freihaut & SSAP 62R Flashcards
Accounting treatment used if risk transfer occurs
Accounting treatment use if risk transfer does NOT occur
YES risk transer →Reinsurance accounting (rsvs net of reinsurance)
NO risk transfer → Deposit accounting (rsvs are gross of reinsurance)
advantage of reinsurance accounting v.s. deposit accounting
reinsurance: paid loss→income down→TAXES down
deposit: paid loss → no change to income
Define deposit accounting
- 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
Pick reinsurance or deposit accy
- reinsurer assumes insurance risk (both timing risk & UW risk) & possible significant loss →
- reinsurer has not assumed significant risk→
- reinsurer may not realize significant loss→
- reinsurer assumes significant insurance risk & loss from events that occur after contract date →
- reinsurer assumes significant insurance risk & loss from events that occur prior to contract date →
- reinsurer assumes insurance risk (both timing risk & UW risk) & possible significant loss → reinsurance accy
- reinsurer has not assumed significant risk→deposit accy
- reinsurer may not realize significant loss→deposit accy
- reinsurer assumes significant insurance risk & loss from events that occur after contract date → prospective reinsurance accy
- 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?)
Conditions needed to demonstrate risk transfer & use reinsurance accy (2)
- 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
- Reinsurer reasonably possible to have significant loss
Self-evident (qualitative) risk transfer exists because?
risk transfer is obvious becasuse…
- premium is low
- OR
- potential loss is high
Substantially all exception (qualitative) risk transfer
risk transfer exists if?
example?
why exist?
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
Expected reinsurance deficit (quantitiaive)
risk transfer exist if
formula
adv (2)
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
10-10 rule (quanitative)
risk transfer exists if
formula
adv (2)
IF reinsurer has at least 10% chance of at least 10% loss
IF {L - P] / P >= 0.10 at least 10% of the time
- Adv: Risk transfer not possible for rare catastrophes (risk transfer is less likely)
- Adv: doesn’t need interest rate b/c doesn’t discount
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
- historical experience of primary
- industry benchmarks
F = pmt pattersn should include variability to account for tail risk bc tail risks matters most to risk transfer tests
loss distributions in risk transfer tests are based on ? (2)
which is best for large company?
which best for small company? why?
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)
Parameter selection (how select)
interest rate
loss distribution
pmt patterns
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)
what is parmeter risk?
should parameter risk be included in risk transfer tests?
if yes, what are the two ways to include it?
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
Parameter risk (how much risk of each parameter?)
loss distribution
pmt pattern
discount rate
premium
- 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
