CIA Reinsurance Treatment

  1. Key Principles of Risk Transfer
    1. Various approaches to assess risk transfer.
    2. prof judgment required for assessment.
      • e.g. select historical data, set parameters for models
    3. reinsurance contract and all other commitments (verbal or written) between parties should be considered
    4. Assessment at inception and any time there is a change in contract provisions
      • e.g. rates / coverage levels that is not a linear change in QS
  2. Qualitative Assessment - Reasonably self-evident risk transfer
    • When obvious that contract protects cedant from future adverse events
    • 'if the event happened is protection afforded' and not on how probable the event or how much risk is transferred
    • requires that transactions be 1) done at arms length, and 2) no risk limiting clauses
  3. Potential limiting features of Risk Transfer
    1. Terms Set in Advance
      1. Profit sharing
      2. Adjustable reinsurance premiums / commissions
      3. Pre-set limits to timing of payments
      4. Expected duration of contract
      5. High front-end reinsurance commissions
      6. Counterparties
    2. Experience Based Renewals
      1. Future terms based on past experience
      2. Forced renewals
  4. Profit sharing - Problems
    1. return pre-agreed % of profits to ceding (QS)
    2. problem:
      • expectation of large profit sharing; there shouldn't be profit expected for reinsurer -> not enough risk transfer to reinsurer
      • absence of loss carryforward (used to determine amount of refund)
      • negative exprience refund (makes reinsurer whole)
  5. Adjustability of reinsurance premiums / commissions - Problems
    1. contract limits/adjusts amounts payable by/to reinsurer
    2. problem:
      • adjustable features counter reinsurer loss
      • QS: final commission to ceding based on experience
      • XOL: adjustable reinsurance premium rate (swing rate)
      • QS: Limits or caps on LRs
  6. Pre-set limits to timing of payments - Problems
    1. some with premium schedules limit timing risk
    2. some only to facilitate admin. but review required
  7. Expected duration of contract - Problems
    1. early capture thru commutation may limit timing risk
    2. may not limit, e.g. ON auto XOL AB claims commuted back after a few years. need to review
  8. High front-end reinsurance commissions - Problems
    1. some elements of financing
    2. doesn't necessarily limit, e.g. to offset acquisition costs, when majority of the risk is ceded.
    3. limit if early lapses higher than expected. Should review.
  9. Counterparties - Problems
    Contracts that cede back to cedant: need to ensure reserves and required capital is not being arbitraged away.
  10. Future terms based on past experience - Problems
    1. When annually renewable, not an issue.
    2. limit if reinsurance rates guaranteed to recover portion of past losses (unless ceding can take business elsewhere)
    3. e.g. multi-year contracts where renewal is not at cedant’s option (premium increase if loss in a prior year -> guarantee payback)
  11. Forced renewals - Problems
    1. limit if contract in deficit and force cedant to renew contract until losses eliminated
    2. may not if future contracts on market term. need to review
  12. Side Agreements - Problems
    1. commitments not in reinsurance contract.
    2. limit if e.g. require ceding to enter into future contracts with reinsurer based on profitability of current contract
    3. may not if future contracts on market terms
  13. Mirroring - Problems
    1. mirroring: ceded liablity estimation equal.
    2. difficult in reality (dif data -> dif assumptions)
      1. QS:
        • often reinsurers do not have access to data and rely on cedant (IBNR)
        • reinsurer assumptions based on agg of treaties (!=sum of individual treaties)
      2. XOL:
        • Reinsurer not participating on all layers
        • Cedant's IBNR based on small amount of excess info
        • Reinsurer combine all treaties to produce more credible data
  14. Bifurcation - Problems
    1. Separate contracts into insurance portion vs. not (deposit accounting)
    2. Reinsurance contracts not intended to be bifurcated
      • only valid in entirety
      • individual components may not be issued on their own
    • e.g. A cedes to B and received upfront 150% commission for 1st year. for B to profit, need to charge A more premium following years.
    • Bifurcation -> recovery of upfront commission separate from pure insurance risk, and treated as a loan (deposit accounting)
  15. Reinsurance Counterparty Risk - Problems
    Reinsurer unable to pay claims or pay in full. Degree of MfAD depends on uncertainty of recovery:
    • Rating from rating agencies
    • History of dispute on claims;
    • Whether reinsurer is in runoff;
    • Expertise of reinsurer;
Card Set
CIA Reinsurance Treatment
CIA Reinsurance Treatment