Schedule F Flashcards
Provision for reinsurance
Liability - minimum reserve for uncollectible reinsurance
Why schedule F is important to actuary
- Look at assumed reinsurance to assess reasonableness of gross & net rsvs
- Analyze collectability risk (balance sheet only shows net rsvs)
- SAO requires comment & disclosure of net rsvs
Types of Collateral (4)
- Funds held by or deposited w/ reinsured company (primary)
- Letters of credit
- Ceded balances payable
- Other amt due to reinsurer
Funds held by or deposited w/ reinsured company (type of collateral)
defined
asset or liability to primary?
asset or liability to reinsurer?
what is the advantage to primary?
portion of reinsurer premium withheld to pay claims
liability to primary
Asset to reinsurer
ADV to primary: Reduces primary’s credit risk b/c on hand to pay claims (no need to pay out of own pocket & get reimbursed)
Letter of credit (type of collateral)
defined
adv to primary
disadv to reinsurer (3)
defined: Bank issues credit to reinsurance company (to pay primary if can’t meet obligations)
Adv to primary: reduce credit risk b/c reinsurer doesn’t lose it in bankruptcy
- Disdv to reinsurer: Banks charge free
- Disdv to reinsurer: Reduces line of credit w/ bank
- Disdv to reinsurer: Reduces collateralization to meet obligations (reinsurer had to put up collateral w/ bank to get it)
Mapping assets & liab to balance sheet
- Asset = reinsurance recoverable on paid L&LAE
- Asset = net amt recoverable from reinsurers (balancing item)
- Liability = ceded reinsurance premium payable on paid L&LAE
- Liability = Provision for reinsurance
- Liability = Funds held by company under reinsurance treaties
- Liability = L&LAE
- Liability = UnearnedPremium
Part 3 footnotes defined & importance (3)
- Disclose top 5 provisional commission rates (where ceded premium is >50k)
- Primary might be using high commission rates for surplus relief to keep IRIS 2 (NWP/PHS) below 300%
- High provision commission rates will lower IRIS 2 BUT IRIS 2 will pop if LR is bad
- Is primary misusing reinsurance to mask high operating leverage?
Portfolio insurance
defined
reasons to use it
disadv
Primary gives PIF/liabilities to reinsurer + reinsurer gives primary discounted (less) premium
Reasons: a) exit LOB b) remove risk c) surplus relief
Disadv: costly – primary only receives a discounted premium b/c of uncertainty of risk being passed on
Fronting carrier
defined
scenario
when acceptable?
Insurer that cedes >75% of its book
scenario: When A is not authorized to do business in MO then fronting carrier B will write the business in MO & cede it to A
Acceptable when companies are related (i.e. intercompany cessions w/ affiliates OR cessions to joint pool)
How schedule F monitors solvency (3)
Tracks reinsurance transactions
Calculate reinsurance provision
Shows effect on balance sheet of removing all reinsurance protection (part 8)
Adv of provision for reinsurance calculation in schedule F to monitor solvency
Reinsurance provision is formula →hard to manipulate→ easy to compare across companies.
Penalizes unauthorized and authorized slow paying reinsurers
(Part 8) Shows effect on balance sheet of removing all reinsurance protection
Disadv of provision for reinsurance calculation in schedule F to monitor solvency (4)
Reinsurance provision is formula →no statistical basis for formula (20% cut off for slow pay)
Penalty for unauthorized and authorized slow paying reinsurers doesn’t account for financial strength rating
Doesn’t measure quality of reinsurer’s management
Doesn’t directly measure solvency
How can schedule F be improved to monitor solvency? (4)
Disclose details of reinsurance agreements
Include management input
Include reinsurer ratings
Replace 20% slow pay threshold w/ sliding scale
Certified reinsurer
defined
takes what into account (to addresses provison for reinsurance calculation disadvantage)?
provison for reinsurance 2 parts?
vs unauthorized reinsurer
Previously unauthorized but attained certification (legal authority) to do business in jurisdiction
Takes into account reinsurer financial strength (more strength→less provision for reinsurance)
2 parts = collateral deficiency + overdue reinsurance
vs unauthorized: lower reinsurance provison + can post less collateral
Considerations to certify reinsurer (5)
- Jurisdiction (location)
- Rating
- Regulatory history
- Fin pos – financial positon
- C&S Capital & Surplus