TIA Section A - Odomirok 14

Question 1

List two things that the actuary can refer to when opining on the collectability of reinsurance recoverables:

Answer 1

• indications of regulatory actions or reinsurance recoverable over 90 days overdue
• listing of reinsurers, liability amounts ceded to each reinsurer, the collateral held by the insurer

Question 2

Main purpose of Schedule F:

Answer 2

Derive the provision for reinsurance

Question 3

How is the Provision for Reinsurance recorded in the Annual Statement

Answer 3

Liability (in the balance sheet)

Question 4

How does a change in the Provision impact surplus:

Answer 4

An increase in the provision results in a direct decrease to surplus.

Question 5

List two entries insurer must make if it believes that it should book a higher amount than the Provision formula indicates:

Answer 5

It should hold an additional reserve.
Record this in the Income Statement by reversing the accounts that had been used to establish the reinsurance recoverable.

Question 6

List the six parts of Schedule F:

Answer 6

1. Assumed Reinsurance
2. Portfolio Reinsurance
3. Ceded Reinsurance
4. Issuing or Confirming Banks for Letters of Credit from Schedule F, Part 3
5. Interrogatories for Schedule F, Part 3
6. Restatement of Balance Sheet

Question 7

List the components of the Balance Sheet that are populated from Schedule F data:

Answer 7

• Assets:
  *Amounts recoverable from reinsurers
• Liabilities:
  *Reinsurance payable on paid losses & LAE
  *Funds held by the company under reinsurance agreements
  *Provision for reinsurance

Question 8

How are the reinsureds grouped in Part 1:

Answer 8

• Affiliated insurers:
  *US Intercompany Pooling
  *US Non-Pool
  *Other (Non-US)
• Other US Unaffiliated Insurers
• Pools & Associations:
  *Mandatory Pools
  *Voluntary Pools
• Other Non-US Insurers

Question 9

List the benefits of the “Funds held or deposited with reinsured companies” form of collateral:

Answer 9

• reduces credit risk
• reduces administrative burden of having to continually collect money from reinsurer to make payments
• reinsurer gets paid interest

Question 10

Why do reinsureds like the Letters of Credit (LOC) form of collateral:

Answer 10

It is not part of the estate of the insolvent reinsurer, and therefore will not be lost in the event of a bankruptcy

Question 11

Two reasons that LOCs are expensive to the reinsurer:

Answer 11

1. banks charge a fee, which will be higher during uncertain economic times
2. the LOC is a reduction to reinsurer’s line of credit

Question 12

Three reasons that insurers may enter into Portfolio Reinsurance agreements:

Answer 12

They want to:
1. Exit a certain type of business
2. Remove the risk or uncertainty associated with the liability off their books
3. Obtain surplus relief (via the discounted premium)

Question 13

Purpose of Part 3, Col 5 (Special Code):

Answer 13

• Reinsurance relationships that may be particularly important to regulators
• Cases where special considerations are made when calculating the provision for unauthorized reinsurance

Question 14

Components of reinsurance recoverable columns (Part 3):

Answer 14

• Recoverable on paid
• Recoverable on unpaid
• Recoverable on premium
• Contingent Commissions receivable
• Col 15: total recoverable
• Col 16: disputed balances that are included in Col 15.

Question 15

Transactions that are exempt from disclosure as Special Code 2 (whether the contract ceded 75\% or more of the Direct Premium Written):

Answer 15

• Inter-company cessions with affiliates
• Cessions to a pool, group, association, organization of insurers that underwrite jointly, which:
  *is subject to examination by any state regulatory authority, or
  *operates pursuant to any state or federal statutory or administrative authorization (such as Worker’s Compensation or auto assigned risk pool)
• Those where under 5\% of the surplus is ceded
• Cessions to captive insurers that are regulated in their domiciliary state

Question 16

Exclusions from RBC credit risk charge:

Answer 16

• State mandated residual market mechanisms
• NCCI
• Federal Insurance programs (e.g. NFIP)
• U.S. parents, subsidiaries and affiliates

Question 17

Two factors that impact the credit risk charge on ceded reinsurance:

Answer 17

• Whether or not the recoverables are collateralized
• The financial strength of the reinsurer

Question 18

Collateralized reinsurer recoverable charges:

Answer 18

1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4+: 5%

Question 19

Uncollateralized reinsurer recoverable charges:

Answer 19

1: 3.6%/ 2: 4.1%/ 3: 4.8%/ 4: 5.3%/ 5: 7.1%/ 6: 14%/ 7: 10%

Question 20

Formulae to derive Stressed Net Recoverable:

Answer 20

Stressed Total Recoverable
= 120%* (Total Reins. Recoverable - Provision)

Stressed Net Recoverable = Stressed Total Recoverable - Funds Held (Col 20) - Reins. Payable (Cols 17 & 18)

Question 21

Two components of Credit Risk on ceded reinsurance:

Answer 21

• Credit Risk on Collateralized Recoverable
• Credit Risk on Uncollateralized Recoverable

Question 22

Formula to determine Credit Risk on Collateralized Recoverable:

Answer 22

Collateralized Factor * Collateral

Question 23

Formula to determine Credit Risk on Uncollateralized Recoverable

Answer 23

Uncollateralized Factor * Stressed Recoverable Net of Collateral Offsets

Question 24

Components of collateral:

Answer 24

• Multiple beneficiary trusts
• Letters of Credit
• Single beneficiary trusts & other allowable collateral

Question 25

Rules to determine the due date of the reinsurance recoverables:

Answer 25

Use the following hierarchy:
1. Terms of the reinsurance contract, if specified; or
2. Terms that specify when the insurer needs to report the claim to the reinsurer, if specified; or
3. When the amount recoverable from a reinsurer exceeds $50k and is entered into the insurer’s account as a paid recoverable

Question 26

How to record age of reinsurance recoverables when no dates have been mentioned and the recoverable is under $50k:

Answer 26

Record the amount as “currently due”

Question 27

Formula for provision of reinsurance for unauthorized reinsurer:

Answer 27

Provision = Unsecured total recoverables
——————————————————————-
\+20%(recoverables over 90 days overdue, not in dispute)
——————————————————————-
\+20%(amounts in dispute)

Question 28

Formula for provision for reinsurance for authorized slow paying reinsurer:

Answer 28

Provision = max [20% (unsecured total recoverables), 20% (recoverables over 90 days overdue)]

Question 29

Formula for provision for reinsurance for authorized non-slow paying reinsurer:

Answer 29

Provision = 20% (recoverables over 90 days overdue)

recoverables including disputes over 90

Question 30

Purpose of Schedule F Part 4

Answer 30

It lists the Issuing or Confirming Banks

(a Confirming Bank is one which will guarantee the LOC in the event that

Question 31

Define a “Confirming bank”

Answer 31

One which will guarantee the LOC in the event that the Issuing bank does not

Question 32

Describe the first table contained in Schedule F Part 5:

Answer 32

Identifies the five largest commission rates of the cedants reinsurance treaties of the contracts where ceded premium exceeds $50k

Question 33

Describe the second table contained in Schedule F Part 5:

Answer 33

• Identifies the five largest reinsurance recoverables that were listed in Col 15
• Provides the ceded premiums for each reinsurer
• Indicates whether the reinsurer is affiliated with the insurer

Question 34

Two assets that need to be adjusted in Schedule F Part 6

Answer 34

1. Reinsurance recoverable on loss & LAE payment
2. Net amounts recoverable from reinsurers

Question 35

Liabilities that need to be adjusted to 0 in Part 6

Answer 35

• Ceded reinsurance premium’s payable
• Funds held by the company under reinsurance treaties
• Provision for reinsurance

Question 36

Liabilities that need to be adjusted to values other than 0 in Part 6:

Answer 36

1. Losses & LAE
2. Unearned Premiums

Question 37

Items that regulators consider when determining whether to certify a reinsurer:

Answer 37

• Jurisdiction
• Financial Position
• Capital & Surplus
• Regulatory History
• Financial Strength Ratings

Question 38

Jurisdictions that certified reinsurers operate in:

Answer 38

Bermuda, France, Germany, Ireland, Japan, Switzerland and the UK

Question 39

List some functions of Schedule F (in addition to assessing the net reserves):

Answer 39

• helps estimate the significance of the assumed and ceded transactions to the surplus balance
• Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated

Question 40

List some criticisms of schedule F:

Answer 40

• Ignores management input (because it is formulaic.)
• The formula has no statistical, historical or actuarial basis. (It may therefore underestimate the credit risk.)
• Unauthorized reinsurance may be better (it may provide higher quality protection and/or lower prices.)
• The multitude of calculations and level of detail may lead to a false level of precision.
• The cost of collateral requirements will be passed on (from the reinsures to insurers, ultimately increasing the cost to consumers.)
• Schedule F does not reveal anything about the reinsurer’s solvency