Risk Transfer Analysis Flashcards

1
Q

conditions for a contract to qualify as reinsurance accounting treatment

A
  • reinsurer must assume significant insurance risk: both underwriting risk and timing risk
  • it must be reasonably possible that the reinsurer may realize a significant loss
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2
Q

exception to requirement that reinsurer must have reasonable chance of significant loss

A
  • if the reinsurer assumes substantially all of the insurance risk, e.g. quota share contracts on a profitable book of business
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3
Q

what CEO/CFO must confirm in Reinsurance Attestation Supplement (4)

A
  • there are no separate agreements between reporting entity and assuming entity
  • there is is documentation for every reinsurance contract for which risk transfer is not reasonably self-evident
  • compliance with SSAP 62R on reinsurance accounting
  • controls are in place to monitor use of reinsurance
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4
Q

10-10 rule

A

risk transfer occurs if there is at least a 10% chance of a 10% or greater loss for the reinsurer

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5
Q

Expected Reinsurer Deficit (ERD)

A

probability of NPV underwriting loss for the reinsurer multiplied by NPV of average severity of the underwriting loss; risk transfer threshold is typically 1%

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6
Q

why profit commissions generally should not be considered in risk transfer analysis

A

the analysis focuses on scenarios resulting in a reinsurer loss; however, can still have an indirect impact since profit commission in the contract may result in higher premium

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7
Q

why reinsurer expenses should not be considered in risk transfer analysis

A

they do not represent cash flows between the cedant and the reinsurer

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8
Q

what interest rate should be used in risk transfer analysis

A

constant interest rate should be used across all simulations; risk-free rate with duration of the reinsurer’s net cash flows is recommended

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9
Q

what premium should be used in risk transfer analysis

A

gross premium (excluding any payments back to cedant) modeled for each loss scenario, discounted at same rate as loss payments

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10
Q

things to consider in risk transfer analysis

A
  • parameter risk
  • interest rate - should be at least risk-free rate
  • payment pattern - incorporate volatility if possible
  • loss distribution
  • reinsurance pricing assumptions may be helpful
  • commutation clauses
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