Schedule F (Odomirok 14)

Question 1

Main purpose of Schedule F

Answer 1

Derive the provision for reinsurance

Question 2

What is the provision for reinsurance

Answer 2

A minimum reserve for uncollectible reinsurance

Question 3

Where does the provision for reinsurance appear on the Balance Sheet

Answer 3

It appears as a liability, so an increase in this provision will decrease surplus.

Question 4

Part 1:

Answer 4

Assumed Reinsurance @ 12/31, current year

Question 5

Types of securities

Answer 5

-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

Question 6

Part 2:

Answer 6

Premium Portfolio Reinsurance Effected (or Cancelled) during Current Year

Question 7

What is portfolio reinsurance?

Answer 7

Reinsurance of an entire class of business

Question 8

Motivations for portfolio reinsurance

Answer 8

-Exit a certain type of business

-Remove the risk/uncertainty associated with the liability

-Surplus relief

Question 9

Part 3:

Answer 9

Ceded Reinsurance as of 12/31, Current Year

*Most important part

Question 10

Part 3 Purpose

Answer 10

Provides a comprehensive listing of ceded balances by reinsurer
-Helps assess the insurer’s credit risk

Question 11

Columns 7-16 of Part 3 show:

Answer 11

Types of reinsurance recoverables

Question 12

Columns 7-8

Answer 12

Recoverable on PAID losses: Booked as an asset

(How much does reinsurance company owe ceding company for paid losses)

Question 13

Columns 9-12

Answer 13

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.

Question 14

Column 13:

Answer 14

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.

Question 15

Column 14:

Answer 15

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.

Question 16

Stressed Total Recoverable Formula

(Needed for Stressed Net Recoverable Formula)

Answer 16

= 120% * (Total Reinsurance Recoverable - Provision for uncollectable recoverables)

= 120% * Column 28

Question 17

Stressed Net Recoverable Formula

Answer 17

= Stressed Total Recoverable - Funds Held - Reinsurance Payable

= Stressed Total Recoverable - Column 20 - Columns 17&18

Question 18

Credit Risk on Collateralized Recoverable Formula

Answer 18

Credit Risk = Collateralized Charge Factor x Total Collateral

= Collateralized Charge Factor x Column 32

Question 19

Credit Risk of Uncollateralized Recoverable Formula

Answer 19

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

Question 20

Column 15:

Answer 20

Total Recoverable (Be able to calculate this total recoverable from the prior columns)

Question 21

Column 16:

Answer 21

Balances from Column 15 that are in dispute

Question 22

Aging of Ceded Reinsurance (Col. 37-43)

Hierarchy to determine due date of recoverable

Answer 22

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

Question 23

Percentage of amounts more than 90 days overdue not in dispute / Slow Paying Ratio Formula (Column 50)

Answer 23

= (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)

Question 24

Slow Paying vs. Non-Slow Paying Critera

Answer 24

Slow Paying Ratio < 20%: Non-Slow Paying

Slow Paying Ratio = 20%: Slow Paying

Slow Paying Ratio > 20%: Slow Paying

Question 25

Provision for Authorized, Non-Slow Paying Reinsurer Formula

Answer 25

Provision = 20% * (Paid Recoverables over 90 days overdue)

*Includes amounts in dispute over 90 days overdue

Question 26

Provision for Authorized, Slow Paying Reinsurer Formula

Answer 26

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

Question 27

Formula for Unsecured Total Recoverables

Answer 27

= (Reinsurance Recoverables on paid losses, unpaid losses, UEPR, commissions) - (Funds held, payables, and collateral)

= (Columns 7-14) - (Column 25)

Question 28

Provision for Unauthorized Reinsurer Formula

Answer 28

= 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

Question 29

Provision Formula for Certified Reinsurance due to Collateral Deficiency

Answer 29

Provision = Net Recoverable from Reinsurer - Credit Allowed for Net Recoverables

Question 30

Net Recoverable from Reinsurer Formula

Answer 30

= Total Recoverable - Reinsurance Payable

Question 31

Credit allowed for Net Recoverables Formula

Answer 31

= 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)

Question 32

% of Collateral Provided Formula

Answer 32

= (Funds Held + Collateral) / (Net Recoverable - Catastrophic Recoverables Qualifying for collateral deferral)

Question 33

Certified Provision: Overdue Reinsurance

Answer 33

= 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

Question 34

Part 4:

Answer 34

Issuing or Conforming Banks for Letters of Credit from Schedule F, Part 3

Question 35

Part 5:

Answer 35

Interrogatories for Schedule F, Part 3

Question 36

Part 5 Contains Two Tables with more details:

Answer 36

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

Question 37

Part 6:

Answer 37

Reinstatement of Balance Sheet to Identify Net Credit for Reinsurance

Question 38

Provision Formula for Certified Reinsurance due to Collateral Deficiency

Answer 38

Provision = Net Recoverable from Reinsurer - Credit Allowed for Net Recoverables