Odomirok 14 Flashcards
List 2 things that the actuary can refer to when opining on the collectability of reinsurance recoverables
- Indications of regulatory actions or reinsurance recoverable over 90 days overdue
- Listing of reinsurers/liability amounts ceded to each reinsurer/the collateral held by the insurer
Main purpose of schedule F
Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance
How is the provision for reinsurance treated in the annual statement
Liability (in the balance sheet)
How does a change in the provision impact surplus
An increase in the provision results in a direct decrease to surplus
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
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
List the 8 parts of schedule F
- Assumed reinsurance
- Portfolio reinsurance
- Ceded reinsurance
- Aging of ceded reinsurance
- Unauthorized reinsurance
- Overdue authorized reinsurance
- Slowpaying authorized reinsurance
- Restatement of balance sheet
List the components of the Balance sheet that are populated from Schedule F data
Assets: Amounts recoverable from reinsurers
Liabilities: Reinsurance payable on paid losses & LAE/Funds held by the company under reinsurance agreements/Provision for reinsurance
How are reinsurers grouped in Part 1?
- 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
List the benefits of the “Funds held or deposited with reinsured companies” form of collateral
- Reduces credit risk
- Reduces administrative burden of having to continually collect money from reinsurer to make payments
- Reinsurer gets paid interest
Why do reinsureds like the Letters of Credit (LOC) form of collateral?
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
2 reasons that LOCs are expensive to the reinsurer
- Banks charge a fee, which will be higher during uncertain economic times
- The LOC is a reduction to reinsurers line of credit
3 reasons that insurers may enter into portfolio reinsurance arrangements
They want to:
- Exit a certain type of business
- Remove the risk/uncertainty associated with the liability off their books
- Obtain surplus relief (via the discounted premium)
Transactions that are exempt from disclosure in Part 3 (whether the contract cedes 75% or more of the DWP)
- 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
Rules to determine the due date of the reinsurance recoverables (to populate part 4):
Use the following hierarchy:
- Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified; or
- Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified; or
- The date at which the amount recoverable from a certain reinsurer exceeds $50K , and is entered into the insurers account as a paid recoverable
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?
Record the amount as “currently due”
Formula for Provision for Reinsurance for Unauthorized Reinsurer
Provision = Unsecured total recoverabeles + 20% (recoverables over 90 days overdue) + 20% (amounts in dispute)
Formula for provision for reinsurance for authorized slow paying reinsurer
Provision = max[20% (unsecured total recoverables), 20% (recoverables over 90 days overdue)
Formula for provision for reinsurance for authorized non slow paying reinsurer
Provision = 20% (recoverables over 90 days overdue)
2 assets that need to be adjusted in Part 8
- Reinsurance recoverable on loss & LAE payment (line 3)
- Net amounts recoverable from reinsurance (line 6)
Liabilities that need to be adjusted to 0 in part 8
- Ceded reinsurance premiums payable (line 14)
- Funds held by the company under reinsurance treaties (line 15)
- Provision for reinsurance (line 17)
Liabilities that need to be adjusted to values other than 0 in part 8
- Losses & LAE (line 9)
- Unearned premiums (line 11)
2 changes that the NAIC made to schedule F in 2012
- It added a new part 6, and
2. It shifted the original parts 6-8 to 7-9, respectively
Items that regulators consider when determining whether to certify a reinsurer
- Jurisdiction
- Financial position
- Capital & surplus
- Regulatory history
- Financial strength ratings
What do the 2 sections of the “new” part 6 contain?
- Section 1: Provision for reinsurance for certified reinsurers due to collateral deficiency
- Section 2: Provision for overdue reinsurance ceded to certified reinsurers
List some functions of schedule F (in addition to assessing the net reserves)
- 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
List some criticisms of schedule F
- 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
