Schedule F Flashcards
Schedule F Parts
- 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)
Groups used in Schedule F, Part 1
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
Schedule F - Part 1
- Provides the total assumed reinsurance balances by reinsured
- Enables an understanding of the risks associated with assumed reinsurance transactions as of the current year
Schedule F - Part 2
- Provides a detailed listing of portfolio reinsurance transactions effected or canceled during the current year
Funds held under reinsurance contracts
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
Portfolio reinsurance
The transfer of policies-in-force, or the transfer of liabilities remaining on a block of the insurer’s business
Fronting carrier
- 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
Reasons Schedule F is important tool to monitor solvency
- 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
Schedule F, Part 3 Special Codes
- 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
Balance Sheet & Schedule F mapping
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)
Provision for reinsurance - definition
a minimum reserve that reflects estimated uncollectible reinsurance recoveries
Balance Sheet changes - removing reinsurance
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)
Strengths of Schedule F as solvency monitoring tool
- 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
Weaknesses of Schedule F as solvency monitoring tool
- 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
Schedule F enhancements to improve monitoring of credit risk
- 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
Provision for reinsurance notation
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
RP formula - Unauthorized reinsurer
RP = T - C + 20% x (Pn90 + Td)
* RP is capped by T
Slow-paying ratio formula
Slow-paying ratio = Pn90 / (Pn + Recvd)
RP formula - Authorized reinsurer (NOT slow-paying)
RP = 20% x (Pn90 + Pd90)
* RP is capped by T
RP formula - Authorized reinsurer (slow-paying)
RP = 20% x max(T - C, Pn90 + Pd90)
* RP is capped by T
Unauthorized Reinsurer
A reinsurer that does business where it is not legally permitted to do so
Certified Reinsurer
- 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
Regulator considerations when evaluating an unauthorized reinsurer’s application for certification
JRR Tolkien & CS Lewis (Frodo for FinPos?)
Jurisdiction of reinsurer
Rating from a rating agency
Regulatory history
FinPos (Financial Position)
C & S (Capital & Surplus)
Benefits of being certified reinsurer
- 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)
Two components of reinsurance provision for certified reinsurers
RP64(CD): collateral deficiency
RP69(OR): overdue reinsurance
RP64(CD) formula
RP64(CD) = A19(recov) - Cr63(recov)
A19(recov) = net amount recoverable from reinsurer
Cr63(recov) = credit allowed for net recoverables
RP69(OR) formula
RP69(OR) = min[20% x max(Pn90 + Pd90, F), Cr63(recov)]
F = net unsecured recoverable for slow payers for which credit is permitted
Cr63(recov) formula
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)
Schedule F, Part 5
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
