Odomirok - Schedule F

Question 1

What are the parts of Schedule F?

6 Parts

Answer 1

• Part 1 Assumed Reinsurance
• Part 2 Premium Portfolio Reinsurance
• Part 3 Ceded Reinsurance (authorized, unauthorized, certfied)
• Part 4 List of Conforming Banks (Collateral) for Part 3
• Part 5 Interrogatories for Schedule F, Part 3
• Part 6 restatement of balance sheet (to identify net credit for reinsurance)

Question 2

What information is shown on Schedule F, Part 1?

Answer 2

• Assumed Reinsurance
  
  • Premiums, losses, commissions, collateral

Enables understanding of risks assumed as of the current year

Question 3

What are the categories shown on Schedule F, Part 1?

Answer 3

• affiliated insurers
  
  • U.S. intercompany pooling
  • U.S. non-pool
  • other (non U.S.)
• other U.S. unaffiliated insurers
• pools & associations
  
  • mandatory pools
  • voluntary pools
• other non-U.S. insurers

Question 4

What information is shown on Schedule F, Part 4?

Answer 4

Provides a listing of the issuing or confirming banks for letters of credit as collateral reported in Schedule F, Part 3, column 22.

Confirming banks make payments in event original issuing bank does not

Question 5

What are the forms of security a ceding insurer may require from reinsurers as collateral?

Answer 5

• Funds Held
  
  • A portion of the premium due to the reinsurer is WITHHELD by ceding company to pay claims
  • For a reinsurer this is a balance sheet ASSET
  • For ceding company this is a balance sheet LIABILITY
• Letter of Credit
  
  • A credit issued by a bank in favor of reinsured IN CASE reinsurer cannot meet obligations

Letters of Credit are shown on Part 4

Question 6

What is the information shown of Schedule F, Part 3?

Answer 6

• The first 20 columns detail the ceded reinsurance balances
• Columns 21- 36 calculate credit risk charge on ceded reinsurance
• Columns 37 - 53 provide the aging of ceded reinsurance
• Columns 54 - 69 provide the calculation of the Provision for Reinsurance for Certified Reinsurance
• Columns 70 - 78 provide the Total Provision for Reinsurance (authorized, unauthorized and total)

Question 7

What information is shown on Schedule F, Part 5?

Answer 7

• Part 5 has 2 tables with interrogatories for Part 3

Table 1
* identifies 5 largest reinsurer commission rates (where ceded premium ≥ $50,000)
* used to identify companies using reinsurance to conceal high operating leverage

Table 2
* identifies 5 largest loss recoverables from (Col 15) and whether the reinsurer is affiliated with the reporting entity
* to assess concentration of insurance risk

Question 8

How does Schedule F correspond to the Balance Sheet?

6 items: 1 Asset, 5 Liabilities

Answer 8

Assets
* Line 16.1: amounts recoverable from reinsurers (from Schedule F, Part 3 Cols 7-8, 43)
Liabilities
* line 2: reinsurance payable on paid losses and loss adjustment expenses (from Schedule F, Part 1 Col 6)
* line 9: unearned premiums for ceded reinsurance (from Schedule F, Part 3 Col 13)
* line 12: ceded reinsurance premiums payable net of ceding commissions (from Schedule F, Part 3 Col 17)
* line 13: funds held by company under reinsurance treaties (from Schedule F, Part 3 Col 20)
* line 16: provision for reinsurance (from Schedule F, Part 3 Col 78)

Question 9

What are the forms of security a ceding insurer may require from reinsurers as collateral?

Answer 9

• Funds Held
  
  • A portion of the premium due to the reinsurer is WITHHELD by ceding company to pay claims
  • For a reinsurer this is a balance sheet ASSET
  • For ceding company this is a balance sheet LIABILITY
• Letter of Credit
  
  • A credit issued by a bank in favor of reinsured IN CASE reinsurer cannot meet obligations

Question 10

Why are “Amount of assets pledged or collateral held in trust” not considered an offset when calculating reinsurance provision?

Answer 10

These assets or collateral amounts are
under the control of the reinsurer

the insurer has no control over them

Question 11

What is the purpose of collateral for reinsurance?

Answer 11

The purpose of both Funds Held and Letter of Credit is to reduce credit risk if reinsurer does not pay claims

Question 12

What is portfolio insurance and why is it done?

Answer 12

It is the transfer of policies in force or liabilities remaining on a block of insurer’s business

• To Discontinue a line of business
• Remove risk for these liabilities from their books of business
• Surplus relief (in form of discounted premium)

Question 13

What are the special codes used for in Schedule F, Part 3?

Answer 13

To identify reinsurance relationships of heightened importance to regulators

• Special Code “2” - Cessions of 75% or more of subject premium (identifying potential fronting arrangements to avoid reg oversight)
• Special Code “3” – Counterparty Reporting Exception for Asbestos and Pollution Contracts
• Special Code “4” – Incurred but not Reported Losses on Contracts in Force Prior to July 1, 1984
  
  • Exempt from Unauthorized reinsurance provison

Intercompany cessations are exempt from special code 2

Question 14

What is a fronting carrier arrangement?

Answer 14

• It is when an insurer cedes a large portion of its business (>75%), so that the reinsurer can avoid regulatory oversight
• Likely occurs when reinsurer is not authorized to conduct business in ceding company’s jurisdiction

Often occurs with WC due strict licensing requirements.

Question 15

What are the components of reinsurance recoverable?

Answer 15

Recoverable on Paid
* Columns 7 and 8 provide recoverables on paid losses and LAE. These are an asset on the company’s balance sheet (line 16.1)

Recoverable on Unpaid
* Columns 9 through 12 provide recoverable on unpaid loss and LAE.
* For companies that do not participate in intercompany pooling, these are equal to the amount of ceded reserves that are netted against the gross loss and LAE reserves (Balance Sheet Liability rows 1 plus 3)

Unpaid reconciles to Underwriting and Investment, Part 2A, column 3

Question 16

How is the Credit Risk Charge on Ceded Reinsurance Calculated

Answer 16

Credit Charge = Charge 1 + Charge 2 where

Charge 1 = Credit Risk Factor for Collateralized Recoverables x Collateralized Recoverables

Charge 2 = Credit Risk Factor for Non-Collateralized Recoverables x NonCollateralized Recoverables

Credit Risk Factors determined by financial strength rating for reinsurer (table)

Question 17

What are the categories for the aging of reinsurance?

Answer 17

The aging of reinsurance is based on terms and conditions of the contract or the date when recoverables exceed $50K

• Current (column 37)
• 1 to 29 days (column 38)
• 30 to 90 days (column 39)
• 91 to 120 days (column 40)
• Over 120 days (column 41

Amounts above reconcile to the summation of Schedule F Part 3, Cols 7 + 8

Amounts greater than 90 days are important for slow play calculation.

Question 18

How is the aging of reinsurance determined?

Answer 18

• The terms of the contract that specify when the reinsurer should make payment
• The terms of contract that specify when the insurer needs to notify the reinsurer of claims paid

OR

• The date when the amount recoverable exceeds $50,000 for a particular reinsurer and is entered in the insurance company’s financial accounts as a paid recoverable

If terms not specified or amounts less than $50, then mark current

Question 19

What are certified reinsurers?

Answer 19

• non-U.S. reinsurers domiciled in a jurisdiction designated by the NAIC as a Qualified Jurisdiction (i.e., Bermuda, France, Switzerland, etc.)
• one that would have been categorized as unauthorized prior to 2012
• one that has attained certification from the reporting entity’s domiciliary state

Question 20

What is considered when a reinsurer applies for certification?

Answer 20

• Jurisdiction
• Rating from rating agency
• Regulatory History
• Financial Position
• Capital / Surplus

Question 21

What are the benefits of becoming a certified reinsurer?

Answer 21

• Not penalized as heavily as an unauthorized reinsurer, so lower reinsurance provision
• Can post collateral of less than 100% against recoverables.

Question 22

What are the 2 parts of the Certified Reinsurer reinsurance provision?

Answer 22

RP⁶⁴(CD): reinsurance provision for collateral deficiency related to certified reinsurers → appears in (Col 64) of Part 3

RP⁶⁹(OR): reinsurance provision for overdue reinsurance related to certified reinsurers → appears in (Col 69) of Part 3

Question 23

For a certfied reinsurer how is the collateral deficiency portion of the reinsurance provisions calculated?

RP⁶⁴(CD)

Answer 23

• Determine Certified Reinsurer rating and % collateral needed for full credit.
• Collateral Requirement = Net Recoverable (Col19) x % Collateral Needed for Full credit
• Credit for Collateral [Cr⁶³(recov)] = Net Recoverable (Col 19) - (Collateral Provided / Collateral Requirement)
• Reinsurance Provision [RP⁶⁴(CD)] = Net Recoverable (Col 19) - Credit for Collateral [Cr⁶³(recov)]

Question 24

For a slow paying certfied reinsurer how is the reinsurance provision for overdue reinsurance calculated?

Answer 24

• Determine the amounts overdue by 90 days or more both in dispute and not in dispute (Pn90 & Pd90)
• Determine Credit for Collateral [Cr⁶³(recov)]
• Determine Amount of unsecured recoverables [F] (ie above collateral) where credit is given (Credit for Collateral - Total Collateral) —->min 0.
• RP⁶⁹(OR) = min [ 20% x MAX ( Pn90 + Pd90 , F ) , Cr⁶³(recov) ]

Different than authorized reinsurer

Recall that the RP69(OR) can not exceed Cr63(recov)

Question 25

For a non-slow paying certfied reinsurer how is the reinsurance provision for overdue reinsurance calculated?

Answer 25

RP⁶⁹(OR) = 20% x ( Pn90 + Pd90)

This is basically equal to the authorized reinsurer

Question 26

What is the provision for reinsurance for an unauthorized reinsurer

Answer 26

RP = min( T – C + 20% x Pn90 + 20% x Td , T )

• Uncollateralized recoverables + 20% of Non-Disputed 90 days past due + 20% Total Disputed Recoverables
• max of total recoverables

Question 27

What is the provision for reinsurance for a non-slow paying authorized reinsurer

Answer 27

RP = 20 % x ( Pn90 + Pd90 )

20% of recoverables 90 days overdue

Question 28

What is the provision for reinsurance for a slow paying authorized reinsurer

Answer 28

RP = 20 % x max( T - C , PN90 + PD90 )

• Max of either 20% Uncollateralized Recoverables or 20% of Total Paid Recoverables over 90 days past due.

Question 29

What are the strengths with using Schedule F as a solvency monitoring tool?

Answer 29

• Comparisons are easy and manipulation is hard:
  
  • RP is formulaic - easy to compare across years & companies
  • RP is formulaic - hard to manipulate because inputs are numbers from financial statements
• RP accounts for reinsurer credit risk with penalties for unauthorized reinsurers (often this means foreign insurers)
• RP accounts for reinsurer credit risk with penalties for slow-paying reinsurers
• Schedule F shows impact to surplus if reinsurance contracts are canceled (Part 6)
  
  • Would company be able to pay claims?

Question 30

What are the weaknesses with using Schedule F as a solvency monitoring tool?

Answer 30

• Formulas are a weakness too!!!!
  
  • may mask management’s better informed estimate of collectability risk
  • no statistical basis for formula - may not represent true collectability risk
• RP penalizes unauthorized reinsurers regardless of their financial strength
• RP penalizes slow-paying reinsurers regardless of their financial strength and 20% slow-payer threshold is arbitrary
• Schedule F doesn’t directly measure reinsurer’s solvency which is the true source of uncollectibility risk
  
  • It’s really just a proxy
• Schedule F doesn’t measure the quality of an insurer’s reinsurance management
• There are simply other more direct ways of looking at an insurers solvency such as RBC or IRIS

Question 31

What would be some ways to improve Schedule F?

Answer 31

• Disclose details of arrangements, as it doesn’t currently measure quality
• Include management input for uncollectibility risk - formula may miss important factors
• Include reinsurer ratings, as this directly gets at uncollectibility risk (is contemplate for certified)
• Replace 20% slow pay threshold with a sliding scale (20% is arbitrary)

Question 32

Why do SAP and GAAP use different estimates of uncollectable reinsurance risk

Answer 32

SAP
* for regulators to monitor insolvency risk (policyholders)
* Schedule F formula is conservative & hard for management to manipulate

GAAP
* for investors to evaluate future profitability (going concern/investors)
* management’s estimate may be better since it includes considerations not reflected in formula

Question 33

How is the Sched F reinsurance provision different from the actuary’s SAO discussion of reinsurance collectability?

Answer 33

• Schedule F is quantitative/formulaic, difficult to manipulate, and gives a minimum provision.
• SAO Discussion the actuary can consider both quantitative and qualitative factors and can recommend higher than the minimum from the RP formula based on factors not included.

Question 34

In Schedule F, Part 6 which items are impacted if reinsurance is removed.

Answer 34

__assets (2)__
* item 3: reinsurance recoverable on loss and loss adjustment expense payment (goes to 0)
* item 6: net amount recoverable from reinsurers (balancing item)

__liabilities (5)__
* item 8: losses & LAE (Increases by ceded)
* item 9: unearned premium (Increases by ceded)
* item 12: ceded reinsurance premiums payable (goes to 0)
* item 13: funds held by company under reinsurance treaties (goes to 0)
* item 14: provision for reinsurance (goes to 0)