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Reinsurance Flashcards

1
Q

What are the six parts of schedule F?

A

1 - Assumed Reinsurance (premiums, losses, commissions, collateral)
2 - Premium Portfolio reinsurance (orig and reinsurance premiums)
3 - Ceded Reinsurance (Provision for Rein./RBC)
4 - Issuing or Confirming Banks for Letters of Credit
5 - Interrogatories for Schedule F, part 3 (commisison rates, loss recoverables)
6 - Restatement of Balance Sheet

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2
Q

Identify the groups/categories used in Schedule F, part 1 (row labels)

A

Affiliated Insurers
* U.S. intercompany pooling
* U.S. non-pool
* other (non U.S.)

Other U.S. Unaffiliated Insurers
Pools & Associations
* mandatory pools
* voluntary pools

Other Non-U.S. Insurers

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3
Q

Describe part 1 of Schedule F

A
  • Provides the total assumed reinsurance balances by reinsured
  • Enables an understanding of the risks associated with reinsurance transactions as of the current year.

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4
Q

Describe part 2 of Schedule F

A

Provides a detailed listing of portfolio reinsurance transactions effected or canceled during the current year
(Portfolio insurance is the transfer of policies-in-force, or the transfer of liabilities remaining on a block of the insurer’s business)

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5
Q

Describe part 3 of Schedule F

A
  • The first 20 columns detail the ceded reinsurance balances
  • Columns 21 through 36 calculate credit risk charge on ceded reinsurance
  • Columns 37 through 53 provide the aging of ceded reinsurance
  • Columns 54 through 69 provide the calculation of the Provision for Reinsurance for Certified Reinsurance
  • Columns 70 through 78 provide the Total Provision for Reinsurance (authorized, unauthorized, total)

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6
Q

Describe part 4 of Schedule F

A

Provides a listing fo the issuing or confirming banks for letters of credit as collateral reported in Schedule F, Part 3, Column 22
Confirming banks are those that provide a guarantee on a letter of credit such that the confirming bank will pay if the original bank issuing the letter of credit does not)

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7
Q

Describe Part 5 of Schedule F

A

Has 2 tables with interogattories for Part 3

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8
Q

Describe Part 6 of Schedule F

A

Restates the balance sheet Gross of reinsurance

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9
Q

Define funds held under reinsurance contracts

A

A portion of premium due to the reinsurer that is witheld by the ceding company to pay claims (Liability for the insurer, asset for the reinsurer)

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10
Q

Define Letter of Credit

A

A line of credit issued by a bank in favor of a reinsurer if the reinsurer is unable to fulfill its obligations

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11
Q

Define Portfolio Insurance

A

The transfer of policies in force, or transfer of liabilities remaining on a block of an insurer’s business

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12
Q

Why would an insurer enter into portfolio reinsurance?

A
  • Discontinue a line of business
  • Remove risk of the liabilities
  • Surplus Relief (in the form of discounted premium)

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13
Q

Identify 3 reasons an insurer would cede a large portion of their business to a reinsurer, besides fronting

A
  • Discontinue a line of business
  • Intercompany Cessions to share risk across related companies
  • Cession to a regulated pool

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14
Q

Why is schedule F an important tool in monitoring solvency for users of the Annual Statement?

A

Identifies gross Assumed Losses
Identifies Slow-Paying (Authorized) reinsurers for futhur scrutinty
Measures Significance of reinsurance against surplus
Provides Financial Strength information of reinsureds and reinsurers

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15
Q

What is the purpose of Schedule F Special Codes? What are they?

A

They Identify relationships of heightened importance to regulators

Special Code 2 Cessions of 75% or more of subject premium (indicator of fronting to avoid regulatory scrutinty)
Special Code 3 Counterparty Reporting Exception for Asbestos and Pollution Contracts
Special Code 4 IBNR Losses on Contracts in force prior to July 1, 1984 Exempt from: Statutory Provision for Unauthorized Reinsurance

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16
Q

What is a Reinsurance Provision?

A

a minimum reserve (calculated under SAP) that reflects estimated uncollectible reinsurance recoveries

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17
Q

Identify one asset and five liabilities on an insurance company’s balance sheet that comes directly from Schedule F?

A

Asset:
* Reinsurance Recoverable on Paid Loss & LAE

Liabilities:
* Reinsurance Payable on Paid Loss (when assuming reinsurance)
* Unearned Premium for Ceded Reinsurance
* Ceded Reinsurance Premiums Payable
* Funds held under Reinsurance Treaties
* Reinsurance Provision

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18
Q

How can Schedule F be used to monitor the solvency of an insurer?

A
  • Schedule F tracks reinsurance transactions, calculates a reinsurance provision, and shows the effect on the insurer’s balance sheet of cancelling all reinsurance contracts.
  • Quality of reinsurance impacts risks of uncollectibility from reinsurer, which impacts solvency of the insurer
  • (Schedule F only provides a narrow scope of solvency, because there are many other risks factors besides reinsurance)

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19
Q

What are strengths and weaknesses with using Schedule F as a solvency monitoring tool?

A

Strengths:
* RP is formulaic - easy to compare across years & companies
* RP is formulaic - hard to manipulate because inputs are numbers from financial statements
* RP accounts for reinsurer credit risk with penalties for unauthorized reinsurers (often foreign)
* RP accounts for reinsurer credit risk with penalties for slow-paying reinsurers
* Schedule F shows impact to surplus if reinsurance contracts are canceled

Weaknesses:
* RP is formulaic - may mask management’s better informed estimate of collectability risk
* RP is formulaic - but no statistical basis for formula - may not represent true collectability risk
* RP penalizes unauthorized reinsurers regardless of their financial strength
* RP penalizes slow-paying reinsurers regardless of their financial strength and slow-payer threshold is arbitrary
* In General: Schedule F doesn’t directly measure reinsurer’s solvency which is the true source of uncollectability risk
* In General: Schedule F doesn’t measure the quality of an insurer’s reinsurance management

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20
Q

How can Schedule F be enhanced to improve its capacity to monitor reinsurer credit risk?

A

Disclose details of reinsurance arrangements
Include management input of uncollectability risk
Include Reinsurer ratings
Replace 20% slow-pay threshold with a sliding scale and consider reasons for slow-pay

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21
Q

What is an unauthorized reinsurer?

A

An Unauthorized Reinsurer is one that does business where it is not legally permitted to do so
For Example, a reinsurer authorized to conduct business only in Maine would be unauthorized to sell reinsurance to an insurer in Texas

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22
Q

Formula for Reinsurance Provision for Unauthorized Reinsurers

A

RP = T - C + 20% x (P(N>90) + T(D))

T = Total Recoverable
C = Collateral (Offsets to RP)
P(N>90) = Recoverable not in dispute 90 days past due
T(D) = Total reinsurance recoverable in dispute

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23
Q

Slow paying ratio for authorized Reinsurers

A

SPR = P(N>90) / (P(N) + Received in past 90 Days)

P(N>90) = Recoverable not in dispute 90 days past due
P(N) = Total recoverable not in dispute

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24
Q

Formula for Reinsurance Provision for Authorized Reinsurers

A

If Not Slow-Paying
RP = 20% x (P(N>90) + P(D>90))

If Slow-Paying
RP = 20% x max(T - C, P(N>90) + P(D>90))

P(N>90) = Recoverable not in dispute 90 days past due
P(D>90) = Recoverable in dispute 90 days past due
T = Total Recoverable
C = Collateral

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25
Q

Define ‘Certifed Reinsurer’

A
  • non-U.S. reinsurers domiciled in a jurisdiction designated by the NAIC as a Qualified Jurisdiction (i.e., Bermuda, France, Germany, Ireland, Japan, Switzerland and the United Kingdom)
  • one that would have been categorized as unauthorized prior to 2012
  • one that has attained certification from the reporting entity’s domiciliary state

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26
Q

What does a regulator consider when evaluating an unauthorized reinsurer’s application for certification?

A

Jurisdiction of reinsurer
Rating from a rating agency
Regulatory History
Financial Positioin
C&S Capital and Surplus

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27
Q

What are the benefits of being certified (for reinsurers)

A

The Reporting entity is not penalized as heavily (= reinsurance provision is lower)
The Reinsurer can post collateral of less than 100% of its U.S. claims

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28
Q

Identify the two portions of the RP for Certifed Reinsurers.

A

Collateral Defficiency [RP64(CD)]

= A19(recov) - Cr63(recov)

A19(recov) = net amount recoverable from reinsurer

Cr63(recov) = credit allowed for net recoverables

Overdue Reinsurance [RP69(OR)]

= min[20% x MAX(PN90 + PD90, F), CR63(recov)]

Pd90 = recoverable on Paid loss loss & LAE > 90 days past due in dispute

Pn90 = recoverable on Paid loss & LAE > 90 days past due not in dispute

F = net unsecured recoverable for slow payers for which credit is permitted

Cr63(recov) = (Col 57) + (Col 58) x (Col 61)

(Col 57) = Catastrophe Recoverables Qualifying for Collateral Deferral (Whatever the heck that is…we’re just going to assume this equals 0!)

(Col 58) = Net Recoverables Subject to Collateral Requirements for Full Credit

(Col 61) = Percent Credit Allowed on Net Recoverables Subject to Collateral Requirements

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29
Q

Briefly Describe the 2 tables in Schedule F part 5

A

Table 1:
* Identifies 5 largest reinsurer commission rates (where ceded premium > $50,000)
* The purpose is to identify companies using reinsurance to conceal high operating leverage

Table 2:
* Identifies 5 largest loss recoverables from (Col 15) and whether the reinsurer is affiliated with the reporting entity
* The purpose is to assess concentration of insurance risk

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30
Q

Define Commutation

A

A commutation agreement is an agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsurance contract.

Klann

31
Q

Identify reasons for a commutation to occur

A

Solvency - insurer/reinsurer concerned about other’s solvency
Exit - commutation provides a way for the reinsurer (& potentially, eventually, for the primary insurer) to exit a particular market
Disputes - disagreements between parties over contract provisions
Reserves - primary/reinsurer potentially disagree about value of reserves (both may think they are getting a good deal under the commutation

Klann

32
Q

Why would a commutation occur for only one year? In other words, short commutation

A
  • Cash Infusion
  • Differences in opinions on reserves
  • Perhaps older accident year is more stable, primary willing to retain risk
  • Legal/regulator change
  • Reduce Credit risk
  • Trial run for future years
  • Exit certain markets, territories
  • Reduce Collateral required
  • Lower provision for reinsurance

Klann

33
Q

Who is the buyer in a reinsurance commutation?

A

The primary insurer is the buyer because they are receiving the liability back (even though they are receiving money)

Klann

34
Q

Loss reserves are generally discounted for {} accounting and undiscounted for {} accounting? {Tax/SAP}

A

Discounted for Tax purposes, nominal for SAP

Klann

35
Q

What are the steps in pricing a commutation?

A

Estimate the claim payments that would be made in the absence of commutations (reins. recov for insurer, loss reserves for reinsurer)
Discount the estimates
Tax effects
Unique considerations

Klann

36
Q

Identify 9 functions of reinsurance

A

Fronting Arrangements
CATatastraphe protection
Surplus relief and capital efficiency
Withdrawal from market
Internal reinsurance transactions
Pools - mandatory and voluntary
Large Line Capacity
Enter market and/or UW guidance
Stabilie Results

Cedar

37
Q

Name 2 conditions for a contract to receive reinsurance accounting treatment

A
  • Requires that a significant insurance risk is assumed by reinsurer (under reinsured portion of contract)
  • requries that a significant loss to the reinsurer is reasonably possible

Freihaut

38
Q

Name 2 components of insurance risk

A

U/W Risk - There must be uncertainty in the dollar-value of loss
Timing Risk - Refers to the timing of claims payments, there should not be any sort of predetermined payment schedule

Freihaut

39
Q

What are the implications for an insurer’s blance sheet if they cannot use reinsurance accounting (must use deposit accounting)?

A

The insurer cannot show reserves as ‘net’ of reinsurance recoverables, they get no capital credit for having reinsurance

Freihaut

40
Q

Why is determination of risk transfer important?

A
  • Cannot properly price a reinsurance contract without knowledge of how much risk is taken on
  • When contract qualifies as reinsurance, cedant may use reinsurance accounting treatment, which is more favorable than deposit accounting

Freihaut

41
Q

Name 4 methods of assessing the existence of risk transfer

A

Self-Evident - Qualitative
“Substantially All” Exception - Qualitative
Calculate Expected Reinsurer Deficit - Quantitative
10-10 Rule - Quantitative

Freihaut

42
Q

Describe “Self-Evident” Method of testing risk transfer

A
  • Is the transfer of risk self-evident?
  • Maybe potential loss is obviously very high, such as with hurricanes/earthquakes
  • Reasonably self-evident characterized as (i) transaction is doen at arms-length, (ii) no risk-limiting features
  • If payment schedule, then self-evident that no risk transfer

Freihaut

43
Q

Describe “Substatially All Exception” Method of testing risk transfer

A

If significant loss is not reasonably possible but reinsurer assumes substantially all risk, then risk transfer may still exist

Often applies to quota-share contracts with a high % transferred or individual risk contracts without LR caps or other risk-limiting features

Freihaut

44
Q

Describe Expected Reinsurer Deficit Method of testing risk transfer

A

ERD = prob(NPV reinsurer loss) x NPV(reinsurer loss)/reinsurance premium
* if ERD > 1%, then tehere has been transfer of risk

Freihaut

45
Q

Describe 10-10 rule Method of testing risk transfer

A

If reinsurer has >= 10% chance of >=10% UW loss, then the contract has transferred risk

Freihaut

46
Q

What is the reason for the ‘substantially all’ exception is risk transfer testing? / Identify 2 common examples of the ‘substantially all’ exception in risk transfer testing

A

To maintain access to reinsurance for profitable books of business

  • Quota Share Treaties with high % ceded
  • Individual Risk contracts with no loss capping features

Freihaut

47
Q

Identify the pitfalls in a risk transfer test

A

Profit commissions
Reinsurer expenses
Interest rates
Commutation timing
Evaluation date
Premiums

Freihaut

48
Q

Identify considerations in selecting a discount rate for a risk transfer test

A
  • Equal in duration to that of the reinsurer’s net cash flows
  • Risk Free rate as its minimum or floor (if lower, rate may over detect risk, or vice versa)
  • Should be the same rate for all cash flows
  • Use of interest rate from US treasure department
  • Should be reasonable (per SSAP 62)
  • Should not include non-UW risk (for example, should not incorporate a provision for credit risk,interest rate risk, etc…)

Freihaut

49
Q

Why is the evaluation date important in a risk transfer test?

A

Risk transfer is done at the evaluation date based on circumstances, facts known at the time

Freihaut

50
Q

Practical Considerations in a risk transfer test

A

Paramater selection (interest rate, payment-pattern, loss distribution)
Parameter risk
Pricing Assumptions
Commutation clause

Freihaut

51
Q

Under new rules (2020) how must uncollectible reinsurance be established?

A

They must be established based on anticipated ultimate uncollectible amounts.

AAA Uncollectible

52
Q

What are the current (previous?) approaches to determining Uncollectable Reinsurance Reserve?

A
  • Incurred Loss Model - Include only known impairments
  • Expected Loss Model - Include ultimate of all uncollectable reinsurance

AAA Uncollectible

53
Q

What are the primary causes of reinsurance uncollectibility?

A
  • Credit Risk (inability to pay)
  • usually due to either impairment or insolvency
  • Dispute Risk (unwillingness to pay)
  • *Could be due to following:
  • Unique exposures (alien invasion from Mars)
  • Rare events (squirrel steals your sandwich)
  • Provisions untested in the courts (future self travels back to dump water on your head)
  • Circumstance not contemplated by the contract (Worldwide pandemic)*

AAA Uncollectible

54
Q

Name some specific situations where contract disputes can occur

A
  • Missing Policies
  • Late Notice of Claim
  • Settlements made without first consulting with the reinsurer
  • Definition of an “Occurence”

AAA Uncollectible

55
Q

Does a reinsurer default imply that 100% of the associated reinsurance recoverable should be written off?

A

No, some reinsurers may partially or fully recover and pay some or all amounts previously in default

AAA Uncollectible

56
Q

When would you use incremental default rates rather than cumulative default rates

A

Use incremental default rates when future ceded balances are projected on a runoff basis

AAA Uncollectible

57
Q

How is the cumulative probability of default by rating estimated?

A
  • A.M. Best Financial Strength ratings and associated probability of impairment
  • Insurer’s history of reinsurer default rates by internal rating
  • transition matrices

AAA Uncollectible

58
Q

How is the Uncollectible Reinsurance Reserve provision for disputes treated in a rating-based method?

A

Calculate dispute provision by considering any or all of:
* Insurer’s prior dispute-based reinsurance write-offs
* Industry data to the extent available and relevant
* Management’s judgment

AAA Uncollectible

59
Q

How can double-counting be avoided when estimating Uncollectible Reinsurance Reserve?

A

Apply the URR rating-based method to the reinsurance recoverable net of the calculated dispute provision

AAA Uncollectible

60
Q

What are the two methods of estimating URR?

A
  • Rating based (basically calculate expected recoverable by expected default by rating and by year, multiply together)
  • Experience based (simple: have ratio of all unrecovered over last sever years by total recoverable, multiply by future year; enhanced, add write-offs over time by billing lag year, reinsurance structure (quota, excess of loss, etc…), LOB))

AAA Uncollectible

61
Q

When is it appropriate to use experience-based methods?
What are the challenges associated with experience-based URR methods?

A

Appropriate when an insurer’s writeoff history has sufficient credibility
* Thin data
* Past Uncollectible rates may not be indicative of future uncollectible rates
* Experience-based uncollectible rates can be distorted by individual events (commutations, reinsurer insolvency)
* (more are listed in the text)

AAA Uncollectible

62
Q

Define Prospective Reinsurance
Define Retroactive Reinsurance

A

A reinsurance contract in which coverage is provided for future losses on insurable events
A reinsurance contract in which coverage is provided for losses from insurable events that may have occurred in the past

SSAP-62R

63
Q

Describe the accounting treatiment of prospective and retroactive reinsurance according to SAP

A

Prospective Reinsurance
* If there is a claim then loss reserves increase

Retroactive Reinsurance
* If there is a claim then loss reserves do not increase
* the claim amount is recorded as a write-in liability

SSAP-62R

64
Q

Define Novation

A
  • A novation is an issuance of a new contract
  • A novation releases the primary insurer of all liability
  • A novation may be eligible for reinsurance accounting treatment but not in these situations: (Retroactive reinsurance, novation with an affiliated company)

SSAP-62R

65
Q

What is a runoff agreement?

A

An agreement underwhich an insurer cedes 100% of LOB to a third party and no longer marketing, but still liable if 3rd party defaults (unlike under novation, which liability is completely transferred

SSAP-62R

66
Q

Identify items a regulator might consider before approving a reinsurance accounting treatment for a runoff agreement

A
  • Reinsurer is properly licensed
  • Contract must meet normal risk transfer requirements
  • Policy limits and coverage don’t change
  • Reinsurere must be rated at least as high as cedant by 2 different rating agencies

SSAP-62R

67
Q

Define Financial Guarantee

A

Non-Cancellable indemnity bond backed by an insurer to guarantee investors that principal and interest payments will be made (in other words, it covers a lender from the liability resulting from the borrower defaulting on a loan)

FASB 944

68
Q

What is a retrospectively rated contract?

A
  • a contract where the final premium is based on the loss experience of the policy
  • includes loss development after expiration
  • final premium is determined by a formula written into the policy or by law

SSAP-66

69
Q

What is a term for a contract that has retrospective features?

A

Loss Sensitive Contract

SSAP-66

70
Q

Are premium adjustments due “to” or “from” insureds considered to be admitted assets?

A

yes, but with certain exceptions, like if amounts are deemed uncollectible

SSAP-66

71
Q

Briefly describe 2 ways of estimating retrospective premium adjustments

A

[1] apply the historical ratio of (retrospective rated developments)/(earned standard premium) to the premium for the policy being rated
[2] for each risk, compare known to anticipated loss development (including IBNR) to estimate return or additional premium earned at that point in time

SSAP-66

72
Q

Briefly describe the accounting treatment of “accrued additional” & “accrued return” retrospective premium

A

accrued additional retrospective premium
→ record as a receivable
→ with a corresponding entry in written premium or an adjustment to earned premium
accrued return retrospective premium
→ record as a liability (as a change in unearned premium)
→ with a corresponding entry in written premium or an adjustment to earned premium (same as for accrued additional premium)

SSAP-66

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