TIA Section F - Reinsurance - AAA CE CL

Question 1

How is the URR accounted for in the financials

Answer 1

Offset to the ceded reserve balances

Question 2

2 major causes of reinsurance uncollectibilitiy:

Answer 2

• Credit Risk
• Dispute Risk

Question 3

Sources of credit risk:

Answer 3

• Reserving risk
• Market and investment risk (typically not major)
• Accumulation risk
• Pricing/ UW risk

Question 4

4 potential reasons that disputes may arise

Answer 4

• Losses from policies that the reinsurer was not informed about (missing policies)
• Late notice of a claim
• Settlements made by the insurer without first consulting reinsurer
• Disagreements about the definition of an occurrence

Question 5

5 other factors that impact reinsurance uncollectibility

Answer 5

• Insurer being too aggressive (or cautious) in presenting claims for reimbursement
• Experience of insurer in processing ceded claims, which may impact the acceptance by reinsurer
• Experience of the reinsurer in handling the claims being presented
• Business relationship between insurerer and reinsurer.
• Commutations: the insurer may agree to a partial collection due to the credit risk

Question 6

2 main methods to estimate URR (and list whether each reflects credit risk and/or dispute risk)

Answer 6

• Rating-based: use thee financial strength ratings of the reinsurer as the basis. Credit risk only
• Experience-based method: use historical write offs as the basis. Reflects credit & dispute risk

Question 7

4 factors upon which default rates can be based:

Answer 7

• AM Best Financial Strength Ratings
• Rating agencies
• Historical data of defaults by internal rating
• Transition matrices

Question 8

4 sources of provision for Dispute risk to be included in Rating based method

Answer 8

• Insurers priorio dispute related reinsurance write offs
• Industry data (if available and relevant)
• Management judgement
• Combination of the above

Question 9

2 steps to generate an Experience-based URR estimate:

Answer 9

• An experience-based disupte rate could be based on the ratio of historical write-offs to total ceded billed over a multi-year period
• Apply this ratio to the current total ceded balance

Question 10

Requirement to be able to use an Experience-based URR approach:

Answer 10

The insurer needs to have sufficient credibility in its historical data.

Question 11

4 potential improvements to an Experience-based method:

Answer 11

• Accounting for write-offs by billing lag year
• Accounting for development of write-offs, which would account for both lag and potential future recoveries off amounts previously written off
• A more granular analysis of write-offs
• Use different experience-based default rates by line of business

Question 12

Factors that a more granular analysis of write-offs can account for include:

Answer 12

• reinsurance structure
• line of business
• ongoing versus runoff business
• maturity of reinsurance recoverables
• quality of reinsurance purchased over time
• collateral backing reinsurance recoverables

Question 13

The major challenges of employing an Experience-based method include:

Answer 13

• Data availability:
  -The past uncollectible rates may not be indicative of future uncollectible rates if there are changes to the characteristics of reinsurance recoverables
  -Historical write-offs could be heavily influenced by individual events such as commutations & reinsurer insolvency
• Billing may occur over many years, making it difficult to estimate an ultimate uncollectible rate, and timing of recoveries:
  -It is difficult to account for the impact of collateral, as the experience-based methods are typically run at an aggregate level, whereas the collateral applies at an individual insurer level
• Some data may require interpretation:
  -The historical numbers may be already adjusted to be net out uncollectible balances
  -It may be impossible to distinguish between credit and dispute related losses in the historical data