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19 Cards in this Set
- Front
- Back
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2 criteria to classify a transaction as having risk transfer:
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1. Reinsurer assumes significant insurance risk (underwriting risk and timing risk)
2. It is reasonably possible that the reinsurer may realize a significant loss |
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What must the CEO/ CFO confirm in the Reinsurance Attestation Supplement:
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• 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 & 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 |
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Formula for Expected Reinsurer Deficit (ERD):
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ERD = Probability (NPV U/W RI Loss)* Avg Severity (U/W loss) Threshold is typically >1%
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Describe why profit commissions need to be excluded from the risk transfer analysis.
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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
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Describe why profit commissions can have an indirect impact on risk transfer:
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The reinsurer may charge a higher premium to account for the fact that profit commissions may need to be paid.
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Describe why reinsurer expenses need to be excluded from the risk transfer analysis:
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They do not constitute a cash flow that takes place between ceding company & reinsurer.
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How should premium be treated in the risk transfer analysis when it is dependent on future events:
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Initial deposit premium: intuitive & 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. |
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2 reasons that the selected interest rate should at least exceed the risk free rate:
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1. Very unlikely that a lower rate will be reasonable
2. A lower rate would over detect risk transfer |
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2 issues with using a rate higher than risk free if the reinsurer has a higher expected investment yield:
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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 |
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Why cant a yield curve be used to discount cash flows in a risk transfer analysis:
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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.
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What factors can be used to derive the projected loss payment patterns:
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• Previous experience of the ceding insurer
• Industry benchmarks • Combination of the two |
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List some factors which the loss distributions can be based on:
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• Previous company experience
• Industry benchmarks • Pricing information • Judgment • All of the above |
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2 ways to reflect parameter risk in the risk transfer analysis:
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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. |
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Common pitfalls with risk transfer analyses:
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• Profit Commissions
• Reinsurer Expenses • Interest Rates and Discount Factors • Premiums • Evaluation Date • Commutation and Timing of Payments |
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Practical considerations with risk transfer analyses:
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• Parameter Selection
• Interest Rate • Payment Pattern • Loss Distribution • Parameter Risk • Use of Pricing Assumptions • Commutation Clauses |
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Exclusion to "signifant loss" requirement to qualify for reinsurance accounting:
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Substantially All: reinsurer assumes 'substantially all' of the insurance risk related to the reinsured portions of the underlying insurance contracts (ie: straight quota share or individual risk contracts with no loss ratio caps or risk limiting features). Allows companies to aquire qualifying reinsurance on inherently profitable books of business without the possibility of the reinsurer realizing a significant loss.
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Descirbe the 10-10 rule:
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A reinsurance contract exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for the reinsurer.
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Risk transfer methods
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• ERD
• 10-10 Rule • Value at Risk • Tail Value at Risk • Right Tail Deviation • Risk Coverage Ratio |
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2 issues with using pricing assumptions in the risk transfer model
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• Simulation testing for risk transfer should be based on expected loss experience and not be market-driven
• Pricing might include conservative selections which might not be conservative when testing for risk transfer (ie lower discount rate, or higher expected losses) and could lead to over-detection of risk transfer |
