Reinsurance

Question 1

F.1

Answer 1

Assumed reinsurance: total balances of premium, loss, commissions, collateral to enable an understanding of risk associated with reinsurance for the year

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

Question 2

F.2

Answer 2

Premium portfolio reinsurance: detailed listing of portfolio reinsurance transactions effected or canceled

Values of collateral show up in F.3 column 22

Question 3

F.3 general

Answer 3

Ceded reinsurance, 78 columns, calculation of provision for reinsurance

Question 4

F.3 page 1

Answer 4

Cols 1-20: detailed ceded reins balances; Col 20 is funds held

Question 5

F.3 page 2

Answer 5

Cols 21-36: calculate change in credit risk on ceded

Question 6

F.3 page 3

Answer 6

Cols 37-53: aging of ceded reins

Question 7

F.3 page 4

Answer 7

Cols 54-69: calculate Provision for Reinsurance for Certified Reinsurance

Question 8

F.3 page 5

Answer 8

Cols 70-78: Total Provision for Reinsurance: authorized, unauthorized, and total

Question 9

F.4

Answer 9

Issuing (primary claim) or confirming (secondary claim) letters of credit from banks as collateral

Question 10

F.5

Answer 10

Interrogatories: commission rates, loss recoverables, and a calculation of surplus relief and IRIS 2

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

Question 11

F.6

Answer 11

Restatement of balance sheet gross of reinsurance

Question 12

Groups or categories used in SchF.1 (row labels)

Answer 12

Affiliated insurers (US intercompany pooling, US non-pool, other (non-US))
Other US unaffiliated insurers
Pools and associations (mandatory, voluntary)
Other non-US insurers

Question 13

Contingent commission

Answer 13

Profit commission payable to ceding insurer contingent on profitability of reinsurance contract - excluded from normal commissions payable

Question 14

identify 2 forms of security a ceding insurer might require of a reinsurer and the purpose

Answer 14

forms of security:
- funds held, letter of credit
purpose:
- reduces credit risk

Question 15

Funds held

Answer 15

a portion of the premium due to the reinsurer that is withheld by the ceding company to pay claims (liability for insurer, asset for the reinsurer)

Question 16

Letter of credit

Answer 16

a credit issued by a bank in favor of reinsured in case the reinsurer cannot meet obligations

Question 17

Portfolio reinsurance

Answer 17

a transfer of policies in-force or the transfer of liabilities remaining on a block of the insurer’s business

Question 18

Reasons for portfolio reinsurance (3)

Answer 18

Discontinue a line of business
Remove risk for these liabilities from book of business
Surplus relief (in the form of discounted premium)

Question 19

Fronting carrier

Answer 19

• an INSURER that cedes a large portion of its business (>75%) so the REINSURER can avoid regulatory oversight
• may occur when the reinsurer is not authorized to conduct business in the ceding insurer’s jurisdiction
• often occurs in WC due to strict licensing requirements

Question 20

identify reasons other than ‘fronting’ for an insurer to cede a large portion of their business (3)

Answer 20

• intercompany cessions to share risk across related companies
• cession to a regulated pool (Ex: high-risk auto pool)
• to exit a line of business

Question 21

identify the components of the ‘provision for reinsurance’

Answer 21

provision for:
→ authorized reinsurance (Schedule F, Part 3, Col 75)
→ unauthorized reinsurance (Schedule F, Parts 3, Col 76)
→ certified reinsurance (Schedule F, Part 3, Col 77)
Note also the location of the slow-pay ratio:
→ if slow-pay ratio ≥ 20% then apply slow-pay penalty (Schedule F, Part 3, Col 51,52,74)

Question 22

reasons that Schedule F is an important tool in monitoring solvency for users of the Annual Statement (4)

Answer 22

• identifies gross ASSUMED losses
• identifies SLOW-PAYING (authorized) reinsurers for further scrutiny
• measures significance of REINSURANCE against SURPLUS
• provides FINANCIAL STRENGTH information of reinsureds & reinsurers

Question 23

Special codes (general)

Answer 23

Used to identify reinsurance relationships of heightened importance to regulators

Question 24

Special Code 2

Answer 24

cessions of 75% or more of subject premium (may be fronting carrier to avoid regulatory oversight)

Question 25

Special Code 3

Answer 25

counterparty reporting exception for asbestos and pollution contracts

Question 26

Special Code 4

Answer 26

IBNR losses on contracts in force prior to July 1,1984 exempt from statutory provision for unauthorized reinsurance

Question 27

Balance sheet ASSET from SchF (1)

Answer 27

Amounts recoverable from reinsurers

Question 28

Balance sheet LIABILITIES from SchF (5)

Answer 28

Reinsurance payable on paid losses and LAE Unearned premiums for ceded reinsurance Ceded reinsurance premiums payable net of ceding commissions Funds held by company under reinsurance treaties Provision for reinsurance

Question 29

unauthorized reinsurer

Answer 29

one that is not licensed or certified to conduct business in a particular jurisdiction

Question 30

certified reinsurer

Answer 30

non-US reinsurer domiciled in a jurisdiction designated by the NAIC as qualified, would have been considered unauthorized prior to 2012, and has attained certification from the reporting entity's domiciliary state

Question 31

how can Schedule F be enhanced to IMPROVE its capacity to monitor reinsurer credit risk

Answer 31

- disclose details of reinsurance arrangements - include management input of uncollectability risk (the formula may miss important risk factors) - include reinsurer ratings (Schedule F doesn't do this even though it is an important risk factor) - replace slow-pay threshold with a sliding scale and consider reasons for slow-pay

Question 32

Reinsurance Provision for UNauthorized reinsurer

Answer 32

Tn + Td - C + 0.2*(Pn90 +Td) capped by Tn + Td

Question 33

Reinsurance Provision for Authorized reinsurer

Answer 33

RP(not slow-paying) = 0.2 * (Pn90 + Pd90) RP(slow-paying) = 0.2 * max(T – C , Pn90 + Pd90) slow-pay ratio = Pn90 / (Pn + Recvd), threshold >= 20%

Question 34

Qualitative tests for risk transfer (2)

Answer 34

Self-evident - significant reins risk is assumed and significant loss to reinsurer is reasonably possible "Substantially all" - IF significant loss is NOT reasonably possible but reinsurer assumers substantially all of the primary's risk THEN risk transfer may still exist

Question 35

Expected Reinsurer Deficit

Answer 35

prob(NPV reins loss) * (NPV reins loss / reins prem) > 1% then yes, risk transfer exists

Question 36

10-10 rule

Answer 36

if reinsurer has >= 10% chance of >= 10% UW loss then yes risk transfer exists

Question 37

Pitfalls of Risk Transfer test (6)

Answer 37

Profit commission: - do NOT include in risk transfer test Reinsurer expenses: - do NOT include in risk transfer test Interest rates: (same as discount rate) - do NOT vary with scenario - should only consider insurance risk (U/W & timing risk) Commutation timing: - do NOT use prescribed payment patterns - DO include commutation FEES Evaluation date: - risk transfer test should be based on circumstances at evaluation date Premiums: - use PV (Present Value) of GROSS premiums - apply premium adjustments to UNDISCOUNTED premiums