TIA Section A - Odomirok 14 Flashcards
List two things that the actuary can refer to when opining on the collectibility of reinsurance recoverables
- 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
Main purpose of Schedule F
Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance
How is the Provision for Reinsurance treated in the Annual Statement
Liability (in the balance sheet)
How does a change in the Provision impact surplus
An increase in the provision results in a direct decrease to surplus
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:
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.
List the six parts of Schedule F
- Assumed reinsurance
- Portfolio reinsurance
- Ceded reinsurance
- Issuing or confirming banks for letters of credit from Schedule F, Part 3
- Interrogatories for Schedule F, Part 3
- Restatement of balance sheet
List the components of the balance sheet that are populated from Schedule F data
- Assets: amounts recoverable from reinsurers
- Liabilities: reinsurance payable on paid losses and LAE/ Funds held by the company under reinsurance agreements/ Provision for reinsurance
How are the reinsureds grouped in Part 1
- 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
List the benefits of the “funds held or deposited with reinsured companies” form of collateral
- reduces credit risk
- reduces administrative burden of having to continually collect money from reinsurer to make payments
- reinsurer gets paid interest
Why do reinsureds like the Letters of Credit (LOC) form of collateral
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
Two reasons that LOCs are expensive to the reinsurer
- Banks charge a fee that increases during uncertain economic times
- The LOC is a reduction to reinsurer’s line of credit
Three reasons that insurers may enter into Portfolio Reinsurance agreements
They want to:
- Exit a certain type of business
- Remove the risk or uncertainty associated with the liability off their books
- Obtain surplus relief (via the discounted premium)
Purpose of Part 3, Col 5 (Special Code)
- Reinsurance relationships that may be particularly important to regulators
- Cases where special considerations are made when calculating the provision for unauthorized reinsurance
Components of reinsurance recoverable columns (Part 3)
- Recoverable on paid
- Recoverable on unpaid
- Recoverable on premium
- Contingent Commissions receivable
- Total recoverable
- Disputes balances that are included in Col. 15
Transactions that are exempt from disclosure as Special Code 2 (whether the contract ceded 75\% or more of the Direct Premium Written)
- 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
Exclusions from RBC credit risk charge
- State mandated residual market mechanisms
- NCCI Federal Insurance programs (e.g. NFIP)
- U.S. parents, subsidiaries and affiliates
Two factors that impact the credit risk charge on ceded reinsurance
- Whether or not the recoverable is collateralized
- The financial strength of the reinsurer
Collateralized reinsurer recoverable charges
1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4+: 5%
Uncollateralized reinsurer recoverable charges
1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4: 5.3%/ 5: 7.1%/ 6: 14%/ 7: 10%
Formulae to derive Stressed Net Recoverable
Stressed Total Recoverable = 120%* (Total Reins. Recoverable Provision)
Stressed Net Recoverable = Stressed Total Recoverable - Funds Held (Col 20) - Reins. Payable (Cols 17/18)
Two components of credit risk on ceded reinsurance
- Credit risk on collateralized recoverable
- Credit risk on uncollateralized recoverable
Formula to determine credit risk on collateralized recoverable
Collateralized Factor * Collateral
Formula to determine credit risk on uncollateralized recoverable
Uncollateralized Factor * Stressed Recoverable Net of Collateral Offsets
Components of collateral
- Multiple beneficiary trusts
- Letters of Credit
- Single beneficiary trusts and other allowable collateral
Rules to determine the due date of the reinsurance recoverables
Use the following hierarchy:
- Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified
- Terms of reinsurance contract that specify when the insurer needs to report the claim to the reinsurer
- 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
When determining the age of reinsurance recoverable, what should be done if not dates have been mentioned or if the recoverable is under $50k?
Record the amount as currently due
Formula for provision of reinsurance for unauthorized reinsurer
Provision = Unsecured total recoverables ——————————————————————- \+20%(recoverables over 90 days overdue, not in dispute) ——————————————————————- \+20%(amounts in dispute)
Formula for provision for reinsurance for authorized slow paying reinsurer
Provision = max [20% (unsecured total recoverables), 20% (recoverables over 90 days overdue)]
Formula for provision reinsurance for authorized non-slow paying reinsurer
Provision = 20% (recoverables over 90 days overdue including disputes over 90)
Purpose of Schedule F Part 4
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)
Two tables contained in Schedule F Part 5
- 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
Two assets that need to be adjusted in Schedule F Part 6
- Reinsurance recoverable on loss and LAE payment
- Net amounts recoverable from reinsurers
Liabilities that need to be adjusted to 0 in Part 6
- Ceded reinsurance premium’s payable
- Funds held by the company under reinsurance treaties
- Provision for reinsurance
Items that regulators consider when determining whether to certify reinsurer
- Jurisdiction
- Financial position
- Capital and surplus
- Regulatory history
- Financial strength ratings
Jurisdictions that certified reinsurers operate in
Bermuda, France, Germany, Ireland, Japan, Switzerland and the UK
List some functions of Schedule F (In addition to assessing the net reserves)
- 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
List some criticisms of schedule F
- 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
What is the formula for the slow-paying test?
90+ Overdue Excluding Disputes / (Unpaid Excluding Disputes + Paid in Last 90)
