Freihaut Flashcards
Reinsurance Attestation Supplement
No separate agreements between parties; documentation for every contract where risk is not self-evident; reporting entity complies with SSAP 62; appropriate controls
“Substantially all”
Assumes virtually all of the insurance risk of the reinsured portion of the underlying contracts (quota share)
“Reasonably self-evident”
Aggregate limits no less than one per occurrence limit; no ceding commissions; rate on line is under 500%
10-10 rule
At least a 10% chance of a 10% or greater loss
Expected reinsurer deficit
Prob (NPV UW loss to reinsurer) * Avg Severity; risk transfer exists if this is greater than 1% of premium
Exclusions from risk transfer analysis
Profit commissions (only focuses on loss generating scenarios) Reinsurer expenses (not a cash flow)
Interest rate in risk transfer analysis
Same discount rate needs to be used in each simulation (SSAP 62); AAA states same interest rate to discount cash flows
Implicit parameter risk
Slightly higher expected loss input, increased expected volatility
Explicit parameter risk
Varying parameters; more judgment involved
Criteria to qualify for reinsurance treatment
- Reinsurer assumes significant insurance risk
2. It is reasonably possible that reinsurer may realize a significant loss
Contract qualifies as reinsurance to GAAP
Assumed to qualify according to SAP, and vice versa
Rate on line
Premium / limit
Low discount rate in risk transfer test
Results in higher present value of losses
Risk transfer: when premium is dependent on future events
Initial deposit premium: easily manipulated
Expected premium: may over-detect risk transfer
Actual premium: best option (based on losses simulated)
[Fees: should be included, treated as premium]
Risk transfer evaluation date impacts
Interest rate
Losses considered
Frequency of retesting for risk transfer
Unless major changes made, no need to retest
Prescribed payment patterns
Does not qualify as having risk transfer
Risk transfer: alternatives to risk free rate (lower)
Not likely to be reasonable; also, lower rate over detects risk transfer
Risk transfer: alternatives to risk free rate (higher)
Use reinsurer expected yield, however likely unknown, and discounting will be affected (better yield, less chance of risk transfer)
Use of yield curve in risk transfer analysis
Produce more stringent risk transfer analysis (rates at longer durations generally higher); however not consistent with SSAP 62
Risk transfer test: selection of loss distribution
Difficult even for MM; really focusing on right tail
Parameter risk
Risk that selected parameters are incorrect; reasonable to include in risk transfer analysis
