Flashcards in F4. Freihaut & Vendetti Deck (17):
What must the CEO/ CFO confirm in the Reinsurance Attestation Supplement:
-There are no separate written or oral agreements between the two parties
-There is documentation for every reinsurance contract where risk transfer is not self evident that describes the economic purpose of the transaction and discloses that documentation proving risk transfer is available for review
-The reporting entity complies with all requirements of SSAP62
-The appropriate controls are implemented to monitor the use of reinsurance
2 criteria to classify a transaction as having risk transfer:
1. Reinsurer assumes significant insurance risk
2. It is reasonably possible that the reinsurer may realize a significant loss
Describe why profit commissions need to be excluded from the risk transfer analysis
Risk transfer analysis only focuses on scenarios that would generate a loss to the reinsurer, in which case a profit commission will not be required.
Formula for Expected Reinsurer Deficit (ERD):
ERD = Probability (NPV U/W loss to reinsurer) *Avg Severity (U/W loss)
Describe why reinsurer expenses need to be excluded from the risk transfer analysis
They do not constitute a cash flow that takes place between ceding company and reinsurer.
Describe why profit commissions can have an indirect impact on risk transfer:
The reinsurer may charge a higher premium to account for the fact that profit commissions may need to be paid.
2 reasons that the selected interest rate should at least exceed the risk free rate:
1. Very unlikely that a lower rate will be reasonable
2. A lower rate would over detect risk transfer
How should premium be treated in the risk transfer analysis when it is dependent on future events:
-Initial deposit premium: intuitive and simple, but does not include future payments, and can therefore be easily manipulated.
-Expected premium: also intuitive. may over detect risk transfer: in the iterations with the highest losses, the premium should be higher as well.
-Actual premium: based on the losses simulated
Why cant a yield curve be used to discount cash flows in a risk transfer analysis:
Not consistent with the accounting standards, as it would produce different interest rates in each iteration of the simulation when the timing of cash flows differed, which is against the standard that interest rates can not vary by scenario.
2 issues with using a rate higher than risk free if the reinsurer has a higher expected investment yield:
1. The reinsurers yield is most likely not known by the ceding company
2. It will generate the situation where risk transfer is more likely to be triggered when dealing with reinsurers with poorer investment yields
List some factors which the loss distributions can be based on:
-Previous company experience
-All of the above
What factors can be used to derive the projected loss payment patterns:
-Previous experience of the ceding insurer
-Combination of the two
2 ways to reflect parameter risk in the risk transfer analysis:
1. Implicitly: via slightly higher expected loss input, or increased expected volatility
2. Explicitly: the parameters would be variable. This is more scientific, but there is more judgment involved.
Distortions in Schedule P from commutation where insurer losing.
Part 5-commuted claims will be considered closed
Why might you accept less in a commutation?
Cash flows wanted
Concern of financial strength
Tax savings from UW loss
Can settle claims better
Reduce admin cost
A process in which the future value of claim adjustment expenses and claims are current values, taking into consideration financial and on financial aspects