Schedule F (Odomirok 14) Flashcards
Main purpose of Schedule F
Derive the provision for reinsurance
What is the provision for reinsurance
A minimum reserve for uncollectible reinsurance
Where does the provision for reinsurance appear on the Balance Sheet
It appears as a liability, so an increase in this provision will decrease surplus.
Part 1:
Assumed Reinsurance @ 12/31, current year
Types of securities
-Funds held or deposited with reinsured companies
-Letters of Credit (LOC): Letter from bank stating that it will pay if reinsurance company can not
-Amount of assets pledged or collateral held in trust
Part 2:
Premium Portfolio Reinsurance Effected (or Cancelled) during Current Year
What is portfolio reinsurance?
Reinsurance of an entire class of business
Motivations for portfolio reinsurance
-Exit a certain type of business
-Remove the risk/uncertainty associated with the liability
-Surplus relief
Part 3:
Ceded Reinsurance as of 12/31, Current Year
*Most important part
Part 3 Purpose
Provides a comprehensive listing of ceded balances by reinsurer
-Helps assess the insurer’s credit risk
Columns 7-16 of Part 3 show:
Types of reinsurance recoverables
Columns 7-8
Recoverable on PAID losses: Booked as an asset
(How much does reinsurance company owe ceding company for paid losses)
Columns 9-12
Recoverable on UNPAID losses: Netted from the gross loss reserves
Represents how much is due from the reinsurance company on the loss reserves that have been established by the insurance company
Extra note: When ceding company calculates gross reserves, it nets out this recoverable on unpaid losses that it expects to be paid by the reinsurance company. On Balance Sheet, the ceding company just holds the net reserves which impacts the Surplus. Reserves will reduce when we net this amount out, which increases Surplus, so we want to be comfortable that we are going to recover this amount from the reinsurance company.
Column 13:
Recoverable on premium: Netted from gross UEPR
Ceding company pays reinsurance company the premium at the start of the year. It’s possible that the reinsurance contract may be cancelled at some point during the contract period. If this happens, the unearned portion of the premium has to be refunded back to the ceding company. So, until this premium is earned, it is considered a recoverable back to the ceding company.
Column 14:
Contingent Commissions Receivable
This is the amount of commissions owed from reinsurance company to ceded company based on the experience to date, and is treated as a recoverable.
Sometimes the reinsurance company is going to have a contingent commission set up with the ceding company where it pays the ceding company based on the profitability of the book. Pays a higher commission to ceding company if ceding company is profitable, and pays a lower/no commission if the ceding company’s contracts/insureds are not as profitable.
Stressed Total Recoverable Formula
(Needed for Stressed Net Recoverable Formula)
= 120% * (Total Reinsurance Recoverable - Provision for uncollectable recoverables)
= 120% * Column 28
Stressed Net Recoverable Formula
= Stressed Total Recoverable - Funds Held - Reinsurance Payable
= Stressed Total Recoverable - Column 20 - Columns 17&18
Credit Risk on Collateralized Recoverable Formula
Credit Risk = Collateralized Charge Factor x Total Collateral
= Collateralized Charge Factor x Column 32
Credit Risk of Uncollateralized Recoverable Formula
Credit Risk = Uncollateralized Charge Factor x Stressed Net Recoverable Net of Collateral Offsets
= Uncollateralized Charge Factor x (Stressed Net Rcoverable - Total Collateral)
= Uncollateralized Charge Factor x Column 33
Column 15:
Total Recoverable (Be able to calculate this total recoverable from the prior columns)
Column 16:
Balances from Column 15 that are in dispute
Aging of Ceded Reinsurance (Col. 37-43)
Hierarchy to determine due date of recoverable
i. Terms of the reinsurance contract that specify when the reinsurer needs to pay
ii. Terms of the reinsurance contract that specify when insurer needs to report claims to reinsurer
iii. Date at which amount recoverable from a certain reinsurer exceeds 50K (once 50K is reached we start over)
iv. Currently due
Recoverables from mandatory pools & associations are always treated as currently due
Percentage of amounts more than 90 days overdue not in dispute / Slow Paying Ratio Formula (Column 50)
= (Recoverables on paid > 90 days overdue - Disputed Balances > 90 days overdue) / (Recoverables on paid not in dispute + Amounts received in the last 90 days)
= ((Col. 40+41) - Col. 45) / ((Col. 43-44) + Col. 48)
Slow Paying vs. Non-Slow Paying Critera
Slow Paying Ratio < 20%: Non-Slow Paying
Slow Paying Ratio = 20%: Slow Paying
Slow Paying Ratio > 20%: Slow Paying
Provision for Authorized, Non-Slow Paying Reinsurer Formula
Provision = 20% * (Paid Recoverables over 90 days overdue)
*Includes amounts in dispute over 90 days overdue
Provision for Authorized, Slow Paying Reinsurer Formula
Provision = Max (20% * Unsecured Total Recoverables, 20% * Paid Recoverables over 90 days overdue)
*Includes total amounts in dispute/amounts in dispute over 90 days overdue
Formula for Unsecured Total Recoverables
= (Reinsurance Recoverables on paid losses, unpaid losses, UEPR, commissions) - (Funds held, payables, and collateral)
= (Columns 7-14) - (Column 25)
Provision for Unauthorized Reinsurer Formula
= Unsecured Total Recoverables + (20% * paid recoverables over 90 days overdue) + (20% * Total Amounts in dispute)
*Unsecured Total Recoverables INCLUDES amounts in dispute
*Paid recoverables over 90 days overdue EXCLUDES amounts in dispute, since they are accounted for separately
*This provision is capped at the total amount recoverable
Provision Formula for Certified Reinsurance due to Collateral Deficiency
Provision = Net Recoverable from Reinsurer - Credit Allowed for Net Recoverables
Net Recoverable from Reinsurer Formula
= Total Recoverable - Reinsurance Payable
Credit allowed for Net Recoverables Formula
= Catastrophic recoverables qualifying for collateral deferral + (Net Recoverable from Reinsurer - Catastrophic recoverables qualifying for collateral deferral) * (% of collateral provided / % of collateral required for full credit)
% of Collateral Provided Formula
= (Funds Held + Collateral) / (Net Recoverable - Catastrophic Recoverables Qualifying for collateral deferral)
Certified Provision: Overdue Reinsurance
= Min ((20% x Max((Paid Recoverables over 90 days overdue + Disputed Balances over 90 days overdue), (Credit - Collateral&Funds Held))), Credit Allowed for Net Recoverables)
**Do not apply 20% to Credit Allowed for Net Recoverables
**(Credit - Collateral&Funds Held) is only calculated for Slow Paying Reinsurers
Min((20% *(Paid Recoverables over 90 days overdue + Disputed Balances over 90 days overdue)), Credit Allowed for Net Recoverables)
**Do not apply 20% to Credit Allowed for Net Recoverables
Part 4:
Issuing or Conforming Banks for Letters of Credit from Schedule F, Part 3
Part 5:
Interrogatories for Schedule F, Part 3
Part 5 Contains Two Tables with more details:
Table 1: Identifies the five largest commission rates of reins. contracts where ceded premium > 50K
-Contracts with high commission rates can generate large surplus relief
*May want to calculate IRIS Ratio WP/Surplus with an without reinsurance to see benefit to surplus due to reinsurance (IRIS ratio will decrease when reinsurance is used) Schedule 5 Lesson 5 Part 5 video for example
-Footnotes can therefore help identify companies that are potentially using reinsurance to conceal a high operating leverage
Table 2: Identifies five largest total recoverables from reinsurers (from Part 3)
-Helps the regulator assess the concentration of reinsurance credit risk
Part 6:
Reinstatement of Balance Sheet to Identify Net Credit for Reinsurance
Provision Formula for Certified Reinsurance due to Collateral Deficiency
Provision = Net Recoverable from Reinsurer - Credit Allowed for Net Recoverables
