CIA Reinsurance treatment

Question 1

List the four key principles to risk transfer

Answer 1

#1  Several approaches can be used to assess the existence of risk transfer
#2 Professional judgment will be required when assessing the existence of risk transfer
#3 The entire agreement, consisting of the Re contract and all written and verbal agreements and correspondence, must be considered in assessing the existence of risk transfer
#4 The existence of risk transfer must be assessed at inception of the contract and every time a change is made to the contract that significantly alters the expected future cash flows

Question 2

List Limitations of Risk Transfer (Terms set in advance)

Answer 2

1 - Profit Sharing – The assuming company is willing to offer profit sharing to the ceding company due to the asymmetry of the spectrum of possible results

2 - Adjustability of Re Premiums/Commissions – based on xp of the contract within a pre-established range

3 - Pre-Set Limits to timing of payments – payment schedule can limit risk transfer

4 - Expected Duration of Contract – claims commutated back in certain number of years

Question 3

List Limitations of Risk Transfer (Experience Based Renewals)

Answer 3

1 - Future Terms based on past experience – try to recover past losses

2 - Forced Renewals – contract is in deficit and the cedant is obligated to cede future business to the Re until losses are eliminated

Question 4

What are the “Other Issues” listed in the CIA Re that may limit risk transfer ?

Answer 4

1 - Side Agreements – agreements not directly incorporated into the contract

2 - Mirroring and Communication – Re’s and insurer’s actuary should have similar view of risks and those risks being transferred. Since there is no mirroring environment, the actuaries must have good communication

3 - Bifurcation – separating contracts into basic constituents, identifying parts that are insurance based and parts that are not. Re contracts are not intended to be bifuricated and are only valid in their entirety

4 - Re Counter-party Risk – credit risk from the Re. Determine if a credit provision is needed

Question 5

Describe the qualitative assessment for the existence of risk transfer

Answer 5

In order to determine if risk transfer exists:
1 - See if there is “reasonably self-evident” risk transfer

2 - If the conditions for 1. do NOT exist then the actuary would consider expanding the qualitative assessment or a quantitative assessment.

Question 6

List considerations when the actuary is estimating if a credit provision is necessary and the amount of such provision (Re Counter-party Risk)

Answer 6

• The rating
• Any history of dispute on claims
• Whether the Re or book of business is in runoff
• Expertise of the Re
• Diversification of the Re
• Quality of the Re’s retrocession
• The MCT ratio for a PC Re

Question 7

Discuss “Reasonably Self-Evident” Risk

Answer 7

“Reasonably Self-Evident” Risk Transfer exists when it is intuitively obvious that the contract protects the cedent from future events that could adversely affect the cedent’s financial position

Examples

• Excess of loss Re where coverage is in excess of an attachment point and there is no cap on losses
• Specific event Re such as natural catastrophe covers

***Restricted to contracts that are done on arms-length terms and where there are no potentially limiting risk transfer contract features

Question 8

Discuss Qualitative Assessment if it is not a “Reasonably Self-Evident” Risk

Answer 8

The actuary would next consider whether expanding the qualitative assessment will lead to a conclusion that risk transfer exists

o Contract that holding limiting feature, the actuary should isolating the financial impact of the feature

o Contract that are related party transactions, the actuary would assess market consistency of Re premium being charged vs risk being transferred