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Exam 6U > Schedule F > Flashcards

Schedule F Flashcards

1
Q

Schedule F Parts

A
  • Part 1 - assumed reinsurance
  • Part 2 - premium portfolio reinsurance
  • Part 3 - ceded reinsurance
  • Part 4 - Issuing or Confirming Banks for Letters of Credit from Schedule F, Part 3
  • Part 5 - Interrogatories for Schedule F, Part 3
  • Part 6 - restatement of balance sheet (to identify net credit for reinsurance)
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2
Q

Groups used in Schedule F, Part 1

A

Affiliated insurers
* US intercompany pooling
* US non-pool
* Other (non US)

Other US unaffiliated insurers

Pools & associations
* mandatory pools
* voluntary pools

Other non-US insurers

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3
Q

Schedule F - Part 1

A
  • Provides the total assumed reinsurance balances by reinsured
  • Enables an understanding of the risks associated with assumed reinsurance transactions as of the current year
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4
Q

Schedule F - Part 2

A
  • Provides a detailed listing of portfolio reinsurance transactions effected or canceled during the current year
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5
Q

Funds held under reinsurance contracts

A

Portion of the premium due to the reinsurer that is withheld by the ceding company to pay claims:
* Liability for the insurer
* Asset for the reinsurer

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6
Q

Portfolio reinsurance

A

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

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7
Q

Fronting carrier

A
  • 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
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8
Q

Reasons Schedule F is important tool to monitor solvency

A
  • 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
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9
Q

Schedule F, Part 3 Special Codes

A
  • 2: Cessions of 75% or more of subject premium
  • 3: Counterparty Reporting Exception for Asbestos and Pollution Contracts
  • 4: IBNR Losses on Contracts in Force Prior to July 1, 1984 Exempt from: Statutory Provision for Unauthorized Reinsurance
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10
Q

Balance Sheet & Schedule F mapping

A

Assets:
* Amounts recoverable from reinsurers (F, Part 3)

Liabilities:
* Reinsurance payable on paid losses and loss adjustment expenses (F, Part 1)
* Unearned premiums for ceded reinsurance (F, Part 3)
* Ceded reinsurance premiums payable net of ceding commissions (F, Part 3)
* Funds held by company under reinsurance treaties (F, Part 3)
* Provision for reinsurance (F, Part 3)

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11
Q

Provision for reinsurance - definition

A

a minimum reserve that reflects estimated uncollectible reinsurance recoveries

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12
Q

Balance Sheet changes - removing reinsurance

A

Assets:
* reinsurance recoverable on loss and loss adjustment expense payment (reversal)
* net amount recoverable from reinsurers (balances liabilities)

Liabilities:
* losses & LAE (schedule P ceded)
* unearned premium (schedule F ceded)
* ceded reinsurance premiums payable (reversal)
* funds held by company under reinsurance treaties (reversal)
* provision for reinsurance (reversal)

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13
Q

Strengths of Schedule F as solvency monitoring tool

A
  • 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 this means foreign insurers)
  • RP accounts for reinsurer credit risk with penalties for slow-paying reinsurers
  • Schedule F shows impact to surplus if reinsurance contracts are canceled
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14
Q

Weaknesses of Schedule F as solvency monitoring tool

A
  • 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 20% slow-payer threshold is arbitrary
  • Schedule F doesn’t directly measure reinsurer’s solvency which is the true source of uncollectability risk
  • Schedule F doesn’t measure the quality of an insurer’s reinsurance management
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15
Q

Schedule F enhancements to improve monitoring of credit risk

A
  • disclose details of reinsurance arrangements (Schedule F doesn’t measure quality of an insurer’s reinsurance)
  • include management input of uncollectability risk (the formula may miss important factors)
  • include reinsurer ratings (Schedule F doesn’t do this even though it is an important risk factor)
  • replace 20% slow-pay threshold with a sliding scale and consider reasons for slow-pay
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16
Q

Provision for reinsurance notation

A

RP = Reinsurance Provision
T = Total Recoverable (includes amounts not in dispute & amounts in dispute)
P = Paid Recoverable
C = Collateral (or Offsets to RP)
* A superscript of n means the amount is NOT in dispute
* A superscript of d means the amount IS in dispute
* A subscript of 90 means the amount is PAST 90 DAYS due
* Cs = collateral that is secured
* Cu = collateral that is unsecured

17
Q

RP formula - Unauthorized reinsurer

A

RP = T - C + 20% x (Pn90 + Td)
* RP is capped by T

18
Q

Slow-paying ratio formula

A

Slow-paying ratio = Pn90 / (Pn + Recvd)

19
Q

RP formula - Authorized reinsurer (NOT slow-paying)

A

RP = 20% x (Pn90 + Pd90)
* RP is capped by T

20
Q

RP formula - Authorized reinsurer (slow-paying)

A

RP = 20% x max(T - C, Pn90 + Pd90)
* RP is capped by T

21
Q

Unauthorized Reinsurer

A

A reinsurer that does business where it is not legally permitted to do so

22
Q

Certified Reinsurer

A
  • non-US reinsurers domiciled in a jurisdiction designated by the NAIC as a Qualified Jurisdiction (i.e. Bermuda, France, Germany, Ireland, Japan, Switzerland, UK)
  • one that would have been categorized as unauthorized prior to 2012
  • one that has attained certification from the reporting entity’s domiciliary state
23
Q

Regulator considerations when evaluating an unauthorized reinsurer’s application for certification

A

JRR Tolkien & CS Lewis (Frodo for FinPos?)
Jurisdiction of reinsurer
Rating from a rating agency
Regulatory history
FinPos (Financial Position)
C & S (Capital & Surplus)

24
Q

Benefits of being certified reinsurer

A
  • reporting entity is not penalized as heavily as for an unauthorized reinsurer so the reinsurance provision is lower (amount depends on strength of reinsurer)
  • reinsurer can post collateral of less than 100% of its US claims (varies according to financial strength of reinsurer)
25
Q

Two components of reinsurance provision for certified reinsurers

A

RP64(CD): collateral deficiency
RP69(OR): overdue reinsurance

26
Q

RP64(CD) formula

A

RP64(CD) = A19(recov) - Cr63(recov)
A19(recov) = net amount recoverable from reinsurer
Cr63(recov) = credit allowed for net recoverables

27
Q

RP69(OR) formula

A

RP69(OR) = min[20% x max(Pn90 + Pd90, F), Cr63(recov)]
F = net unsecured recoverable for slow payers for which credit is permitted

28
Q

Cr63(recov) formula

A

Cr63(recov) = (col 57) + (col 58) x (col 61)
col 57 = Catastrophe Recoverables Qualifying for Collateral Deferral (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

Works out to (collateral provided) / (collateral required)

29
Q

Schedule F, Part 5

A

Table 1:
* identifies 5 largest reinsurer commission rates (where ceded premium >= $50K)
* 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

Exam 6U (39 decks)

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