FREI.RSKTRANS Flashcards

1
Q

describe 2 conditions for a contract to receive reinsurance accounting treatment

A
  • requires that significant insurance risk is assumed by reinsurer (under reinsured portion of contract)
  • requires that a significant loss to the reinsurer is reasonably possible
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2
Q

list 4 methods for assessing the existence of risk transfer and state whether each is qualitative or quantitative

A

METHOD 1: self-evident?
- qualitative
METHOD 2: “substantially all” exception
qualitative
METHOD 3: ERD rule (Expected Reinsurer Deficit)
quantitative
METHOD 4: 10-10 rule
quantitative

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3
Q

describe the “self-evident” method for assessing the existence of risk transfer

A
  • when it’s obvious that cedant’s financial interest are protected by the reinsurance contract
  • may apply if reinsurance premium is low and/or the potential loss is high
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4
Q

describe the “substantially all” exception method for assessing the existence of risk transfer

A

IF (significant loss is NOT reasonably possible) BUT (reinsurer assumes ‘substantially all’ risk) THEN (risk transfer may still exist)

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5
Q

‘substantially all’ - 2 common Exs

A

QUOTA SHARE contracts with high % ceded
INDIVIDUAL RISK CONTRACTS without (LR caps, other risk limiting features)

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6
Q

describe the ERD method (Expected Reinsurer Deficit) method for assessing the existence of risk transfer

A
  • ERD = Prob(NPV loss) x NPV(avg severity of loss as a % of premium)
    • if ERD > 1% –> Risk transfer has occurred
  • ERD is basically (frequency) x (severity as a % of premium)
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7
Q

describe the “10-10” rule for assessing the existence of risk transfer

A

IF reinsurer has a 10% chance of suffering a 10% loss THEN the contract is deemed to have transferred risk

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8
Q

describe the pitfalls in a risk transfer test (6)

A

Profit commission:
- do NOT include in risk transfer test
Reinsurer expenses:
- do NOT include in risk transfer test
Interest rates:
- do NOT vary with scenario
- should only consider insurance risk (U/W & timing risk)
Commutation timing:
- do NOT use prescribed payment patterns
- DO include commutation fees
Evaluation date:
- risk transfer test should be based on circumstances at evaluation date
Premiums:
- use PV (Present Value) of GROSS premiums
- apply premium adjustments to UNDISCOUNTED premiums

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