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exam 6 NEW > freihaut & SSAP 62R > Flashcards

freihaut & SSAP 62R Flashcards

1
Q

Accounting treatment used if risk transfer occurs

Accounting treatment use if risk transfer does NOT occur

A

YES risk transer →Reinsurance accounting (rsvs net of reinsurance)

NO risk transfer → Deposit accounting (rsvs are gross of reinsurance)

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2
Q

advantage of reinsurance accounting v.s. deposit accounting

A

reinsurance: paid loss→income down→TAXES down

deposit: paid loss → no change to income

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3
Q

Define deposit accounting

A
  • premium is NOT income (deposit to surplus)
  • paid loss is NOT an expense (return on capital)
  • no impact on taxes
  • balance sheet is gross of reinsurance
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4
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5
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6
Q

Pick reinsurance or deposit accy

  1. reinsurer assumes insurance risk (both timing risk & UW risk) & possible significant loss →
  2. reinsurer has not assumed significant risk→
  3. reinsurer may not realize significant loss→
  4. reinsurer assumes significant insurance risk & loss from events that occur after contract date →
  5. reinsurer assumes significant insurance risk & loss from events that occur prior to contract date →
A
  1. reinsurer assumes insurance risk (both timing risk & UW risk) & possible significant loss → reinsurance accy
  2. reinsurer has not assumed significant risk→deposit accy
  3. reinsurer may not realize significant loss→deposit accy
  4. reinsurer assumes significant insurance risk & loss from events that occur after contract date → prospective reinsurance accy
  5. reinsurer assumes significant insurance risk & loss from events that occur prior to contract date → retroactive reinsurance accy w/ exceptions (run off agreement & novation uses deposit accy?)
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7
Q

Conditions needed to demonstrate risk transfer & use reinsurance accy (2)

A
  1. Reinsurer assumes significant insurance risk
  • insurance risk = BOTH UW risk &TIMING risk
  • UW risk = uncertain IF loss will occur
  • Timing risk = uncertain when loss will occur
  1. Reinsurer reasonably possible to have significant loss
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8
Q

Self-evident (qualitative) risk transfer exists because?

A

risk transfer is obvious becasuse…

  • premium is low
  • OR
  • potential loss is high
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9
Q
A
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10
Q

Substantially all exception (qualitative) risk transfer

risk transfer exists if?

example?

why exist?

A

IF significant loss NOT reasonably possible BUT reinsurer assumes substantially ALL risk

  • Quota Share with very high % ceded
  • OR
  • individual risk contract with loss ratio caps

Exist so profitable books of business can access reinsurance

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11
Q
A
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12
Q

Expected reinsurance deficit (quantitiaive)

risk transfer exist if

formula

adv (2)

A

IF ERD >= 1%

ERD = [pr(L) * (pv(L) - P)] / P >= 0.01

  • Adv: Risk transfer possible for rare catastrophes (risk transfer is more likely)
  • Adv: Allows discounting
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13
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14
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15
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16
Q

10-10 rule (quanitative)

risk transfer exists if

formula

adv (2)

A

IF reinsurer has at least 10% chance of at least 10% loss

IF {L - P] / P >= 0.10 at least 10% of the time

  1. Adv: Risk transfer not possible for rare catastrophes (risk transfer is less likely)
  2. Adv: doesn’t need interest rate b/c doesn’t discount
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17
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18
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19
Q
A
20
Q

loss pmt patterns in risk transfer test are based on? (2)

T/F loss pmt patterns should be constant bc no need to account for tail risk

A
  1. historical experience of primary
  2. industry benchmarks

F = pmt pattersn should include variability to account for tail risk bc tail risks matters most to risk transfer tests

21
Q

loss distributions in risk transfer tests are based on ? (2)

which is best for large company?

which best for small company? why?

A

historical experience of primary - best for large books due to having lots of data

industry benchmark - best for small book bc no data is available to fit the tail (which drives risk transfer)

22
Q

Parameter selection (how select)

interest rate

loss distribution

pmt patterns

A

interest rate – use rf, not investment rate (using discount rate below rf will over detect risk transfer & vice versa)

loss distribution – care about tail more (use historical experience for large book but benchmark for small book)

pmt patterns – care about tail more (use historical experience for large book but benchmark for small book)

23
Q

what is parmeter risk?

should parameter risk be included in risk transfer tests?

if yes, what are the two ways to include it?

A

paramter risk = risk that selected model paremeters might be incorrect

yes but only for pmt pattern and loss distribution (not interest rate, nor premium)

implicit - choose higher expected loss selection or expected loss variance

explicit - include probability distribution of parameters = more parameter risk

24
Q

Parameter risk (how much risk of each parameter?)

loss distribution

pmt pattern

discount rate

premium

A
  • loss distribution - a lot - UW risk - most uncertainty –> selecting higher expected loss over detects risk transfer
  • pmt pattern - some - timing risk
  • discount rate - NONE - no Timing nor UW risk
  • premium - very little
25
Q

Risk Transfer Test pitfalls PRICE-P

include in risk transfer tests?

why or why not?

A
  • only include cash flows bw primary and reinsurer
  • ​Profit Commission: NO (usually not triggered during loss)
  • Reinsurer Expenses: NO (not a cash flow)
  • Interest Rates: NO variation (not insurance risk) + use rf w/ duration equal to that of reinsurers net cash flows (not investment rate as investments is not insurance risk)
  • Commutations: YES include commutation & maitenance fees (cash flow)
  • Evaluation date: test based on inception date unless there is amendment to reinsurance contract
  • Premiums: YES include premium fees (cash flow) + use actual discounted gross premiums (gross of commission)
26
Q
A
27
Q
A
28
Q

Investment returns

include in risk transer tests?

why or why not?

A
  1. No
  2. Not part of insurance risk (not Timing risk nor UW risk)
29
Q

Profit commission impact & indirect impact on chance of risk transfer

profit commission defined

Do profit commisions decrease or increase chance of risk transfer? why? (2)

A

Defined: reinsurer pays primary more if more profitable

  • Decrease
  • profit commission ↑ —> reinsurer premium ↑ (of reinsurance contract)
  • profit carryforwards ↑ (profits carried foward from prior years) → losses ↓
30
Q

why profit commissions should not be considered in risk transfer analysis?

A

not usually trigerred during a reinsurer loss

31
Q

why reinsurer expenses should not be considered in risk transfer analysis?

A

not cash flows bw primary and reinsuer

32
Q

why not select interest rate that is lower than risk free rate?

why not select interest rate (i.e. investment rate) that is higher than rf?

A

lower

  • overstates risk transfer
  • rf is free to get

higher

  • rate is unknown
  • will pass risk transfer test simply b/c investment returns are low
33
Q

recomended discount rate for risk transfer tests? (3) why?

A

constant rf with duration equal to reinsurer’s cash flows

constant - varying rate would be market risk (not insurance risk)

risk free - don’t want investments impacting the risk transfer test

duration of cash flows - reflect expected timing of pmts

34
Q

when should Pricing assumptions be used

are pricing assumptinos based on expected loss experience or market’s view of loss experience

A

small book of business when data is thin

market

35
Q

use of pricing assumptions in risk transfer

2 risk of using pricing assumptions

A

pricing uses high expected losses → make profit

vs

risk transfer should use lower expected losses → don’t want to overstate risk transfer

pricing cares about whole loss distribution

vs

risk transfer cares about right tail

36
Q

use of pricing assumptions in risk transfer tests

  • T/F if premium is high then that must indicate the cedants cash flows are more volatile so risk trasnfer exists?
  • better to use data underlying the pricing or the pricing derived from the data?
A
  • F - price might be based on market risk.
  • risk transfer should be based on expected losses (not market risk)
  • if market is overstating the risk (aka higher prices) then pricing assumptions will overstate risk transfer
  • better to use the data underlying the pricing
37
Q
A
38
Q

what should the evaluation date be for risk transfer tests

A

inception date of reinsurance contract

only use renewal date if reinsurance contract was amended

39
Q

what kind of premium should be used in risk transfer test?

what interest rate to discount premium?

A

actual gross premiums (including commisions)

discounting: same interest rate as used to discount losses

40
Q

impact of prescribed pmts in determinig if risk transfer exists

A

contract with prescribed pmt patterns does not meet risk trasnfer b/c no timing risk

41
Q

should commuations be included in risk transfer test? why or why not

A

yes, bc they are cash flows bw primary and reinsurer

include maintenance costs of commutation too

42
Q

Commutation clause

  • commutation fees based on (2)

which has pmt pattern adjustment?

A
  1. Mutually agreed value (NO pmt pattern adjustment) vs
  2. Rules (YES pmt pattern adjustment)
43
Q

Prospective reinsurance accoutning vs retroactive reinsurance accounting under SAP

A

prospective reinsurance accy: if claim then reserve up

retroactive accy: if claim then reserve NOT up (contra liability)→L↓+I↑+S↑ (no rsv impact nor SOA opinion impact)

44
Q

type of accounting used if reinsurance is entered into AFTER policy expiration

4 exceptions

A
  • retroactive reinsurance accounting
  • run off agreement – retain liability until date x or policy expire/cancel
  • novation – released of all liability
  • intercompany reins agreement
  • termination of reins treaty
45
Q

Run-off agreement vs novation

A

run-off agreement: primary retains liability until x date or policies expire

vs novation: primary released of all liability (both cede 100% of liability to leave LOB)

46
Q

Run-off provision vs Cut-off provision

A
  1. run-off provision: reinsurer has liability until …policies expire/cancel
  2. cut-off provsion: reinsurer has liability until . ..certain date

exam 6 NEW (32 decks)

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