Part 30 (AAA CE CL)

Question 1

What could uncollectible balances have a material impact on for the insurer

Answer 1

Insurer’s Solvency

Question 2

How is the URR reflected as

Answer 2

An offset to the ceded reserve balances

Question 3

URR exits under which accounting principles

Answer 3

SAP and GAAP

Question 4

Major Causes of Reinsurance Uncollectibility and how they may arise

Answer 4

• 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

Question 5

How are Dispute Risks often settled

What may happen if dispute had been sided with insurer

Answer 5

• 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

Question 6

Minor Causes of Reinsurance Uncollectibility

Answer 6

• 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

Question 7

2 main methods to estimate the URR

Answer 7

• Rating-Based approach: based on the financial strength ratings of the reinsurer
• Experience-Based: Based on historical write-offs

Question 8

Keep in mind what about write offs and insurers

What would all insurers write off the same

What may differ in write offs

Answer 8

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

Question 9

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

Answer 9

(1000 - 400) * 1%

Question 10

Where may default rates be based on

Answer 10

• AM Best financial strength ratings
• Rating agencies
• Historical Data
• Transition matrices

Question 11

What to do with Rating Based method if multiple reinsurers

Answer 11

Calculate URR for each reinsurer then aggregate the results

Question 12

How can URR Rating based calculations be improved

Answer 12

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)

Question 13

Ceded balances in Rating Based calculations need to be what

why

Answer 13

Net of write-offs

so we don’t double count the uncollectibles

Question 14

How is total credit loss determined

Answer 14

Add the amount written off with the default amount calculated

Question 15

Transition Matric

Answer 15

Reflects that the financial strength of a reinsurer can change over time

Question 16

Rating-based methods do not include a provision for what

Answer 16

Dispute, this would need to be loaded seperately

Question 17

Apply the rating-based method to recoverable how

Answer 17

net of disputed balances, to avoid double counting

Question 18

Load for dispute can be based on

Answer 18

• Industry Data
• Managements Judgement
• Insurer’s prior dispute related reinsurance write offs

Question 19

2 adjustments to improve accuracy for Rating-Based Method in terms of default rates and recovery rate

Answer 19

• Default Rates if cumulative, may be better to use incremental (but very complicated)
• Incorporate a recovery rate

Question 20

To generate an Experience-Based URR estimate:

Answer 20

• 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

Question 21

Experience Based

Insurer has written off 2% of historical receivables due to credit and dispute

Reinsurance Recoverable is $100,000

Answer 21

2% * 100,000

Question 22

why is using a multi year period advantageous in experience based URR

Answer 22

Using a single year may understate

Multi year also reflects the volatility of economy and other factors

Question 23

In order to implement the experience based URR method what does an insurance company need

Answer 23

Sufficient credibility

Question 24

Potential Improvements for Experience based URR

Answer 24

1. Account for Write-offs by billing lag year
   - would account for the reinsurer deterioration over time
2. Account for development of write-offs
3. More granular analysis of write-offs
   - Vary by company, business, contract, etc
4. Use different experience-based default rates by line of business (similar to 3)

Question 25

Challenges with Experience Based URR rating

Answer 25

• 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