Odomorik 14: Schedule F

Question 1

Provision for reinsurance

Answer 1

Minimum reserve for uncollectable reinsurance; liability on balance sheet

Question 2

Schedule F Part 1

Answer 2

Assumed reinsurance

Question 3

Schedule F Part 2

Answer 3

Portfolio reinsurance

Question 4

Schedule F Part 3

Answer 4

Ceded Reinsurance

Question 5

Schedule F Part 4

Answer 5

Aging of ceded reinsurance

Question 6

Schedule F Part 5

Answer 6

Unauthorized reinsurance

Question 7

Schedule F Part 6

Answer 7

Overdue authorized reinsurance

Question 8

Schedule F Part 7

Answer 8

Slow paying authorized reinsurance

Question 9

Schedule F Part 8

Answer 9

Restatement of balance sheet

Question 10

Balance sheet sections populated from schedule F

Answer 10

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

Question 11

Contingent commissions

Answer 11

Based on profit of ceded business

Question 12

Funds held or deposited with reinsured companies

Answer 12

Portion of premium due to reinsurer is withheld; reduces credit risk, administrative burden, reinsurer gets interest

Question 13

Letters of Credit

Answer 13

Bank assumes risk of reinsurer not paying; expensive for reinsurer (reduction to line of credit, fees)

Question 14

Portfolio reinsurance

Answer 14

Used to exit a LOB, obtain surplus relief, remove risk from books

Question 15

Protected cell

Answer 15

Essentially separate company with own assets and liabilities, but access to parent’s capital

Question 16

Fronting carrier

Answer 16

Ceding more than 75% of the premium to an insurer not licensed for business in the state

Question 17

Footnotes to Schedule F, Part 3

Answer 17

Top five commission rates of contracts where ceded premium > $50K

Question 18

Surplus relief

Answer 18

WP * ceding % * commission rate

Question 19

Age of recoverable

Answer 19

Hierarchy:

1. Terms of contract specifying payment date
2. Terms of contract specifying report date
3. Date at which recoverable > $50K
4. Currently due

Question 20

Provision for unauthorized reinsurer

Answer 20

Unsecured total recoverables + 0.2*(paid recoverables > 90 days or in dispute)
Unsecured includes amounts in dispute

Question 21

Provision for authorized slow-paying reinsurer

Answer 21

0.2*max (unsecured total recoverables, paid recoverables over 90 days due)
includes amounts in dispute

Question 22

Provision for authorized non-slow-paying reinsurer

Answer 22

0.2*(recoverables over 90 days overdue)

includes disputed balances over 90 days overdue

Question 23

Slow paying ratio

Answer 23

(Recoverables > 90 days overdue) / (Total recoverables + amounts received in past 90 days)

Question 24

Total recoverables

Answer 24

Unpaid recoverables (paid, case, IBNR) + UEPR + commissions

Question 25

Certified reinsurer

Answer 25

Rated 1-6; lower number, less needed collateral

Question 26

Provision for certified reinsurer, section 1

Answer 26

Collateral deficiency = (1 - Posted/Required)*Recoverables

Question 27

Provision for certified reinsurer, section 2

Answer 27

Min[0.2*Max[ (Overdue + Dispute, unsecured recoverable)], credit permitted for net recoverable)]

Question 28

Criticisms of Schedule F

Answer 28

Provision ignores management input; no statistical basis; “unauthorized” not bad; no speaking to financial strengths of reinsurers; false level of precision; may limit competition within US

Question 29

GAAP handling of provision for reinsurance

Answer 29

Does not have one

Question 30

SAP treatment of provision for reinsurance

Answer 30

Additional liability; lowers the surplus

Question 31

When provision for reinsurance may be insufficient

Answer 31

Estimates of eventual losses are too low (penalty not harsh enough)

Question 32

How provision for reinsurance encourages solvency

Answer 32

Encourages insurers to demand prompt payment; encourages insurers to require collateral

Question 33

How provision for reinsurance may damage company’s ability to stay solvent

Answer 33

Authorized over unauthorized not always better

Costly to obtain LOCs – may have to increase rates