TIA Section A - Odomirok 14

Question 1

List two things that the actuary can refer to when opining on the collectibility of reinsurance recoverables

Answer 1

• Indications of regulatory actions or reinsurance recoverable over 90 days overdue
• Listing of reinsurers, liability amounts ceded to each reinsurer, the collateral held by the insurer

Question 2

Main purpose of Schedule F

Answer 2

Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance

Question 3

How is the Provision for Reinsurance treated in the Annual Statement

Answer 3

Liability (in the balance sheet)

Question 4

How does a change in the Provision impact surplus

Answer 4

An increase in the provision results in a direct decrease to surplus

Question 5

What should the insurer do if it believes that it is necessary to book a higher amount than what is being indicated by the Provision Formula:

Answer 5

It should hold an additional reserve. It should record this additional amount on the Income Statement by reversing the accounts that had been used to establish the reinsurance recoverable.

Question 6

List the six parts of Schedule F

Answer 6

1. Assumed reinsurance
2. Portfolio reinsurance
3. Ceded reinsurance
4. Issuing or confirming banks for letters of credit from Schedule F, Part 3
5. Interrogatories for Schedule F, Part 3
6. Restatement of balance sheet

Question 7

List the components of the balance sheet that are populated from Schedule F data

Answer 7

• Assets: amounts recoverable from reinsurers
• Liabilities: reinsurance payable on paid losses and LAE/ Funds held by the company under reinsurance agreements/ Provision for reinsurance

Question 8

How are the reinsureds grouped in Part 1

Answer 8

• Affiliated insurers: US inter company pooling, US non-pool, Other (non-US)
• Other US unaffiliated insurers
• Pools and Associations: mandatory and voluntary pools
• Other non-US insurers

Question 9

List the benefits of the “funds held or deposited with reinsured companies” form of collateral

Answer 9

• reduces credit risk
• reduces administrative burden of having to continually collect money from reinsurer to make payments
• reinsurer gets paid interest

Question 10

Why do reinsureds like the Letters of Credit (LOC) form of collateral

Answer 10

It is not part of the estate of the insolvent reinsurer and therefore will not be tied up or subject to degradation in the event of a bankruptcy

Question 11

Two reasons that LOCs are expensive to the reinsurer

Answer 11

• Banks charge a fee that increases during uncertain economic times
• The LOC is a reduction to reinsurer’s line of credit

Question 12

Three reasons that insurers may enter into Portfolio Reinsurance agreements

Answer 12

They want to:

1. Exit a certain type of business
2. Remove the risk or uncertainty associated with the liability off their books
3. Obtain surplus relief (via the discounted premium)

Question 13

Purpose of Part 3, Col 5 (Special Code)

Answer 13

• Reinsurance relationships that may be particularly important to regulators
• Cases where special considerations are made when calculating the provision for unauthorized reinsurance

Question 14

Components of reinsurance recoverable columns (Part 3)

Answer 14

• Recoverable on paid
• Recoverable on unpaid
• Recoverable on premium
• Contingent Commissions receivable
• Total recoverable
• Disputes balances that are included in Col. 15

Question 15

Transactions that are exempt from disclosure as Special Code 2 (whether the contract ceded 75\% or more of the Direct Premium Written)

Answer 15

• Inter-company cessions with affiliates
• Cessions to a pool, group, associations, organization of insurers that underwrite jointly, which:
  •is subject to examination by any state regulatory authority
  •operates pursuant to any state or federal statutory or administrative authorization (such as Worker’s Compensation or auto assigned risk pool)
• Those where under 5/% of the surplus is ceded
• Cessions to captive insurers that are regulated in their domiciliary state

Question 16

Exclusions from RBC credit risk charge

Answer 16

• State mandated residual market mechanisms
• NCCI Federal Insurance programs (e.g. NFIP)
• U.S. parents, subsidiaries and affiliates

Question 17

Two factors that impact the credit risk charge on ceded reinsurance

Answer 17

• Whether or not the recoverable is collateralized

- The financial strength of the reinsurer

Question 18

Collateralized reinsurer recoverable charges

Answer 18

1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4+: 5%

Question 19

Uncollateralized reinsurer recoverable charges

Answer 19

1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4: 5.3%/ 5: 7.1%/ 6: 14%/ 7: 10%

Question 20

Formulae to derive Stressed Net Recoverable

Answer 20

Stressed Total Recoverable = 120%* (Total Reins. Recoverable Provision)

Stressed Net Recoverable = Stressed Total Recoverable - Funds Held (Col 20) - Reins. Payable (Cols 17/18)

Question 21

Two components of credit risk on ceded reinsurance

Answer 21

• Credit risk on collateralized recoverable

- Credit risk on uncollateralized recoverable

Question 22

Formula to determine credit risk on collateralized recoverable

Answer 22

Collateralized Factor * Collateral

Question 23

Formula to determine credit risk on uncollateralized recoverable

Answer 23

Uncollateralized Factor * Stressed Recoverable Net of Collateral Offsets

Question 24

Components of collateral

Answer 24

• Multiple beneficiary trusts
• Letters of Credit
• Single beneficiary trusts and other allowable collateral

Question 25

Rules to determine the due date of the reinsurance recoverables

Answer 25

Use the following hierarchy:

1. Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified
2. Terms of reinsurance contract that specify when the insurer needs to report the claim to the reinsurer
3. The date at which the amount recoverable from a certain reinsurer exceeds $50k and is entered into the insurer’s account as a paid recoverable

Question 26

When determining the age of reinsurance recoverable, what should be done if not dates have been mentioned or if the recoverable is under $50k?

Answer 26

Record the amount as currently due

Question 27

Formula for provision of reinsurance for unauthorized reinsurer

Answer 27

Provision = Unsecured total recoverables
——————————————————————-
\+20%(recoverables over 90 days overdue, not in dispute)
——————————————————————-
\+20%(amounts in dispute)

Question 28

Formula for provision for reinsurance for authorized slow paying reinsurer

Answer 28

Provision = max [20% (unsecured total recoverables), 20% (recoverables over 90 days overdue)]

Question 29

Formula for provision reinsurance for authorized non-slow paying reinsurer

Answer 29

Provision = 20% (recoverables over 90 days overdue including disputes over 90)

Question 30

Purpose of Schedule F Part 4

Answer 30

It lists the Issuing or Confirming Banks (a Confirming Bank is one which will guarantee the LOC in the event that the Issuing Bank does not)

Question 31

Two tables contained in Schedule F Part 5

Answer 31

• Identifies the five largest commission rates of the cedants reinsurance treaties of the contracts where ceded premium exceeds $50k
• Identifies the five largest reinsurance recoverables that were listed in Col 15. It also provides the ceded premiums for each reinsurer and indicates whether the reinsurer is affiliated with the insurer

Question 32

Two assets that need to be adjusted in Schedule F Part 6

Answer 32

• Reinsurance recoverable on loss and LAE payment

- Net amounts recoverable from reinsurers

Question 33

Liabilities that need to be adjusted to 0 in Part 6

Answer 33

• Ceded reinsurance premium’s payable
• Funds held by the company under reinsurance treaties
• Provision for reinsurance

Question 34

Items that regulators consider when determining whether to certify reinsurer

Answer 34

• Jurisdiction
• Financial position
• Capital and surplus
• Regulatory history
• Financial strength ratings

Question 35

Jurisdictions that certified reinsurers operate in

Answer 35

Bermuda, France, Germany, Ireland, Japan, Switzerland and the UK

Question 36

List some functions of Schedule F (In addition to assessing the net reserves)

Answer 36

• identifies the portion of the gross losses that are from assumed reinsurance transactions
• helps estimate the significance of the assumed and ceded transactions to the surplus balance
• allows further investigation into the financial strength of the insurers and reinsurers
• Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated

Question 37

List some criticisms of schedule F

Answer 37

• The provision is formulaic and therefore ignores management input.
• The formula has no statistical, historical or actuarial basis. It may therefore underestimate the credit risk.
• Unauthorized reinsurance may provide higher quality protection and/or lower prices.
• Slow payers that are financially strong may eventually pay, whereas the reinsure that is current may not be able to withstand a stress event.
• The multitude of calculations and level of detail may lead to a false level of precision.
• The cost of collateral requirements will be passed from the reinsures to insurers, ultimately increasing the cost to consumers.
• The Provision may limit the amount of competition in the US, due to the penalty associated with unauthorized European reinsurers.
• Schedule F die not reveal anything about the reinsurer’s solvency

Question 38

What is the formula for the slow-paying test?

Answer 38

90+ Overdue Excluding Disputes / (Unpaid Excluding Disputes + Paid in Last 90)