Odomirok Ch 14: Schedule F

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 reinsureds 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 Direct Premium Written):

Answer 13

• 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

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

Define a certified reinsurer

Answer 15

non-U.S. based reinsurers that are domiciled in jurisdictions that
are designated by the NAIC as a Qualified Jurisdiction (Bermuda, France, Germany,
Ireland, Japan, Switzerland and the U.K.) that have applied for and received
“certification” from the insurer’s domiciliary state.

Question 16

What do regulators consider when determining whether to certify a reinsurer?

Answer 16

• Jurisdiction
• Financial Position
• Capital & Surplus
• Regulatory History
• Financial Strength Ratings from recognized rating agencies

Question 17

Benefits of having a certified reinsurer

Answer 17

• The insurer has a lower Provision (the formula for the Provision is provided in the
  next section)
• The reinsurer does not need to post as much collateral