Part 30 (AAA CE CL) Flashcards
Uncollectible Reinsurance Reserve (URR)
What could uncollectible balances have a material impact on for the insurer
Insurer’s Solvency
How is the URR reflected as
An offset to the ceded reserve balances
URR exits under which accounting principles
SAP and GAAP
Major Causes of Reinsurance Uncollectibility and how they may arise
- Credit Risk: because of the various risks that the reinsurer is exposed to
- Dispute Risk: because of difference in interpretation of contract provisions from insurer and reinsurer
How are Dispute Risks often settled
What may happen if dispute had been sided with insurer
- Via litigation or arbitration
- If decision is made in insurer’s favor, still possible that the reinsurer will still be unwilling or unable to pay
Minor Causes of Reinsurance Uncollectibility
- Insurer too aggressive (or cautious) in presenting claims in reimbursement
- Experience of insurer in processing ceded claims
- Experience of the reinsurer in handling the claims being presented
- Business relationship between insurer and reinsurer (if they are still have a contract, or if liabilities being seeded are just old ones)
- Commutations
2 main methods to estimate the URR
- Rating-Based approach: based on the financial strength ratings of the reinsurer
- Experience-Based: Based on historical write-offs
Keep in mind what about write offs and insurers
What would all insurers write off the same
What may differ in write offs
Different insurers have different definitions of write-offs
- All insurers would write off amounts billed but not yet collected that are deemed to be uncollectible
- Insurer may or may not write off ceded case
Rating Based Method
Insurer has $1,000 reinsurance recoverable
Insurer holds $400 in collateral
Estimates probability of default in reinsurance to be 1%
Calc the URR
(1000 - 400) * 1%
Where may default rates be based on
- AM Best financial strength ratings
- Rating agencies
- Historical Data
- Transition matrices
What to do with Rating Based method if multiple reinsurers
Calculate URR for each reinsurer then aggregate the results
How can URR Rating based calculations be improved
By accounting for the strength the collateral
Consider the possibility of the reinsurer defaulting over the lifetimes of the recovery
(courts may require collateral to be returned for other reasons)
Ceded balances in Rating Based calculations need to be what
why
Net of write-offs
so we don’t double count the uncollectibles
How is total credit loss determined
Add the amount written off with the default amount calculated
Transition Matric
Reflects that the financial strength of a reinsurer can change over time
Rating-based methods do not include a provision for what
Dispute, this would need to be loaded seperately
Apply the rating-based method to recoverable how
net of disputed balances, to avoid double counting
Load for dispute can be based on
- Industry Data
- Managements Judgement
- Insurer’s prior dispute related reinsurance write offs
2 adjustments to improve accuracy for Rating-Based Method in terms of default rates and recovery rate
- Default Rates if cumulative, may be better to use incremental (but very complicated)
- Incorporate a recovery rate
To generate an Experience-Based URR estimate:
- An experience based dispute rate could be based on the ratio of historical write-offs to total ceded billed over a multi-year period
- Apply this ratio to the current total balance
Experience Based
Insurer has written off 2% of historical receivables due to credit and dispute
Reinsurance Recoverable is $100,000
2% * 100,000
why is using a multi year period advantageous in experience based URR
Using a single year may understate
Multi year also reflects the volatility of economy and other factors
In order to implement the experience based URR method what does an insurance company need
Sufficient credibility
Potential Improvements for Experience based URR
- Account for Write-offs by billing lag year
- would account for the reinsurer deterioration over time - Account for development of write-offs
- More granular analysis of write-offs
- Vary by company, business, contract, etc - Use different experience-based default rates by line of business (similar to 3)
Challenges with Experience Based URR rating
- Data Availability (needs to be credible, no industry data to leverage)
- Past uncollectible rates may not indicate future uncollectible rates
- Historical write-offs could be influenced by individual events such as commutations and reinsurer insolvency
- Billing may occur over may years, difficult to estimate an ultimate uncollectible rate and timing of recoveries
- Difficult to account for the impact of collateral
- Data may require interpretation (like if gross or net)
- May be impossible to distinguish between credit and dispute related losses in the historical data