C - CIA Reinsurance Treatment Flashcards Preview

Exam 6C (Fall 2018) > C - CIA Reinsurance Treatment > Flashcards

Flashcards in C - CIA Reinsurance Treatment Deck (26):
1

CIA REINSURANCE TREATMENT

CIA's 4 key principles for ASSESSMENT of RISK TRANSFER

1) MANY APPROACH can be used

2) PROFESSIONAL JUDGMENT is required

3) the ENTIRE AGREEMENT (written/oral agreement, correspondence) must be considered

4) must be ASSESSED AT INCEPTION of contract, and every time there is a significant change to expected future CF of contract.

2

CIA REINSURANCE TREATMENT

2 examples where a risk transfer reassessment is required

1) reinsurance rate change

2)revision of coverage level

3

CIA REINSURANCE TREATMENT

Define
REASONABLY SELF-EVIDENT RISK TRANSFER

When OBVIOUS that reinsurance contract protects insurer from future event that could affect financial position

4

CIA REINSURANCE TREATMENT

Define
EXISTENCE OF RISK TRANSFER

When reinsurance contract protect the insurer from negative financial impact from adverse events

5

CIA REINSURANCE TREATMENT

(1)
Question that must be asked to assess risk transfer

(2)
Question that must be asked to assess if risk transfer is self-evident

(3)
2 questions that should not be asked when assessing if risk transfer is self-evident?

(1)
does the reinsurance contract protect the insurer from financial impact from adverse event?

(2)
if the reinsured event happens, is protection afforded?

(3)
How probable the event is?
How much risk is transferred?

6

CIA REINSURANCE TREATMENT

2 criteria that must be met before performing a "Reasonably Self-Evident" Qualitative Assessment on a contract

1) must have NO risk transfer LIMITING FEATURES

Truc : quand tu es Raisonnable, tu as des limites


2) must be done on ARMS-LENGTH terms

Truc : Selfie-vident, on prend un selfie à une longueur de bras

7

CIA REINSURANCE TREATMENT

What kind of risk comprises most of the Reasonably Self-Evident Class of contract?

Low-Frequency high-severity risks

8

CIA REINSURANCE TREATMENT

Why ACTUARY PREFERS A QUALITATIVE APPROACH to assess risk transfer even when not reasonably self-evident?

For quantitative approach:
HISTORICAL DATA MAY NOT BE AVAILABLE

RISK MAY NOT LEND ITSELF TO MATH MODELS

COMPUTER MODELS MAY LEAD TO INCONCLUSIVE RESULTS

9

CIA REINSURANCE TREATMENT

Explain whether the presence of risk limiting features in reinsurance contract means that the risk has not been transferred?

No.
it only means additional work is required to assess the existence of risk transfer

10

CIA REINSURANCE TREATMENT

2 broad categories of risk limiting features in reinsurance contract.

1) TERMS SET IN ADVANCE

2) EXPERIENCE BASED RENEWALS

11

CIA REINSURANCE TREATMENT

6 examples of risk limiting features in reinsurance contract where "terms are set in advance"

PROFIT SHARING

ADJUSTABLE PREMIUM/COMMISSION

PRE-SET LIMITS TO TIMING OF PAYMENTS

EXPECTED DURATION OF CONTRACT
(commutation clause)

HIGH FRONT-END REINSURANCE COMMISSION

COUNTERPARTIES

12

CIA REINSURANCE TREATMENT

3 situations where actuary would need to be careful when assessing risk transfer when there is a Profit Sharing Limiting Feature

1) PREDETERMINED EXPECTATION OF LARGE PROFIT SHARING
may indicate insufficient risk transfer

2) ABSENCE of LOSS CARRY-FORWARD PROVISION.
may reflect reinsurer's expectation that the chance of loss in one accounting year is really small

3) NEGATIVE EXPERIENCE REFUND
may negate risk transfer to the reinsurer

13

CIA REINSURANCE TREATMENT

Examples of
"ADJUSTABILITY OF REINSURANCE PREMIUM OR COMMISSION" limiting feature of risk transfer

for proportional contracts (3)

for non-proportional contracts (1)

--proportional--
ADJUSTABLE COMMISSION BASED ON EXPERIENCE

LIMITS OR CAPS ON LRs

LOSS CORRIDOR PROVISION

--non-proportional--
SWING RATE

14

CIA REINSURANCE TREATMENT

2 examples of
"PRE-SET LIMITS TO TIMING OF PAYMENT" limiting feature of risk transfer

PAYMENT SCHEDULE

FUNDS WITHHELD PROVISIONS

15

CIA REINSURANCE TREATMENT

2 examples of "EXPERIENCE BASED RENEWALS" risk limiting feature

FUTURE TERMS BASED ON PAST EXPERIENCE

FORCED RENEWALS

16

CIA REINSURANCE TREATMENT

Purpose of Forced Renewals

How FORCED RENEWALS can limit risk transfer.

Purpose
Required by reinsurer so that insurer is forced to renew until at least losses are eliminated.

If future business ceded is at market terms, risk transfer may not be limited.

17

CIA REINSURANCE TREATMENT

2 considerations in determining whether there is a limit in risk transfer when FUTURE TERMS are BASED ON PAST EXPERIENCE

1) if reinsurance is annually renewable (without obligation to renew), then risk transfer is not limited

2) if obligation to renew (multi year contracts) and renewal premium recovers prior year losses, then risk transfer is limited

18

CIA REINSURANCE TREATMENT

Define
SIDE AGREEMENTS in a reinsurance contract

One special case of side agreement that can limit risk transfer

Agreement (written or verbal) subsequent to original effective date of reinsurance contract.

Side agreements REQUIRING INSURER TO ENTER INTO FUTURE REINSURANCE CONTRACT WITH REINSURER, IF CONTRACT TRANSACTED ABOVE MARKET RATES

19

CIA REINSURANCE TREATMENT

AMF and OSFI's position on reinsurance side agreements

Both strongly discourage the use of side agreements

20

CIA REINSURANCE TREATMENT

Define
Mirroring (or mirror reserving) in reinsurance

When ceded liabilities determined by insurer = assumed liabilities determined by reinsurer

Implies that insurer and reinsurer have the same view of risk being transferred

21

CIA REINSURANCE TREATMENT

About MIRRORING,
2 safeguards ensuring that insurer and reinsurer's actuaries have a similar view of the risk being transferred

1) data integrity

2) communication between insurer and reinsurer's actuaries.

22

CIA REINSURANCE TREATMENT

Define
reinsurance BIFURCATION.

Breaking reinsurance contract in parts, to identify parts that are non-risk-transfer and could be subject to non-insurance accounting

Reinsurance contract should not be bifurcated (only valid in their entirety)

23

CIA REINSURANCE TREATMENT

Why reinsurance expose the insurer to credit risk

Because the reinsurer may be unable to pay claims

Because the amount reimbursed may differ from expectation

24

CIA REINSURANCE TREATMENT

3 considerations when determining reinsurance counterparty risk

Reinsurer's rating from rating agency

Whether reinsurer is in runoff

Expertise of reinsurer

Diversification of reinsurer

History of disputes on claims

Quality of reinsurer retro-cession

MCT/BAAT ratio

25

CIA REINSURANCE TREATMENT

Contrast
CONCENTRATION RISK
vs
REINSURANCE COUNTERPARTY RISK

--concentration risk--
risk of excess of exposure to a single reinsurer

--reinsurance counterparty risk--
risk of default from reinsurer

26

CIA REINSURANCE TREATMENT

Define
Commutation

Agreement to settle all current and future liabilities
from reinsurance agreement
for a set payment
from the reinsurer to the insurer.