Freihaut and Vendetti Flashcards
What are the 2 requirements for a risk transfer to receive Re accounting treatment ?
- Re assumes significant insurance risk under the reinsured portion of the contract
- It is reasonably possible that the Re may realize a significant loss
List and describe the components of insurance risk
- Underwriting Risk - Uncertainties around the ultimate amount of net cash flows
- Timing Risk - Timing of the receipt and payment of those cash flows
Expected Reinsurer Deficit (ERD) formula
(probability of underwriting loss) x (NPV of average severity of underwriting loss)
What is the “substantially all” exemption for a Re contract to be exempt from risk transfer requirements ?
Narrow exemption to “requirement of significant loss” when Re assumes substantially all the insurance risk of reinsured portions of a contract
o Allows Re on inherently profitable business
e.g., Straight QS
When is documentation required for risk transfer ?
Required for every Re contract for which risk transfer is not “reasonably self-evident”
What is the 10-10 rule ?
Re contract exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for the Re
What is the ERD rule ?
Risk transfer exists if ERD is greater than 1%. CAS does not endorse ERD, but prefers it to the 10-10 rule
List methods to measuring if risk transfer exists
- 10-10 Rule
- ERD rule
- VaR
- TVaR
- Right tail deviation (RTD)
- Risk coverage ratio (RCR)
Steps to determine if risk transfer is present
1 - Understand the contract’s terms and conditions, especially those affecting the amount of risk transfered
2 - Determine reporting dates and premium due dates
Treatment of profit commission in risk transfer analysis
Not considered. May effect economic results and future premium amounts but do not explicitly effect risk transfer
Treatment of Re expenses as a common pitfall in risk transfer analysis
Not included. Should only consider cash flows between ceding company and Re
Broker expenses, operating expenses, fees and taxes should bear no impact on the analysis
Treatment of Interest Rates for Discount rate as a common pitfall in risk transfer analysis
Should not vary by scenario because risk transfer analysis should only consider insurance risk (not investment, currency, or credit)
Treatment of premiums as a common pitfall in risk transfer analysis
Gross premiums. Same interest rate used to discount losses should be applied to calculate the PV
Treatment of evaluation date as a common pitfall in risk transfer analysis
Used in selection of interest rate and in determining how much is known about potential losses
Treatment of commutation as a common pitfall in risk transfer analysis
Commutation clauses restrict the amount of risk transfer, but may meet risk transfer requirements, but to the extent they affect cash flow between insurer and Re, they must be modeled