CIA.Reins

Question 1

List the 4 key principles of risk transfer assessment

Answer 1

1. Use quantitative and/or qualitative approaches depending on information available
2. Use professional judgment
3. Consider overall agreement (all verbal & non-verbal agreements)
4. Check risk transfer at inception of contract
   (& re-check whenever changes affect future cash flows)

Question 2

In a risk transfer contract, what is included in the ‘overall agreement’ (3 items)

Answer 2

1. Contract, Amendments
2. Verbal agreements
3. Other written docs

Question 3

When should existence of risk transfer be (re)checked

Answer 3

• at inception

- when contract change significantly alters expected future cash flows

Question 4

Changes to a reinsurance contract that would trigger re-check of risk transfer

Answer 4

Revision to premiums or coverage levels OTHER THAN linear increase/decrease of quota share

Question 5

Changes to a reinsurance contract that would NOT trigger re-check of risk transfer

Answer 5

Events that are part of the normal course of the contract (Ex: build-up of a Claim Fluctuation Reserve)

Question 6

What should actuary do PRIOR to re-check of risk transfer

Answer 6

Check whether previous reinsurance assessment is still applicable

Question 7

Identify 2 broad categories of risk-limiting contract features

Answer 7

• terms set in advance

- experience-based renewals (EBR)

Question 8

Identify 3 types of terms-set-in-advance risk limiting features

Answer 8

ADJUSTABILITY of reinsurace premiums or commissions (Ex: LR caps)

PRE-SET LIMITS on timing of loss payments from reinsurer to insurer (Ex: qtrly) - removes timing risk

COUNTERPARTIES ceding back to original cedant

Question 9

Identify 2 examples of ‘EBR’ (Experience-Based Renewals) risk limiting features

Answer 9

• future terms BASED ON past experience (& reinsurer guaranteed to recover losses)
• forced renewals if the contract is in deficit (reinsurer is losing money)

Question 10

Describe 3 risk-limiting features of the given contract & 2 that don’t limit risk

Answer 10

Risk-limiting features:

1. High retention (10% of limit)
2. Swing loss ratio (LR > 75% => ceding companies pays reinsurer => reduces risk transfer)
3. Automatic commutation after 7 years unless further payment is made to reinsurer

Non risk-limiting features:

1. Losses are paid when they occur (so timing risk exists)
2. Premium is paid quarterly

Question 11

Define ‘side agreement’

Answer 11

Agreement between cedant & reinsurer NOT DIRECTLY INCORPORATED into contract - may obscure intent of contract

Question 12

Define ‘mirroring’

Answer 12

Cedant & reinsurer carry SIMILAR LIABILITY ESTIMATE for the ceded claims

Note: It is appropriate for cedant & reinsurer actuaries to confer on large losses

Question 13

Identify 4 considerations in estimating a credit provision for a counter-party

Answer 13

1. BEST rating of reinsurer
2. EXPERTISE of reinsurer in relevant LOBs
3. DIVERSIFICATION of reinsurer
4. History of claims DISPUTES