Part 7 (Odomirok 14) (***) Flashcards
*** Derivation of the Prov for Reins. | *** Schedule F parts | *** Part 3 of F
Provision for Reinsurance
Minimum Reserve that the insurer must establish for potentially uncollectible reinsurance.
Provision for Reinsurance is booked as what in the Balance Sheet
Liability
Main purpose of Schedule F
Deriving the Provision for Reinsurance
How does the Provision of Reinsurance reflect SAP accounting
It reflects the conservative nature. Since even though the insurer needs to hold this amount as a liability, this amount specified by the provision may still be fully collected.
If provision for reinsurance is minimum, what to do when it is believed the higher amount indicated is appropriate.
Hold additional reserves
Record the additional amount in the Income Statement by reversing the accounting transactions that reflect the reinsurance recoverable.
Why is the Provision of Reinsurance important in creating the Statement of Actuarial Opinion
> Need to comment on the reasonableness of the Loss & LAE reserves in statement. Reserves include business the insurer has assumed, Schedule F provides info on the assumed reinsurance that could be helpful
> Loss & LAE reinsurance are net of reinsurance, so collectability of recoverables is important. Schedule F helps understand the collectability ability.
> In statement, need to disclose and comment on the amount of reserves from participation in pools & organizations. Schedule F Part 1, contains info on these reserves.
Structure and Parts of Schedule F
Part 1: Assumed Reinsurance at end of year
Part 2: Premium Portfolio Reinsurance Effected during Year
Part 3: Ceded Reinsurance at end of year
Part 4: Issuing or confirming banks for letters of credit (LOC) from part 3
Part 5: Interrogatories for part 3
Part 6: Reinstatement of Balance Sheet to Identify Net Credit for Reinsurance
Schedule F Part 1
Shows assumed Reinsurance at end of year
Groups of Reinsureds S.F/P.1
Affiliated Insurers
- U.S. Intercompany Pooling
- U.S. Non Pool - Captive
- U.S. Non Pool - Other
- Other (Non U.S.) - Captive
- Other (Non U.S.) - Other
Other U.S. Unaffiliated insurers
Pools & Associations
- Mandatory Pools
- Voluntary Pools
Other Non-U.S. Insurers
Contingent Commissions S.F/P.1/C.9
Contingent Commissions are based on the profit of the ceded business.
Premium (C.10) * Ceding Commission = (C.9)
Security S.F/P.1
> Funds held or deposited with reinsured companies: Portion of premium due to reinsurer is withheld by insurer to pay claims
> Letters of Credit (LOC): Letter from bank stating it will pay if the reinsurer can not
> Amounts of assets pledged or collateral held in trust: Under control of reinsurer
Funds held or deposited with reinsured companies
Portion of premium due to reinsurer is withheld by insurer to pay claims
Benefits:
- Reduces credit risk
- Reduces administrative burden of having to continually collect money from reinsurer to make payments
- Reinsurer gets paid interest
Funds booked as assets to reinsurer, and liability to ceding company
Letters of Credit LOC
Letter from bank saying it will pay if the reinsurer can not
- Good for reinsureds since a bank is not part of the estate of the insolvent reinsurer, so will not be tied up in the event of a bankruptcy
- Expensive for the reinsurer
- Banks change a fee, which will be higher during uncertain economic times
- LOC is a reduction to reinsurer’s line of credit (amount that is available for the reinsurer to borrow)
Amounts of assets pledged or collateral held in trust
Under control of the reinsurer (unlike the prior two types)
Schedule F Part 2
Portfolio Reinsurance effected (or cancelled) during current year
New contracts or canceled contracts only
If contract already enforced at start of year and still enforce at end, not listed here
What is portfolio reinsurance
In schedule F part 2.
Reinsurance of an entire class of business
Reconcile Column 5 total (Written premium assured) S.F/P.1
Column 2 (Reinsurance assumed from affiliates) + Column 3 (Reinsurance assumed from non affiliates)
Columns from Part 1B of the UW & Investment Exhibit
Reconcile Column 6 (Reinsurance recoverable on paid loss & LAE) S.F/P.1
Page 3 (Balance Sheet, Liabilities page), Line 2 (Reinsurance payable on paid losses and LAE)
Reconcile Column 7 (Reinsurance recoverable on known case loss & LAE) S.F/P.1
None
If LAE is added to UW and Investment Exhibit, Part 2A, Col 2 (Reported Losses), total should match
Reconcile Column 9 (Contingent commissions payable) S.F/P.1
Reinsurance Notes to the Financial Statement, “Reinsurance Assumed and Ceded”
Reconcile total Column 10 (Assumed premiums recievable) S.F/P.1
Page 2, line 15 (Agent’s Balances)
Reconcile Column 11 (Unearned premiums) S.F/P.1
Page 3, Line 9 (Unearned premiums)
And
Reinsurance Note to the Financial Statement, “Reinsurance Assumed and Ceded”
Why would you want to get Portfolio Reinsurance
Exit a certain type of business
Remove the risk/uncertainty associated with the liability
Surplus relief
Disadvantage of Portfolio Reinsurance
Reinsurer will charge the insurer a risk premium in order to assume the risk
Schedule F Part 3
Ceded Reinsurance
Why is Schedule F Part 3 important
Provides a comprehensive listing of ceded balances by reinsurer
- Helps assess the insurer’s credit risk
- By calculating the Provision for Reinsurance and Credit Risk Charge for reinsurance recoverable (RBC)
What Columns in Schedule F Part 3 indicate types of reinsurance recoverables
Columns 7-16
Columns 7-8 S.F/P.3
Recoverable on paid losses
How much the reinsurance company owes to the seeding company for those losses
Booked as an Asset in the seeding company
Columns 9-12 S.F/P.3
Recoverable on unpaid
Loss reserves established by seeding company, how much is due from the reinsurance company
How does seeding company recognize this? When calculating gross reserves it will net out the amount reimbursed by the reinsurance company. This increases Surplus. The provision will account for what may not be collected, to balance down surplus.
Column 13 S.F/P.3
Recoverable on premium
Contract may be cancelled during period. Then unearned portion needs to be refunded to seeding company.
Seeding company books this by netting these recoverable from its gross on a premium reserve.
Column 14 S.F/P.3
Contingent Commissions receivable
Will pay a commission based on the probability of the book to seeding company.
Column 15
Total Recoverable
Identify various components and add them together
Column 16
Balances from column 15 that are in dispute
What is Provision for reinsurance closely related to
Credit Risk
RBC Charge is based upon
Whether or not the recoverables are collateralized
- Since collateral is a form of security, if it is collateralize, less credit risk
Reinsurer Designation Equivalent Category
- Based on Credit rating of reinsurance company
Secure 1 Credit Rating
Collateralized 3.6% Uncollateralized 3.6%
Secure 2 Credit Rating
Collateralized 4.1% Uncollateralized 4.1%
Secure 3 Credit Rating
Collateralized 5% Uncollateralized 5.3%
Secure 4 Credit Rating
Collateralized 5% Uncollateralized 7.1%
Vulnerable 6 or Unrated
Unauthorized Reinsurers
Collateralized 5% Uncollateralized 14%
Unrated Authorized Reinsurers (7)
Collateralized 5% Uncollateralized 10%
Stressed Total Recoverable Formula
Stressed Total Recoverable = 120% * (Total Reins. Recoverable - Provision)
Stressed Net Recoverable Formula
Stressed Total Recoverable - Funds Held - Reins Payable
Credit Risk collateralized Formula
Collateralized charge factor * Toal Collateral
Credit Risk uncollateralized
Uncollateralized charge factor * (Stressed Net Recoverable - Total Collateral)
if Stressed Net Recoverable - Total Collateral < 0 set to 0
Columns 37 - 43 S.F/P.3
Aging of Ceded Reinsurance
-Required to generate the Provision for Reinsurance
-Good for assessing the level of credit risk
Hierarchy to determine due date of recoverable
i. Terms of the reinsurance contract that specify when the reinsurer needs to pay
ii. Terms of the reinsurance contract that specify when the insurer needs to report the claim to reinsurer - when report due, contract also due
iii. Date at which the amount recoverable from a certain reinsurer exceeds $50K
iv. Currently due
Recoverables from mandatory pools & associations always as currently due
Reconcile Cols 9 & 11 S.F/P.3
Schedule P, Part 1, Cols 14 & 16 respectively
Reconcile Col 10 S.F/P.3
Schedule P, Part 1, Col 18 (since Col 10 excludes AAO)
Reconcile total of Col 12 S.F/P.3
Total of Schedule P, Part 1, Cols 20 & 22
What is the provision of reinsurance based on
SAP accounting
Type of insurer
>Authorized
- Non Slow paying (lowest provision)
- Slow Paying
> Unauthorized (Highest provision)
> Certified
Authorized Non-Slow Paying Insurer
Authorized: Reinsurance company that is in the US
Non Slow paying authorized formula = [ Recoverable on Paid 90 days over due (o/d) (Col 40 + 41) - Disputed > 90 days o/d (Col 45) ] / [ Recoverable on paid not in dispute (Col 43 - 44) + Amounts received in last 90 days (Col 48) ] < 20%
Provision = 20% * (Paid Recoverables over 90 days overdue)
Non-Slow paying Authorized formula
[ Recoverable on Paid 90 days over due (o/d) (Col 40 + 41) - Disputed > 90 days o/d (Col 45) ]
/
[ Recoverable on paid not in dispute (Col 43 - 44) + Amounts received in last 90 days (Col 48) ]
<
20%
- Must be less than 20%
- Excludes disputed balances altogether. If recoverable on paid that include dispute, exclude it.
- Recoverable on paid losses. If given total, make sure only using paid
Authorized Non-Slow Paying Provision
20% * (Paid Recoverables over 90 days overdue)
- Recoverables over 90 days overdue include disputed balances over 90 days overdue
Authorized Slow Paying Reinsurer
Authorized: Reinsurance company that is in the US
If formula is >= 20%
[ Recoverable on Paid 90 days over due (o/d) (Col 40 + 41) - Disputed > 90 days o/d (Col 45) ]
/
[ Recoverable on paid not in dispute (Col 43 - 44) + Amounts received in last 90 days (Col 48) ]
Authorized Slow Paying formula
[ Recoverable on Paid 90 days over due (o/d) (Col 40 + 41) - Disputed > 90 days o/d (Col 45) ]
/
[ Recoverable on paid not in dispute (Col 43 - 44) + Amounts received in last 90 days (Col 48) ]
> = 20%
Authorized Slow Paying Provision
max(20% * Unsecured Total Recoverables, 20% * Paid Recoverables Over 90 days overdue)
- Unsecured Total Recoverables = Total Recoverables - Funds Held, Payables & Collateral
- Always greater than 0. Otherwise set to 0
- Total Recoverables = recoverables on paid, reecoverables on unpaid, unearned premium reserves, contingent commissions
- Amounts in dispute are included in each of the above categories
Unauthorized reinsurer
Foreign reinsurance companies
Assumed to have higher credit risk, and therefore higher provision
May not have same regulation, which is why higher credit risk
Unauthorized Reinsurer Provision
Unsecured Total Recoverables (include all dispute) + .2 * Paid recoverables over 90 days (exclude all dispute) + .2 * Amounts in Dispute (includes dispute)
- Provision is capped at total amount recoverable
- Provision minimum is 0
Certified Reinsurer
Closely Related to Unauthorized companies, but a bit safer.
Foreign but domiciled in NAIC qualified jurisdiction that have received certification from the insurer’s domiciliary state
Receive rating from 1 - 6 which impacts the amounts of capital that they have to post.
How does the rating from 1-6 impact Certified Reinsurers
The riskier they are on this scale, more collateral they need to post
Certified Reinsurer components for provision
2 components
> Provision due to Collateral deficiency
> Provision for overdue reinsurance
Certified Reinsurer Provision due to Collateral Deficiency
Provision = Net recoverable from reinsurer - Amount of Credit allowed for net recoverables
Net recoverable from reinsurer = Total Recoverable - Reinsurance Payable
Credit Allowed for Net Recoverables = Catastrophic recoverables qualifiying for collateral deferral + (Net Recoverable - Catastrophic recoverables qualifying for collateral deferral) * % of collateral provided / % of collateral required for full credit
Credit allowed for net recoverables shortcut = Net recoverable * % of collateral provided / % of collateral required for Full credit
% of collateral provided = (Funds Held + Collateral) / (Net recoverable - Catastrophic recoverable qualifying for collateral deferral)
% of collateral provided shortcut = (Funds Held + Collateral) / Net recoverable
Certified Reinsurer Provision for Overdue Reinsurance
Min ( .2 * Max [ Paid Recoverables > 90 O/D + Disputed Balances > 90 O/D , Credit - Collateral & Funds Held ] , Credit )
> Credit - Collateral & Funds Held is only calculated if slow paying reinsurer
Schedule F Part 4
Lists Issuing or Confirming Banks that issued the LOC state in Part 3 col 22
> Confirming bank is one which will guarantee the LOC in the event that the Issuing bank does not.
Schedule F Part 5
Interrogatories for this schedule
Contains two tables
Table 1 of S.F/P.5
Five Largest Commission rates of cedant’s reinsurance treaties of the contracts where ceded premium exceeds $50K
Why Identified?
> Can generate large surplus relief. So, if reinsurance contract cancelled, insurance company is still in good shape.
> Help identified companies that are using reinsurance to conceal a high operating leverage
Table 2 of S.F/P.5
Five largest total recoverables from reinsurers (from part 3)
Why identified?
> Helps regulator assess if huge recoverables from specific insurance company will be payable. So needs to be a strong company
Schedule F Part 6
Restatement of Balance Sheet to Identify Net Credit for Reinsurance
> Contains a summarized form of the balance sheet to restate to a gross basis
The 3 columns in S.F/P.6
1: As Reported (Net of Ceded)
2: Restatement Adjustments (adjustments made to assets and liabilities)
3: Restated (Gross of Ceded)
Adjustments to Assets S.F/P.6
Only 2 assets need to be adjusted
> Reinsurance recoverable on loss & LAE payment (line 3)
- Reversed to produce a gross amount of 0
- Adjust this first, then go to liability side, then go to line 6
> Net amounts recoverable from reinsurers (line 6)
- Balancing item
- Total adjustments on the assets side = the total adjustments on the liability side
Hint: Adjustments have reinsurance in the name
Adjustments to Liabilities S.F/P.6
Liabilities adjusted to 0:
> Ceded reinsurance premiums payable (line 14)
> Funds held by the company under reinsurance treaties (line 15)
> Provision for Reinsurance (line 17)
Hint: adjust to 0 with reinsurance in the name (liab)
Liabilities adjusted to other values:
> Losses & LAE (line 9)
- Adjusted by the amount ceded
> Unearned Premiums (line 11)
- Adjusted by the amount ceded S.F/P.3/C.13
Criticisms of Schedule F
> Ignores management input since provisions are only based off formulas
> No statistical, historical, or actuarial basis
> The many calculations and vast amount of detail may make you overconfident in your precision.
> Discourages unauthorized reinsurance, which may provide higher quality protection and/or at lower prices
> Provision may limit amount of competition in the U.S
> Slow payers will normally receive higher provision even though they may be financially strong and eventually pay. Faster payers may not be able to withstand a stress event.
> Schedule F does not show anything about reinsurer’s solvency
> Costs of collateral requirements will be passed from reinsurers to insurers then to policyholders
