
Agreement to settle all current and future liabilities
from reinsurance agreement
for a set payment
from the reinsurer to the insurer.
