CIA.Reins Flashcards
List the key principles of risk transfer assessment (4)
KP1: There are several approaches that can be used to assess the existence of risk transfer
KP2: Professional judgment will be required when assessing the existence of risk transfer
KP3: The entire agreement consisting of the reinsurance contract and all written and verbal agreements and correspondence must be considered in assessing the existence of risk transfer
KP4: The existence of risk transfer must be assessed at inception of the contract and every time a change to the contract that significantly alters the expected future cash flows of that contract is made
In a risk transfer contract, what is included in the “overall agreement”?
Contracts, Amendments, Verbal agreements, Other Written docs
When should existence of risk transfer be checked & recheked
At inception & when contract change significantly alters expected future cash flows
Changes to a reinsurance contract that would trigger re-check of risk transfer
Revision to premiums or coverage levels OTHER THAN linear increase/decrease of quota share
Changes to a reinsurance contract that would NOT trigger re-check of risk transfer
Events that are part of the normal course of the contract (ex: build-up of a claim fluctuation reserve)
What should actuary do PRIOR to re-check of risk transfer
Check whether previous reinsurance assessment is still applicable
Describe “reasonably self evident” risk transfer
- “Reasonably self-evident” risk transfer is when it is intuitively obvious there is a transfer of risk and the insurer is protected against significant adverse financial conditions if an event occurs
- Requires that contract is done at arms-length and that there are no risk-limiting features
What are examples where an expanded qualitative assessment may be appropriate?
Reinsurance contracts with occurrence limits or contracts that would fit the “reasonably self-evident” conditions except they contain one or more potentially limiting features or are related party transactions
Note: These assessments usually require substantially more documentation to prove risk transfer exists (too much rather than too little)
2 broad categories of risk-limiting contract features
- Terms set in advance
- Experience-based renewals (EBR)
Identify 3 conditions that may limit the transfer of risk in a reinsurance contract
Terms-set-in advance risk limiting features:
- Profit Sharing
- Adjustability of reinsurance premiums or commissions (Ex: LR Caps)
- Pre-set limits on timing of loss payments from reinsurer to insurer (Ex: quarterly) - removes timing risk
- Commutation clause
- Loss Corridors
Experience-Based Renewals risk limiting features:
- Future terms BASED ON past experience (& reinsurer guaranteed to recover losses)
- Forced renewals if the contract is in deficit (reinsurer is losing money)
Define “side agreement”
Agreement between cedant & reinsurer NOT DIRECTLY INCORPORATED into contract - may obscure intent of contract
Define “mirroring” + comment
Definition: Cedant & reinsurer carry equal liability estimate for the ceded claims
Comment: it is appropriate for cedant & reinsurer actuaries to confer on large losses to ensure that appropriate and sufficient provisions for losses are recognized. Mirroring environment cannot prevent differences in liability estimates but can detect them quickly.
Define “bifurcation” and one purpose of this
Definition: Bifurcation involves separating contracts into their basic constituents, including identification of those portions that are insurance vs those that are not.
Purpose: Identify those portions of contracts that might not have risk transfer elements. Those aspects would then be considered non-risk transfer, and might be subject to deposit accounting.
In reality, reinsurance contracts are not intended to be bifurcated. They are only valid contracts in their entirety.
Considerations in estimating a credit provision for a counter-party (if it is necessary) (4)
- S&P Credit rating, or A.M. Best Credit Rating
- Any history of dispute on claims
- The expertise of the reinsurer in relevant LOBs
- The diversification of the reinsurer
Define concentration risk + how is it addressed?
Concentration risk is the risk of excess exposure to a single counterparty.
Needs to be considered and addressed by the company’s risk management policies. Good risk management practice would include the monitoring of counterparty exposure, procedures for the approval of additional counterparties, and ongoing monitoring of counterparties either for credit or for impacts due to large loss events
