CIA Reinsurance

Question 1

List the key principles of risk transfer assessment. (4)

Answer 1

KP1: use quantitative and/or qualitative approaches depending on the information available.
KP2: use professional judgement
KP3: consider overall agreement
KP4: recheck risk transfer when certain conditions occur

Question 2

In a risk transfer contract, what is included in the ‘overall agreement’? (4)

Answer 2

• Contract
• Amendments
• Verbal agreements
• Other written documents

Question 3

When should the existence of risk transfer be (re)checked? (2)

Answer 3

• at inception

- when a contract change significantly alters expected future cash flows

Question 4

Changes to a reinsurance contract that would trigger re-check of risk transfer.

Answer 4

Revision to premiums or coverage levels OTHER THAN linear increase/decrease of quota share.

Question 5

Changes to reinsurance contract that would NOT trigger re-check of risk transfer?

Answer 5

Events that are part of the normal course of contract (eg.: build-up of a Claim Fluctuation Reserve).

Question 6

What should the actuary do PRIOR to re-check of risk transfer.

Answer 6

Check whether the previous reinsurance assessment is still applicable.

Question 7

Describe the concept of RISK TRANSFER. (2)

Answer 7

• is it obvious that the cedant’s financial interests are protected?
• don’t focus on probabilities: coverage for low frequency, high severity LOB passes IF contract is arms-length and/or there are no risk-limiting features

Question 8

2 broad categories of risk-limiting contract features.

Answer 8

Terms set in advance

experience-based renewals (EBR)

Question 9

Types of terms-set-in-advance risk limiting features. (3)

Answer 9

ADJUSTABILITY of reinsurance premiums or commissions (eg.: LR caps)
PRE-SET LIMITS on timing of payments (Eg.: quarterly) - remove timing risk
COUNTERPARTIES ceding back to the original cedant

Question 10

Examples of EBR (Experience Based Renewals) risk limiting features. (2)

Answer 10

• future terms BASED ON past experience (and reinsurer guaranteed to recover losses)
• forced renewals if the contract is in deficit (reinsurer is losing money)

Question 11

Define ‘Side Agreement’.

Answer 11

These are agreements between cedant and reinsurer NOT DIRECTLY INCORPORATED into a contract. However , this may obscure the intent of the contract.

Question 12

Define ‘mirroring’ and provide comments.

Answer 12

Cedant and reinsurer carry SIMILAR LIABILITY ESTIMATE for the ceded claims
- it is appropriate for cedant’s and reinsurer’s actuaries to confer on large losses

Question 13

Considerations in estimating a credit provision for a counter-party. (4)

Answer 13

BEST rating of reinsurer
EXPERTISE of reinsurer in relevant LOBs
DIVERSIFICATION of reinsurer
DISPUTES: history of claims disputes