FREI.RSKTRANS Flashcards
describe 2 conditions for a contract to receive reinsurance accounting treatment
- 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
list 4 methods for assessing the existence of risk transfer and state whether each is qualitative or quantitative
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
describe the “self-evident” method for assessing the existence of risk transfer
- 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
describe the “substantially all” exception method for assessing the existence of risk transfer
IF (significant loss is NOT reasonably possible) BUT (reinsurer assumes ‘substantially all’ risk) THEN (risk transfer may still exist)
‘substantially all’ - 2 common Exs
QUOTA SHARE contracts with high % ceded
INDIVIDUAL RISK CONTRACTS without (LR caps, other risk limiting features)
describe the ERD method (Expected Reinsurer Deficit) method for assessing the existence of risk transfer
- 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)
describe the “10-10” rule for assessing the existence of risk transfer
IF reinsurer has a 10% chance of suffering a 10% loss THEN the contract is deemed to have transferred risk
describe the pitfalls in a risk transfer test (6)
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