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CAS Exam 6 > Odomirok 14 > Flashcards

Odomirok 14 Flashcards

1
Q

Schedule F

A

Contains details of the insurer’s prospective reinsurance transactions; there are eight parts

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2
Q

Why is Schedule F important to actuaries?

A
  • The actuary needs to comment on the reasonableness of the Loss and LAE reserves. These reserves include business that the insurer has assumed. Schedule F provides info on the assumed reinsurance that may be useful.
  • Because the loss and LAE reserves are net of reinsurance, the collectability of recoverables is important. The actuary therefore needs to opine on the collectability. Can look at:
    + 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
  • The actuary needs to disclose and comment on the amount of the reserves from the participation in pools and associations. Schedule F, Part 1 contains info on these reserves.
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3
Q

Main purpose of Schedule F

A

To derive the provision for reinsurance

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4
Q

Provision for reinsurance

A

A minimum reserve for the uncollectible reinsurance. It is booked as a liability in the Balance Sheet. An increase in the provision results in a direct decrease to surplus. Calculation reflects the conservative nature of SAP accounting, as the entire amount booked may ultimately be collected.

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5
Q

What should the insurer do if it believes that a higher amount than what is indicated by the Provision for Reinsurance procedure is necessary?

A

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

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6
Q

What parts of the Balance Sheet require info from Schedule F?

A
  • Assets
    + Amounts recoverable from reinsurers
  • Liabilities
    + Reinsurance payable on paid losses & LAE
    + Funds held by the company under reinsurance agreements
    + Provision for reinsurance
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7
Q

What are the different parts of Schedule F?

A
  • Part 1: Assumed Reinsurance - Supporting data
  • Part 2: Portfolio Reinsurance - Supporting data
  • Part 3: Ceded Reinsurance - Supporting data
  • Part 4: Aging of Ceded Reinsurance - Develop provision
  • Part 5: Unauthorized Reinsurance - Develop provision
  • Part 6: Overdue Authorized Reinsurance - Develop provision
  • Part 7: Slow Paying Authorized Reinsurance - Develop provision
  • Part 8: Restatement of Balance Sheet - Restate B.S. to gross basis; helps user get a sense of the protection provided to the B.S. via the use of reinsurance
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8
Q

Schedule F, Part 1

A

Assumed Reinsurance as of 12/31, Current Year; shows the assumed reinsurance balances by reinsured. Users can refer to this to get a better understanding of the magnitude of assumed balances, and the risk associated with this.

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9
Q

Reinsureds in Sched F, Part 1 are divided into:

A 
- Affiliated insurers
   \+ US Intercompany Pooling
   \+ US Non Pool
   \+ Other (Non US)
- Other US Unaffiliated insurers
- Pools and Associations
   \+ Mandatory Pools
   \+ Voluntary Pools
- Other Non-US Insurers
Users can use this info (group and reinsured name) to investigate the risk associated with the reinsurance.
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10
Q

Contingent Commissions

A

Schedule F, Part 1 Column 9; based on the profit of the ceded business

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11
Q

Purpose of Security

A

required to protect against credit risk

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12
Q

Types of Security

A
  • Funds held or deposited with reinsured companies
  • Letters of Credit (LOC)
  • Amounts of assets pledged or collateral held in a trust
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13
Q

Funds held or deposited with reinsured companies

A
  • in this arrangement a portion of the premium due to the reinsurer is withheld by the insurer to pay claims
  • this structure has multiple benefits
    + reduces credit risk
    + reduces administrative burden of having to continually collect money from reinsurer to make payments
    + reinsurer gets paid interest
  • the funds are an asset to the reinsurer, and liability to the ceding company
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14
Q

Letters of Credit (LOC)

A
  • letter from the bank stating that it will pay if the reinsurer can not
  • reinsureds like this as 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
  • this form of collateral is expensive for the reinsurer
    + banks charge a fee, which will be higher during uncertain economic times
    + the LOC is a reduction to reinsurer’s line of credit (amount that is available for the reinsurer to borrow)
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15
Q

Amounts of assets pledged or collateral held in a trust

A
  • includes other forms of collateral

- under control of the reinsurer (unlike the prior two types)

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16
Q

Data reconciliation: Schedule F, Part 1 Column 5 Total (Written premium assumed)

A

Should match to totals of Column 2 (Reinsurance assumed from affiliates) and Column 3 (Reinsurance assumed from non-affiliates) in Part 1B of the U&IE

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17
Q

Data reconciliation: Schedule F, Part 1 Column 6 Total (Reinsurance recoverable on paid loss and LAE)

A

Reconciles to Page 3 (Balance Sheet, Liabilities page), Line 2 (Reinsurance payable on paid losses and LAE)

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18
Q

Data reconciliation: Schedule F, Part 1 Column 7 (Reinsurance recoverable on known case loss and LAE)

A

Does not reconcile with any exhibits. However, if the LAE is added to the U&IE Part 2A, Column 2 (Reported losses, the total should match Column 7.

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19
Q

Data reconciliation: Schedule F, Part 1 Column 9 (contingent commissions payable)

A

Should match the Reinsurance Notes to the Financial Statement “Reinsurance Assumed and Ceded”

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20
Q

Data reconciliation: Schedule F, Part 1 Column 10 Total (Assumed premiums receivable)

A

Included within Page 2, line 15 (Agents’ balances)

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21
Q

Data reconciliation: Schedule F, Part 1 Column 11 (Unearned premiums)

A

Included within Page 3, line 9 (Unearned premiums)

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22
Q

Data reconciliation: Schedule F, Part 1 Column 11 (Unearned premiums)

A

Should reconcile the Reinsurance Notes to the Financial Statement “Reinsurance Assumed and Ceded”

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23
Q

Schedule F, Part 2

A

Premium Portfolio Reinsurance Effected (or Cancelled) During Current Year; contains premium detail only

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24
Q

Why might companies enter into Portfolio Reinsurance arrangements?

A
  • Exit a certain type of business
  • Remove the risk/uncertainty associated with the liability off their books
  • Obtain surplus relief (via the discounted premiums)
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25
Q

Disadvantage to Portfolio Reinsurance arrangements

A

The reinsurer will require a risk premium to assume the risk.

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26
Q

Schedule F, Part 3

A

Ceded Reinsurance as of December 31, Current Year; most referenced exhibit in Schedule F; provides comprehensive listing of ceded balances by reinsurer, so the user can assess the credit risk.

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27
Q

Groupings for reinsurers in Schedule F, Part 3

A

Same as Part 1, except that it separately lists authorized and unauthorized reinsurers. In addition, protected cells are listed separately

28
Q

Protected cell

A

Essentially a separate company with its own assets and liabilities, but which has access to the parent’s capital. The advantage of this structure is that the liability is limited to the assets within the cell.

29
Q

Schedule F, Part 3 Column 5

A

Indicates individual contracts where over 75% of the premium is being ceded. It is not common to cede such a large portion of the business, as the insurer is designed to be a risk bearing entity. Regulators are there fore interested in the motives of these arrangements.

30
Q

Fronting carrier

A

When an insurer writes business and cedes a large part of it to another company (the “reinsurer”), in a state where the reinsurer is not licensed to do business. Regulators may be concerned that the reinsurer is exploiting this structure to avoid regulatory oversight.

31
Q

Cessions of more than 75% Subject Premium that are exempt from disclosure

A
  • 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
    + 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 surplus is ceded
    + Cessions to captive insurers that are regulated in their domiciliary state
32
Q

Footnotes to Schedule F, Part 3

A

Disclose the top five commission rates of contracts where ceded premium exceeds $50K. When reading these numbers, users should also refer to:

  • Column 14 (contingent commission receivable
  • Notes to Financial Statement on reinsurance assumed and ceded
33
Q

The contracts in Footnotes to Schedule F, Part 3 are listed because:

A

They generate large amounts of surplus relief. The footnotes can help identify companies that are using reinsurance to conceal a high operating leverage.

34
Q

Data reconciliation: Schedule F, Part 3 Column 6 (Reinsurance Premiums ceded)

A

Should tie to the sum of Columns 4 and 5 from Part 1B of the U&IE

35
Q

Data reconciliation: Schedule F, Part 3 Column 9 (Reinsurance recoverable on known case loss reserves)

A

Should tie to the sum of Column 3 from Part 2A of the U&IE

36
Q

Data reconciliation: Schedule F, Part 3 Column 10 (Reinsurance recoverable on known case LAE reserves)

A

Should tie to Schedule P, Part 1, Column 18

37
Q

Data reconciliation: Schedule F, Part 3 Column 11 (Reinsurance recoverable on IBNR loss reserves)

A

Should tie to the sum of Column 7 from Part 2A of the U&IE

38
Q

Data reconciliation: Schedule F, Part 3 Column 9 & 11 Totals

A

Should reconcile with total of Schedule P, Part 1, Columns 14 and 16

39
Q

Data reconciliation: Schedule F, Part 3 Column 12 (Reinsurance recoverable on IBNR LAE Reserves)

A

Should reconcile with the total of Schedule P, Part 1, Columns 20 and 22

40
Q

Data reconciliation: Schedule F, Part 3 Column 13 (Reinsurance recoverable on unearned premiums)

A

Should equal the parenthetical amount from Page 3, Line 9 (Reduction to gross UEPR from amount ceded). It should also tie to the Reinsurance Note to the Financial Statement, “Reinsurance Assumed and Ceded”.

41
Q

Data reconciliation: Schedule F, Part 3 Column 14 (Reinsurance recoverable on contingent commissions)

A

Should tie to the Reinsurance Note to the Financial Statement, “Reinsurance Assumed and Ceded”.

42
Q

Data reconciliation: Schedule F, Part 3 Column 16

A

Should tie to Page 3, Line 12, “Ceded reinsurance premiums payable (net of ceding commissions)”

43
Q

Data reconciliation: Schedule F, Part 3 Column 19

A

Ties to Page 3, Line 13

44
Q

Schedule F, Part 4

A

Aging of Ceded Reinsurance; same groupings as Part 3; groups recoverables by age overdue.

45
Q

To derive the due date to calculate the age of the recoverable

A

Use the following hierarchy:
- Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified
- Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified.
- The date at which the amount recoverable from a certain reinsurer exceeds $50K, and is entered into the insurer’s account as a paid recoverable.
If the aforementioned dates have not been mentioned and also if the recoverable is under $50K, the amount will be recorded as currently due.
Recoverables from mandatory pools and associations are always treated as currently due.

46
Q

Data reconciliation: Schedule F, Part 4 Column 11 (Total reinsurance recoverable on paid loss and LAE)

A

Reconciles to Schedule F, Part 3, Columns 7 plus 8; and also Page 2, line 16.1

47
Q

Formula for Provision for Reinsurance: Unauthorized Reinsurer

A

Provision = Unsecured total recoverables
+ 20% (paid recoverables over 90 days overdue
+ 20% (amounts in dispute)
Unsecured total recoverables includes amounts in dispute
Recoverables over 90 days excludes disputed balances, since they are accounted for separately

48
Q

Formula for Provision for Reinsurance: Authorized Slow Paying Reinsurer

A

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

Amounts in dispute are included in each of the above categories (the latter includes only the disputed balances over 90 days overdue)

49
Q

Formula for Provision for Reinsurance: Authorized Reinsurer, Not slow paying

A

Provision = 20% (paid recoverables over 90 days overdue

Recoverables over 90 days overdue includes disputed balances over 90 days overdue

50
Q

Schedule F, Part 5

A

Provision for Unauthorized Reinsurance

51
Q

Unauthorized reinsurers

A

Those that have not been authorized to write business in the jurisdiction. The provision is higher to reflect the fact that they are not regulated.

52
Q

What is the assumption behind the provision formula for unauthorized reinsurers?

A

Late payers and also those that dispute balances are more likely not to pay than other unauthorized reinsurers. Note that a high provision does not necessarily mean that there are collectability issues. The provision is capped at the total amount recoverable

53
Q

“Slow paying” reinsurer

A

A reinsurer is classified as slow paying if the ratio of recoverables over 90 days overdue, to (all recoverables on paid losses and LAE + amounts received in the last 90 days) >= 20%.
The reason to include the amounts received in the last 90 days in the denominator, is to avoid discouraging reinsurance claims settlement

54
Q

Schedule F, Part 6

A

Provision for Overdue Authorized Reinsurance; includes authorized non-slow paying reinsurers from Part 4 where the paid recoverable is overdue.

55
Q

Schedule F, Part 7

A

Provision for Overdue Reinsurance; calculates both:

  • Provision for overdue authorized slow paying reinsurers
  • Total Provision for Reinsurance liability (sum of the components), to be included in the Balance Sheet
56
Q

Schedule F, Part 8

A

Restatement of Balance Sheet to Identify Net Credit for Reinsurance; contains a summarized form of the balance sheet to restate to a gross basis. It indicates what the balance sheet would look like if the insurer did not have reinsurance. It consists of three columns:

  • 1: As Reported (Net of Ceded)
  • 2: Restatement Adjustments
  • 3: Restated (Gross of Ceded)
57
Q

Assets to be adjusted in Schedule F, Part 8

A
  • Reinsurance recoverable on loss and LAE payment (line 3): this will be reversed to produce a gross amount of 0
  • Net amounts recoverable from reinsurers (line 6): this is a balancing item that needs to be created so that the total adjustments on the assets side = the total adjustments on the liabilities side
58
Q

Liabilities to be adjusted in Schedule F, Part 8

A

Need to be adjusted to 0 gross amount
- Ceded reinsurance premiums payable (line 14)
- Funds held by the company under reinsurance treaties (Line 15)
- Provision for reinsurance (Line 17)
Adjusted to other values
- Losses & LAE (Line 9): adjusted by the amount ceded
- Unearned Premiums (Line 11): adjusted to the amount ceded (Schedule F, Part 3, Column 13)

59
Q

Data reconciliation: Ceded loss and LAE reserve adjustment in Schedule F, Part 8

A

Should tie to Schedule P, Part 1, Summary if the insurer does not participate in intercompany pooling. However if there is intercompany pooling, the two will not tie as:

  • Schedule P is net of pooling
  • Schedule F treats the pooling as reinsurance
60
Q

Changes to Schedule F in 2012

A
  • Added a new Part 6
  • Shifted original Parts 6-8 to 7-9 respectively
    Necessary to create a new category of reinsurer, certified reinsurer
61
Q

Certified reinsurer

A

These reinsurers, previously categorized as unauthorized, are those that have received certifications from the insurer’s domiciliary state. When determining whether to certify the reinsurer, regulators consider the reinsurer’s:
- Jurisdiction
- Financial position
- Capital & surplus
- Regulatory history
- Financial Strength Ratings
Receive a rating between 1-6 that determines how much capital they have to post

62
Q

Advantages of being certified instead of unauthorized

A
  • The insurer has a lower provision

- The reinsurer does not need to post as much collateral

63
Q

“New” Schedule F, Part 6

A
  • Section 1: Provision for reinsurance for certified reinsurers due to collateral deficiency (based on the total recoverables in excess of the credit allowed for the collateral)
  • Section 2: Provision for Overdue Reinsurance ceded to certified reinsurers
    Provision = min( max(0.2 * Overdue + 0.2 * Dispute, 0.2 * Net Unsecured recoverable for slow payers for which Credit is permitted), Credit permitted for Net Recoverable)
64
Q

Function of Schedule F

A
  • Identifies the portion of the gross losses that are from assumed reinsurance transactions
  • Helps estimated 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
65
Q

Criticism of how well Schedule F monitors solvency

A
  • The provision is formulaic, and therefore ignores management input (based on their knowledge of the reinsurers and contract terms)
  • The formula has no statistical, historical, or actuarial basis. It may therefore underestimate the credit risk
  • Unauthorized reinsurers 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 (and cause the true credit risk to be overlooked)
  • The costs of collateral requirements will be passed from reinsurers to insurers, ultimately increasing the cost to consumers
  • The Provision may limit the amount of competition in the US, due to the penalty associated with unauthorized European reinsurers
    Furthermore, Schedule F does not reveal anything about the reinsurer’s solvency.

CAS Exam 6 (10 decks)

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