NAIC SSAP 62

Question 1

What are 6 functions of reinsurance?

Answer 1

1) Expand capacity
2) Share large risks
3) Spread risk of potential catastrophes while stabilizing results
4) Finance expanding volume
5) Withdrawal from line or class of business
6) Reduce net liability to an appropriate amount

Question 2

What elements must be presnet for a contract to be considered reinsurance?

Answer 2

• The transfer of insurance risk:
  
  • UW Risk: uncertainties about ultimate amounts of net cash flows
  • Timing risk – uncertainties about timing of cash flows
• The reinsuer must assume significant risk
• It is reasonably possible that the reinsurer may realize a significant loss from the transaction

Question 3

What type of interest rate must be used for discounting cash flows for risk transfer?

Answer 3

A constant interest rate is used since investment income is not an element of insurance risk. The rate is selected with judgmental.

Question 4

What is the difference between a novation and run-off transaction?

Answer 4

runoff:
- primary insurer remains liable

novation:
- primary insurer is released from all liability

Question 5

What is a novation?

Answer 5

• a novation is an issuance of a new contract by a different party who assumes responsbilities.
• a novation releases the primary insurer of all liability. (This is not the case in a typical runoff agreement where the primary insurer could still be liable, if, for example, the reinsurer were to become insolvent.)
• a novation may be eligible for reinsurance accounting treatment but not in these situtations:
  
  • retroactive reinsurance
  • novation with an affiliated company

Must be agreed upon by all parties involved

Novation refers to an agreement to replace one party to an insurance policy or reinsurance agreement with another company from inception of the coverage period.