Freihaut Flashcards
What is required for risk transfer ? (Both GAAP and SAP)
Reinsurer assumes significant insurance risk (UW, timing)
reasonable possibility of a significant reinsurer loss => substantially all exception
What are typical contracts that qualify for the substantially all exception?
high QS %
individual contracts with no risk limiting features
What does the Reinsurance Attestation Supplement require the CEO / CFO to confirm?
(1) - no separate oral / written agreements
(2) - documentation for all contracts where risk transfer is not self-evident (economic intent disclosure)
“self-evident” to reduce need for stringent testing on every contract
(3) - reporting entity complies with SSAP 62
(4) - appropriate controls are in place to monitor reinsurance
What does the CAS working party think constitutes self-evident risk transfer?
no ceding commissions
rate on line < 500%
aggregate lims no less than occurrence or 2 x reinsurance premium
Profit commissions treatment
generally not included, only focus on reinsurers loss
indirect impact through premium charged
may consider removing these to make risk transfer more clear
Reinsurer expenses treatment
Only cash flows bw entities; not included
No broker expenses, operating expenses, LOC fees, or taxes
Interest rate treatment
SSAP 62 requires a constant interest rate across simulations
This is because only insurance risk is considered: not investment, currency, or credit
Rate must be reasonable and appropriate; rfr is fine
Investment ability of reinsurer should NOT affect risk transfer
Duration is based on net cash flows – little room for deviation from rfr
Premium date from payment pattern, loss from industry payment pattern
3 possible premiums used in risk transfer
Initial deposit; intuitive + easily manipulated
Expected; potential of over detecting risk transfer
Actual premiums; considered the best
Evaluation date consideration
SSAP 62: risk transfer is made @ inception based on facts known at that time
Not necessary to retest @ every renewal unless significant amendments
If so, amendment date is considered inception date
Should you use a higher rate as reinsurers expected return?
Unlikely ceding company would know this
Poor investment strategy can trigger risk transfer, not trigger with good investment strategies
Payment pattern considerations
Based on company exp, industry benchmarks, or both
Timing of payments can hugely affect risk transfer
What can you use to obtain a loss distribution?
Company exp, industry benchmarks, judgement, or combination
For transactions covering large books, can be as easy as fitting loss distribution to company data
Low to mid-size hard because the tail is important (esp with high XOL contracts)
Why are pricing assumptions not appropriate?
shows how risky market views business but risk transfer should not vary based on soft vs hard markets
Difference in intent bw pricing and risk transfer testing
Pricing: conservatism seems better, opposite is true for risk transfer testing
Need a model optimized on the right tail of the distribution
How does the risk transfer determination process work?
Actuaries assist the CEO / CFO in making the final decision, a lot of judgement is involved
Commutation considerations
Mandatory fees should be included as premium
Do not often restrict risk transfer, can restrict amount of risk transferred
Can limit tail risk
If states future commutation is based on mutually agreed upon value, payment pattern may need to be adjusted
Payment should reflect NPV(payments) and impact on original pattern should be minimal
