TIA Section A - Odomirok 14 Flashcards
List two things that the actuary can refer to when opining on the collectability 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
How is the Provision for Reinsurance recorded 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.
List two entries insurer must make if it believes that it should book a higher amount than the Provision formula indicates:
It should hold an additional reserve.
Record this in 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 & LAE
*Funds held by the company under reinsurance agreements
*Provision for reinsurance
How are the reinsureds grouped in Part 1:
- Affiliated insurers:
*US Intercompany Pooling
*US Non-Pool
*Other (Non-US) - Other US Unaffiliated Insurers
- Pools & Associations:
*Mandatory Pools
*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 lost in the event of a bankruptcy
Two reasons that LOCs are expensive to the reinsurer:
- banks charge a fee, which will be higher 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:
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)
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
- Col 15: total recoverable
- Col 16: disputed 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, association, organization of insurers that underwrite jointly, which:
*is subject to examination by any state regulatory authority, or
*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 recoverables are 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 & other allowable collateral
Rules to determine the due date of the reinsurance recoverables:
Use the following hierarchy:
1. Terms of the reinsurance contract, if specified; or
2. Terms that specify when the insurer needs to report the claim to the reinsurer, if specified; or
3. When the amount recoverable from a reinsurer exceeds $50k and is entered into the insurer’s account as a paid recoverable
How to record age of reinsurance recoverables when no dates have been mentioned and 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 for reinsurance for authorized non-slow paying reinsurer:
Provision = 20% (recoverables over 90 days overdue)
recoverables 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
Define a “Confirming bank”
One which will guarantee the LOC in the event that the Issuing bank does not
Describe the first table 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
Describe the second table contained in Schedule F Part 5:
- Identifies the five largest reinsurance recoverables that were listed in Col 15
- Provides the ceded premiums for each reinsurer
- 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 & 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
Liabilities that need to be adjusted to values other than 0 in Part 6:
- Losses & LAE
- Unearned Premiums
Items that regulators consider when determining whether to certify a reinsurer:
- Jurisdiction
- Financial Position
- Capital & 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):
- helps estimate the significance of the assumed and ceded transactions to the surplus balance
- Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated
List some criticisms of schedule F:
- Ignores management input (because it is formulaic.)
- The formula has no statistical, historical or actuarial basis. (It may therefore underestimate the credit risk.)
- Unauthorized reinsurance may be better (it may provide higher quality protection and/or lower prices.)
- The multitude of calculations and level of detail may lead to a false level of precision.
- The cost of collateral requirements will be passed on (from the reinsures to insurers, ultimately increasing the cost to consumers.)
- Schedule F does not reveal anything about the reinsurer’s solvency
