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 reinsureds 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 Direct Premium Written):
• Intercompany cessions with affiliates
• Cessions to a pool/ group/ association/ 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 Compensation, 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, or if the recoverable is under $50K:
Record the amount as “currently due”
Formula for Provision for Reinsurance for Unauthorized Reinsurer:
Provision= Unsecured total recoverables
+ 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 reinsurers (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
