Odomirok 14

Question 1

List 2 things that the actuary can refer to when opining on the collectability of reinsurance recoverables

Answer 1

1. Indications of regulatory actions or reinsurance recoverable over 90 days overdue
2. Listing of reinsurers/liability amounts ceded to each reinsurer/the collateral held by the insurer

Question 2

Main purpose of schedule F

Answer 2

Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance

Question 3

How is the provision for reinsurance treated in the annual statement

Answer 3

Liability (in the balance sheet)

Question 4

How does a change in the provision impact surplus

Answer 4

An increase in the provision results in a direct decrease to surplus

Question 5

What should the insurer do if it believes that it is necessary to book a higher amount than what is being indicated by the provision formula

Answer 5

It should hold an additional reserve. It should record this additional amount on the income statement by reversing the accounts that had been used to establish the reinsurance recoverable

Question 6

List the 8 parts of schedule F

Answer 6

1. Assumed reinsurance
2. Portfolio reinsurance
3. Ceded reinsurance
4. Aging of ceded reinsurance
5. Unauthorized reinsurance
6. Overdue authorized reinsurance
7. Slowpaying authorized reinsurance
8. Restatement of balance sheet

Question 7

List the components of the Balance sheet that are populated from Schedule F data

Answer 7

Assets: Amounts recoverable from reinsurers
Liabilities: Reinsurance payable on paid losses & LAE/Funds held by the company under reinsurance agreements/Provision for reinsurance

Question 8

How are reinsurers grouped in Part 1?

Answer 8

• Affiliated insurers: US intercompany pooling/US non pool/other (non US)
• Other US unaffiliated insurers
• Pools & associations: Mandatory pools/voluntary pools
• Other non-US insurers

Question 9

List the benefits of the “Funds held or deposited with reinsured companies” form of collateral

Answer 9

• Reduces credit risk
• Reduces administrative burden of having to continually collect money from reinsurer to make payments
• Reinsurer gets paid interest

Question 10

Why do reinsureds like the Letters of Credit (LOC) form of collateral?

Answer 10

It is not part of the estate of the insolvent reinsurer, and therefore will not be tied up/subject to degradation in the event of a bankruptcy

Question 11

2 reasons that LOCs are expensive to the reinsurer

Answer 11

1. Banks charge a fee, which will be higher during uncertain economic times
2. The LOC is a reduction to reinsurers line of credit

Question 12

3 reasons that insurers may enter into portfolio reinsurance arrangements

Answer 12

They want to:

1. Exit a certain type of business
2. Remove the risk/uncertainty associated with the liability off their books
3. Obtain surplus relief (via the discounted premium)

Question 13

Transactions that are exempt from disclosure in Part 3 (whether the contract cedes 75% or more of the DWP)

Answer 13

• Intercompany cessions with affiliates
• Cessions to a pool/group/assocation/organization of insurers that underwrite jointly, which:
• -is subject to examination by any state regulatory authority, or
• -operates pursuant to any state or federal statutory or administrative authorization (such as Workers comp, or auto assigned risk pool)
• Those where under 5% of the gross annual premium is ceded
• Cessions to captive insurers that are regulated in their domiciliary state

Question 14

Rules to determine the due date of the reinsurance recoverables (to populate part 4):

Answer 14

Use the following hierarchy:

1. Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified; or
2. Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified; or
3. The date at which the amount recoverable from a certain reinsurer exceeds $50K , and is entered into the insurers account as a paid recoverable

Question 15

When determining the age of reinsurance recoverables, what should be done if no dates have been mentioned, and also if the recoverable is under $50K?

Answer 15

Record the amount as “currently due”

Question 16

Formula for Provision for Reinsurance for Unauthorized Reinsurer

Answer 16

Provision = Unsecured total recoverabeles + 20% (recoverables over 90 days overdue) + 20% (amounts in dispute)

Question 17

Formula for provision for reinsurance for authorized slow paying reinsurer

Answer 17

Provision = max[20% (unsecured total recoverables), 20% (recoverables over 90 days overdue)

Question 18

Formula for provision for reinsurance for authorized non slow paying reinsurer

Answer 18

Provision = 20% (recoverables over 90 days overdue)

Question 19

2 assets that need to be adjusted in Part 8

Answer 19

1. Reinsurance recoverable on loss & LAE payment (line 3)
2. Net amounts recoverable from reinsurance (line 6)

Question 20

Liabilities that need to be adjusted to 0 in part 8

Answer 20

• Ceded reinsurance premiums payable (line 14)
• Funds held by the company under reinsurance treaties (line 15)
• Provision for reinsurance (line 17)

Question 21

Liabilities that need to be adjusted to values other than 0 in part 8

Answer 21

• Losses & LAE (line 9)

- Unearned premiums (line 11)

Question 22

2 changes that the NAIC made to schedule F in 2012

Answer 22

1. It added a new part 6, and

2. It shifted the original parts 6-8 to 7-9, respectively

Question 23

Items that regulators consider when determining whether to certify a reinsurer

Answer 23

• Jurisdiction
• Financial position
• Capital & surplus
• Regulatory history
• Financial strength ratings

Question 24

What do the 2 sections of the “new” part 6 contain?

Answer 24

• Section 1: Provision for reinsurance for certified reinsurers due to collateral deficiency
• Section 2: Provision for overdue reinsurance ceded to certified reinsurers

Question 25

List some functions of schedule F (in addition to assessing the net reserves)

Answer 25

• Identifies the portion of the gross losses that are from assumed reinsurance transactions
• Helps estimate the significance of the assumed and ceded transactions to the surplus balance
• Allows further investigation into the financial strength of the insurers and reinsurers
• Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated

Question 26

List some criticisms of schedule F

Answer 26

• The provision is formulaic, and therefore ignores management input
• The formula has no statistical, historical, or actuarial basis. It may therefore underestimate the credit risk
• Unauthorized reinsurance may provide higher quality protection and/or lower prices
• Slow payers that are financially strong may eventually pay, whereas a reinsurer that is current may not be able to withstand a stress event
• The multitude of calculations and level of detail may lead to a false level of precision
• The costs of collateral requirements will be passed from the reinsurers to insurers, ultimately increasing the costs to consumers
• The provision may limit the amount of competition in the US, due to the penalty associated with unauthorized European reinsurers
• Schedule F does not reveal anything about the reinsurers solvency