Friedland

Question 1

Identify 4 stakeholders of reinsurers that require sound estimates of unpaid losses.

Answer 1

1. Internal Management
   Pricing, underwriting, strategic planning and financial decision making
2. Investors
   Evaluate reinsurer’s balance sheet and income statement when making investment decisions
3. Regulators
   Appropriate evaluate a reinsurer’s financial
4. Rating agencies
   Issue strong financial ratings.
   If a reinsurer experiences significant adverse development, it risks rating downgrade. This may make the reinsurer look less attractive to primary insurers.

Question 2

Define bordereau

Answer 2

Detailed report of insurance premiums or losses affected by reinsurance.

Reinsurers often receive data by bordereau from cedants or the brokers of their cedants.

Question 3

Describe the 5 primary reasons ceding companies purchase reinsurance

Answer 3

1. Promote Stability
   Reinsurance stabilizes the loss experience of ceding companies from YtoY by retaining smaller, more predictable claims and ceding larger, more unpredictable claims.
2. Increase Capacity
   Reinsurance allows ceding company to assume more risk by ceding a portion of all of their policies or by ceding their larger policies. By increasing its capacity through reinsurance, pedants may be able to write quality accounts that are otherwise unattainable.
3. Protect Against Catastrophe
   Reinsurance protects ceding companies from a single catastrophic loss event as well as multiple large loss events.
4. Manage Capital & Solvency Margin
   Reinsurance passes risk from the pedant to the reinsurer.
5. Access Technical Expertise
   Reinsurers can lend their expertise in the areas of underwriting, marketing, claims and pricing to insurers seeking to enter new lines of business or new regions.

Question 4

Briefly define Treaty Reinsurance

Answer 4

Under treaty reinsurance, pedant enters into a contract with one or more reinsurers to cede all business from certain lines of business, subject to the retentions and attachment points specified in the treaty.

Reinsurer is not involved in the UW of the underlying policies written by the cedant.

Question 5

Briefly define Facultative Reinsurance

Answer 5

Primary purpose of facultative reinsurance is to increase a pendant’s capacity by ceding large risks.

UW risk for the reinsurer is reduced under facultative reinsurance since reinsurer can conduct its own underwriting.

Question 6

Briefly describe hybrid contracts

Answer 6

Some contracts include both treaty and facultative characteristics.

Ex: Facultative Automatic and Facultative Obligatory treaty

Question 7

Briefly describe Facultative Automatic hybrid contract

Answer 7

Bordereau of risks ceded is submitted to the reinsurer, which has limited rights to decline individual risks

Question 8

briefly describe Facultative Obligatory Treaty

Answer 8

Treaty under which the pedant has the option to cede or not cede individual risks. The reinsurer must accept any risks that are ceded.

Question 9

Briefly describe Proportional Reinsurance

Answer 9

Under proportional reinsurance, the reinsurer typically pays a ceding commission to the pedant to reimburse for acquisition and UW expenses associated with issuing the underlying policies.

2 common types of proportional reinsurance:
1. Quota Share
2. Surplus Share

Question 10

Briefly describe Quota Share treaty

Answer 10

Ceding company cedes to reinsurer and agreed % of each risk it insures that falls within LOB(s) subject to reinsurance contract.

In return, reinsurer receives fixed % of premium and losses for all risks ceded to QS agreement.

Question 11

Briefly describe Surplus Share treaty

Answer 11

Unlike QS, surplus share does not have a uniform cession % across risks. Instead, the cedant cedes the surplus amount of risk above its retained line subject to a maximum ceded percentage and limit.

The retained line is the amount the pedant is willing to retain per risk.

The reinsurer’s share is expressed as a multiple of the pedants retained line.

Reinsurer’s share is expressed as a multiple of the pedants retained line.

Question 12

State 3 typical uses of proportional reinsurance

Answer 12

1. Manage capital and solvency margin (net premium-to-surplus ratios are typically improved)
2. To increase capacity
3. To protect against catastrophes

Question 13

Briefly describe non-proportional (XoL) reinsurance

Answer 13

Non-proportional reinsurance can be written on a treaty or facultative basis.

Unlike proportional reinsurance, premium paid to reinsurer is not proportional to the limits of coverage.

Reinsurer pays for all losses above specified retention, subject to any specified limits.

Common types include XS per risk, XS per occurrence, catastrophe, annual aggregate XoL and clash reinsurance.

Question 14

Briefly describe XS per risk reinsurance

Answer 14

Reinsurance indemnifies the cedant against the amount of loss in XS of a specified retention subject to specified limits on a per risk basis.

Typically used to protect property exposures and increase capacity.

Often includes ceding commutations, but those comm provide less surplus relief to the cedant because the reinsurance premium tends to be significantly less.

Question 15

Briefly describe XS per occurrence reinsurance

Answer 15

Protects a cedant from an accumulation of losses due to a single occurrence.

The subject loss under XS per occ reinsurance is the sum of all losses arising from an insured event for all subject policies. This means insure’s retention only comes into play once rather than for each individual risk.

Question 16

Briefly describe catastrophe reinsurance

Answer 16

Indemnifies the cedant for the accumulation of losses in excess of a specified retention arising from a single catastrophic event or a series of events, subject to a specified limit.

It is a special case of XS per occurrence reinsurance.

Question 17

Briefly describe Annual Aggregate XS of Loss (Aggregate Stop-Loss) reinsurance

Answer 17

Total losses to the cedant cannot exceed a specified annual threshold (expressed as either a percent of premium or fixed dollar amount).

Typically used to protect net results (reinsurance kicks in after other contracts have already been applied) and protect insurer’s capital base.

The issue with this type of reinsurance is that it is often unavailable or very expensive.

Question 18

Defin Clash reinsurance

Answer 18

Attaches above all other policy limits and is meant to cover exceptional events where traditional reinsurance contracts will not fully reimburse a cedant’s claims. This can occur when a cedant received multiple claims from multiple insureds arising out of the same catastrophe.

A clash event has 3 components:
1. Loss must arise out of multiple policies held by one insured or similar policies held by multiple insureds.
2. All damages must be traceable to a specific event
3. The event must take place in its entirety within specific timeframe

Question 19

Explain why ceding commissions might provide less surplus relief for non-proportional reinsurance vs proportional reinsurance.

Answer 19

Ceding commissions are stated as a % of premium. It is often the case that non-proportional reinsurance premiums are less than proportional reinsurance premiums. The ceding commissions are smaller as a result.

Question 20

Briefly describe policy limit restatements and reinstatement premiums.

Answer 20

Restatement: in the event of a full limit loss or some other amount specified in the reinsurance contract, cedants can obtain a restatement of the reinsurance policy limit.

Reinstatement premium: if a restatement requires an additional premium to be paid by the cedant to the reinsurer, it is known as a reinstatement premium.

Question 21

Explain what is meant by reinsurance contract A inures to the benefit of reinsurance contract B

Answer 21

In this case, reinsurance contract A is applied first and reduces the loss subject to reinsurance contract B

Question 22

Briefly describe finite risk reinsurance

Answer 22

Multi-year contracts that spread risk over time and take into account the investment generated over the period.

Question 23

Describe 4 features of finite risk reinsurance

Answer 23

1. Risk transfer and risk financing combined in a multi-year contract
2. Emphasis on the time value of money with investment income explicitly included in the contract
3. Limited assumption of risk by the reinsurer
4. Sharing of the results with the cedant

Question 24

Describe a loss portfolio transfer

Answer 24

A LPT is a form of reinsurance that transfers all or a portion of a cedant’s loss reserves present at a specific accounting date to a reinsurer.

Often used by cedants to withdraw from a specific line of business while meeting their obligations to policies they already wrote (timing is main element of risk)

Reinsurers could lose money on an LPT contract in the event that claims are settled faster than expected, resulting in less than anticipated investment income.

Question 25

Describe adverse development cover

Answer 25

Alternative to an LPT where the cedant receives reimbursement from the reinsurer for losses in XS of a pre-agreed retention level.

Reserves are not transferred under these covers.

These covers are often used for M&A to transfer the risks of timing and adverse reserve development.

Question 26

Describe 2 ways in which reinsurance covers claims

Answer 26

1. Losses-occurring-during coverage
   Provides reinsurance coverage for all losses that occur between the contract inception and expiration date regardless of when the cedant issued the underlying policy that resulted in the loss
2. Risks-attaching coverage
   Provides reinsurance coverage only for those policies that began during the reinsurance contract effective period.

Question 27

Briefly describe subscription policy

Answer 27

Policy in which multiple reinsurers share a risk subject to corresponding subscription %.

Useful ways for primary insurers to reduce credit risk by diversifying reinsurer pools.

Question 28

Briefly describe commutation clause

Answer 28

Under a commutation, the reinsurer pays the present value of reinsurance recoveries not yet due to the cedant in exchange for full termination of all future obligations related to the reinsurance contract.

The commutation clause, lays out the terms and conditions for the estimation, payment, and discharge of all obligations of the parties to a reinsurance contract for the purposes of a commutation.

Question 29

4 reasons why a cedant might pursue a commutation

Answer 29

1. To exit a LOB or geo region
2. To manage reserves for transfer or sale
3. To avoid the credit risk associated with its reinsurer, especially if the reinsurer has experienced a ratings downgrade
4. To better manage claims claims-related expenses

Question 30

3 reasons why reinsurer might pursue a commutation

Answer 30

1. To end a relationship with a cedant that is in runoff or one with which it no longer conducts business
2. To protect itself from the potential insolvency of the cedant
3. To avoid disputes when there are significant differences of opinion with respect to future loss development of subject losses

Question 31

4 reasons why understanding commutations is important for the reserving actuary

Answer 31

1. Actuaries are often involved in the analysis of reinsurance contracts that are subject to commutation
2. Commutations affect the estimation of unpaid ceded losses. Thus, a ceding company’s actuary should be aware of commuted contracts.
3. Commutations eliminate the corresponding liability to the reinsurer. Thus, a reinsurer’s actuary should also be aware of commuted contracts.
4. Loss development patterns for commuted contracts could be different from con-tracts that remain in-force.

Question 32

Define sufficient data
and
explain why ensuring sufficient data for projecting ultimate losses using development method can be challenging for reinsurers.

Answer 32

Data are sufficient if they include the needed information for the work.

When projecting ultimate losses using the development method, consistent historical data is key. Consistency might not be present for the following reasons:
1. Contract terms can differ from one cedant to another and from year to year
2. Operational and strategic changes implemented at the cedant and the reinsurer can cause significant changes in mix of business, attachment points, policy limits and claims processing.

Question 33

Define reliable data

Answer 33

Data are reliable if they are sufficiently complete, consistent and accurate for the purposes of the work.

Question 34

4 steps for data validation

Answer 34

1. Reconcile data against audited financial statements, trial balances or other relevant recors (if available)
2. Test the data for reasonableness against external or independent data
3. Test the data for internal consistency and consistency with other relevant information
4. Compare the data to those for a prior period or periods

Question 35

6 reasons why data validation might be more difficult for actuaries working for reinsurers than for actuaries working for primary insurers

Answer 35

1. For each cedant and broker, different IT systems capture different types of data and use different terms for similar types of data.
2. Bordereau reporting may differ by cedant and broker in the types of data reported, data labels and the frequency of submission to the reinsurer.
3. There may be lags in reporting to the reinsurer
4. There may be gaps in reporting critical claims information from the cedants (ex: loss payments, case reserves, etc)
5. The unique nature of reinsurance policies can lead to different coverage for similar loss events with different cedants
6. There may be issues related to data coding for the reinsurer

Question 36

3 reasons for reporting lags to reinsurers

Answer 36

1. Claims must first be reported to the primary insurer before being reported to the reinsurer
2. The LT nature of certain types of reinsurance
3. The use of bordereau reporting, where losses are only reported on a quarterly or more infrequent basis

Question 37

Define homogeneous risk group (HRG)

Answer 37

Obligations that are managed together and have similar risk characteristics such as UW policies, claims settlement patterns, product features, etc.

Question 38

3 considerations when actuaries separate data into HRGs for the purpose of estimating unpaid losses

Answer 38

1. Consistency of the coverage triggered by the losses in the group
2. Length of time to report the claim once an insured event has occurred (reporting patterns)
3. Length of time to settle the claim once it is reported (payment pattern)
4. Average settlement value (severity)
5. Volume of losses in the group

Question 39

8 variables that might affect the pattern of claim report lags to the reinsurer and the development of individual case amounts

Answer 39

1. LOB: property, casualty, ocean marine, etc
2. Type of contract: facultative, treaty, finite
3. Type of reinsurance cover: QS, surplus share, XS per risk, XS per occurrence, aggregate XS, etc
4. Primary LOB for casualty
5. Attachment point for casualty
6. Contract terms: flat-rated, retro-rated, sunset clause, etc
7. Type of cedant: small, larger, or XS and surplus
8. Broker

Question 40

Briefly describe credibility

Answer 40

Credibility is a measure of the predictive value in a given application that the actuary attaches to a particular set of data.

Question 41

Briefly describe the balance between homogeneity and credibility

Answer 41

Actuaries can increase homogeneity by dividing data into smaller groups.

However, credibility decreases as data volume decreases.

The goal is to divide data into homogeneous groupings without compromising credibility.

Question 42

Briefly explain the difference in considerations related to homogeneity and credibility for primary insurer vs reinsurers

Answer 42

Primary insurers tend to segment data by LOB since claims within. LOB are typically subject to similar laws, policy terms and claims-management expenses.

However, further segmentation is often needed by LOB for reinsurers since significant differences can exist between reinsurance contracts within a single LOB.

Question 43

Describe the losses and premiums used under AY aggregation for estimating unpaid losses.

Answer 43

Losses: grouped according to the date of occurrence
Premiums: calendar year EP are used

Question 44

Provide 3 advantages and 1 disadvantage to using AY data for estimating unpaid losses.

Answer 44

3 advantages:
1. Easy to achieve
2. Easy to understand
3. Become reliably estimable sooner than UW year data since AY data represents losses occurring over a shorter time frame
4. Industry benchmarks such as RAA data are based on AY losses
5. Tracking losses by Ay is valuable when there are changes due to economic or regulatory forces or major loss events that can influence loss experience.

Disadvantage: potential mismatch between losses and premiums (matching of CY EP and AY losses is only approximate)

Question 45

Describe the losses and premiums used under UW year aggregation for estimating unpaid losses.

Answer 45

Both losses and premiums are grouped according to the data in which the reinsurance contract was incepted.

Question 46

Provide 1 advantage and 2 disadvantages to using UW year data for estimating unpaid losses.

Answer 46

The main advantage is the exact match of losses and premiums.
This is especially important when UW or pricing changes occur:
1. Shift in AP or Limits
2. New emphasis on certain classes of business or regions
3. Change in types of ceding company
4. increase or decrease in the price

2 disadvantages:
1. Takes longer for data to mature
2. Can be difficult to isolate the effect of a single large event

Question 47

Briefly describe 2 ways UW year results are allocated to AY

Answer 47

1. Based on how premium is earned over the contract period
2. When the reinsurer receives detailed loss data including loss dates and policy effective dates, the reinsurer can allocate UW year results to AY more precisely than using EP.

Question 48

Briefly explain why reserving actuaries working with reinsurers are often unable to calculate triangles of average claim values or count-based ratio triangles.

Answer 48

Detailed claim count and exposure information is often not available.

Instead, the actuary must rely on interviews with management of the reinsurer and cedant to understand changes in the underlying experience.

Question 49

4 issues with bordereau reporting

Answer 49

1. How data are cumulated by the cedant and absorbed by the reinsurer
2. Potential infrequency of bordereau reporting. The more infrequent the reporting, the greater the lag in reporting and the longer the payment pattern.
3. The creation of a bordereau is often manual and time intensive
4. The loss detail on a bordereau is not nearly as detailed as the claim files of the cedant.

Question 50

3 approaches for dealing with ALAE in terms of reinsurance coverage

Answer 50

1. Included with claim amount when determining XOL coverage
2. Included on a pro-rata basis. Th ratio of XS portion of loss to total loss is used to determine the reinsurance coverage for ALAE
3. Not included in reinsurance coverage

Question 51

2 approaches for dealing with multiple currencies

Answer 51

1. Separate the data by currency, cover each current to a common currency using point-in-time exchange rates, then combine the common currency data.
2. Aggregate losses based on the cedant’s currency of origin (used when wiring catastrophe reinsurance in a region with numerous countries and currencies)

Question 52

Briefly explain why it is advantageous to use a single point-in-time exchange rate when converting data to a single curency

Answer 52

It avoids the influence of changes in exchange rates over time

Question 53

Briefly explain how to deal with large losses when projecting ultimate losses for reinsurers

Answer 53

Exclude the large losses from the initial ultimate loss projection.

Once the initial projection is complete, add a case-specific projection for the reported portion of large losses and smoothed provision for the IBNR portion of large losses.

Question 54

Identify 3 potential operational changes for a reinsurer that are important for the reserving actuary to understand

Answer 54

1. System modernization efforts such as the implementation of new policy administration systems and claims administration systems
2. The increased use of analytics and big data to influence pricing, marketing and UW
3. Acquisitions and divestitures made by ceding companies

Question 55

Briefly describe the RAA biannual loss study

Answer 55

Includes historical loss development patterns by AY for reinsurers wiring casualty XS reinsurance for auto Liab, general liability and medical malpractice.

Organize patterns separately by treaty and facultative business and 5 ranges of AP.

Discuss how low loss development patterns have changed over the last few years and provide possible reasons for those changes.

Discuss how loss elopement has varied depending on the business being considered.

Question 56

Describe the external reinsurance data provided by Best’s Aggregates & Averages

Answer 56

Based on the non-proportional loss data found in Schedule P. It has the following limitations:
1. An experience period of 10 years, which is not typically long enough for XOL reinsurance
2. Segmentation is not granular enough
3. Combined experience may not reflect the experience of an individual reinsurer

Question 57

Describe an issue with external reinsurance data found using internet searches.

Answer 57

Internet searches typically provides highly aggregated data which is unlikely to be sufficient for estimating unpaid losses for a single reinsurer.

Question 58

4 general reasons external data may not be useful for a reinsurer

Answer 58

1. Reinsurance contract terms and conditions
2. Mix of assumed business
3. Types of reinsurance
4. UW processes
5. Claims management processes
6. IT systems

Question 59

Briefly describe the 2 basic approaches for determining unpaid losses.

Answer 59

1. Project ultimate losses and unpaid losses on a gross of reinsurance basis and net of reinsurance basis. Then, subtract the two to estimate ceded unpaid losses.
2. Project ultimate losses and unpaid losses on a gross of reinsurance basis and ceded basis. Then, subtract the two to estimate net of reinsurance unpaid losses.

Question 60

2 reasons why usually project gross and net basis and obtain ceded by subtracting them.

Answer 60

1. There is higher volatility from large claims and cat events in ceded data.
2. There are frequent changes in terms and conditions (ex: AP, limits) that result in less homogeneous ceded data.

Question 61

List 3 methods frequently used to estimate unpaid losses for reinsurance.

Answer 61

1. Development method
2. Expected method
3. BF method

Question 62

Describe 3 key assumptions of the development method

Answer 62

1. Losses recorded to date will continue to develop in a similar manner in the future
2. For an immature year, the losses or premiums observed thus far tell the actuary something about the losses or premiums yet to be observed.
3. Claims processing, mix of business, policy limits and reinsurance coverage is consistent throughout the experience period.

Question 63

State one major difference in projecting ultimate losses for primary insurance and reinsurance.

Answer 63

Reinsurance data tends to be far less credible due to volume, volatility and heterogeneity of the data.

Question 64

Briefly describe 4 considerations when selecting age-to-age factors

Answer 64

1. Smooth progression of individual age-to-age factors and average factors across development periods.
   Ideally, there should be steadily decreasing incremental development from valuation to valuation.
2. Stability of age-to-age factors for the same development period.
   Ideally, there should be a relatively small range of factors within each development interval.
3. Credibility for the experience.
   Benchmark development factors should be considered for use when loss experience has low credibility.
4. Changes in patterns and applicability of the historical experience.
   When relying on historical age-to-age factors, actuaries should consider changes in the book of business or insurer operations over time to ensure the past is indicative of the future.

Question 65

State 2 situations in which the expected method is often used.

Answer 65

1. Entering a new LOB or new region
2. Changes in strategy, operations or the environment make historical data no longer indicative of the future.
3. Immature years where development factor are highly leveraged in which case the development method is not appropriate.
4. Data are unavailable for other method.

Question 66

State the key assumption of the expected method

Answer 66

The actuary can better estimate unpaid losses based on a “a priori” estimate than from loss experience observed to date.

Question 67

Briefly describe 3 disadvantages of the development and expected method addressed by the BF method

Answer 67

1. The development method can produce volatile and unreliable estimates in immature accident years with large cumulative development factors since a small change in reported or paid losses can lead to a large change in projected ultimate losses.
2. The expected method ignores actual reported or paid losses to date.
3. The BF blends the two methods y adding actual reported or paid losses to expected unreported or unpaid losses to project ultimate losses.

Question 68

Briefly describe 3 key differences in assumptions between primary insurance and reinsurance.

Answer 68

1. For a similar LOB, loss development factors in the earlier maturity age intervals are often higher for reinsurance than for primary insurance due to reporting lags.
2. Tail factors are often higher due to reporting lags and the nature of large claims associated with excess of loss reinsurance.
3. Loss trend factors tend to be higher for excess of loss reinsurance than primary insurance.
4. There is less precision in premium on-level factors that adjust for rate changes. Detailed rate change information is often difficult to obtain for reinsurers due to the unique nature of reinsurance arrangements.
5. Adjustments for changes such as tort and product reform as less common in reinsurance reserving.

Question 69

Contrast the volatility one might expect to see in age-to-age factors and projected IBNR losses for primary insurance and reinsurance for a similar type of business.

Answer 69

Expect to see greater volatility in age-to-age factors and projected IBNR losses for reinsurance than for primary insurance.

Question 70

Contrast the volatility one might expect to see in age-to-age factors and projected IBNR losses for proportional and non-proportional reinsurance for the same LOB.

Answer 70

Expect to see greater volatility in age-to-age factors and projected IBNR losses for non-proportional than for proportional insurance.

Question 71

Contrast the volatility one might expect to see in age-to-age factors and projected IBNR losses for property reinsurance excluding catastrophe and property reinsurance catastrophe.

Answer 71

Expect to see greater volatility in age-to-age factors and projected IBNR losses for property reinsurance catastrophe than for property reinsurance excluding catastrophe.

Question 72

Briefly explain why paid loss age-to-age factors often experience greater volatility than reported age-to-age factors at early maturities.

Answer 72

Due to the longer time frame for claims settlement, which in turn produces lower paid loss volume at early maturities.

Question 73

Explain why non-proportional reinsurance typically experiences greater volatility in age-to-age factors than proportional reinsurance.

Answer 73

Proportional reinsurance attaches on a ground-up basis, whereas non-proportional reinsurance is excess of loss coverage. Ground-up losses are more stable than excess losses.

Question 74

Explain why proportional development factors are typically greater for non-proportional reinsurance than for proportional reinsurance

Answer 74

There are typically delays associated with non-proportional reinsurance. For example, the claims will not be reported to the reinsurer until it exceeds the primary’s reinsurer’s retention.

Question 75

Provide an approach for developing reserves for total property losses, assuming the losses include catastrophes.

Answer 75

1. Set reserves for each individual catastrophe event based on ground-up assessments from the claims team or a catastrophe model.
2. Project non-catastrophic losses using traditional methods such as the loss development method.
3. Add the catastrophe reserves to the non-catastrophic reserves to obtain the total reserves.

Question 76

Briefly describe why a constant paid-to-reported ratio in age-to-age interval does not necessarily mean there are no changes in claims operations.

Answer 76

Changes in settlement practices (captured by the numerator) might offset changes in case outstanding adequacy (captured by the denominator), resulting in a constant ratio.

Question 77

Briefly describe what typically happens from a market perspective once a company breaches a stop-loss limit.

Answer 77

It is common for the reinsurer to increase the price or the AP of the stop-loss coverage. Furthermore, multiple breaches of a stop-loss limit may make it difficult for a ceding company to secure stop-loss coverage in the future.

Question 78

Formula for proportion ceded under surplus share reinsurance

Answer 78

Proportion ceded = (Policy Limit - Retained Line) / Policy Limit