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An Introduction to Reserving and Financial Reporting Issues for Non-Traditional Reinsurance

An Introduction to Reserving and Financial Reporting Issues for Non-Traditional Reinsurance. Casualty Loss Reserving Seminar September 14, 2004 Derek Jones, FCAS, MAAA. Finite Re Basics. Overview. Customized deals to address specific issues of cedant Limited risk transferred by cedant

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An Introduction to Reserving and Financial Reporting Issues for Non-Traditional Reinsurance

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  1. An Introduction to Reserving and Financial Reporting Issuesfor Non-Traditional Reinsurance Casualty Loss Reserving Seminar September 14, 2004 Derek Jones, FCAS, MAAA

  2. Finite Re Basics Milliman

  3. Overview • Customized deals to address specific issues of cedant • Limited risk transferred by cedant • Limited upside for reinsurer Milliman

  4. Common Uses • Deferral of taxes • Discounting • Earnings stabilization • Risk management • Surplus protection Milliman

  5. Types of Deals Retroactive • Adverse development cover • Loss portfolio transfer Prospective • Aggregate stop-loss • Finite quota share • Spread loss Milliman

  6. Loss Portfolio Transfer • Covers prior written business • Move reserves off balance sheet • Premium = PV (reserves) + provision for potential adverse development • Tends to cover smaller segments Milliman

  7. Adverse Development Cover • Cedant retains portfolio • Premium is based on potential for adverse development and related timing of future payments • Tends to cover larger groupings of business than LPTs Milliman

  8. Aggregate Stop-Loss • Stabilize earnings • Typically multi-year deals • Loss ratio corridor above plan ratio • Fixed premium Milliman

  9. Finite Quota Share • Primary benefit = surplus relief • Differences from traditional QS • Loss ratio cap • Loss corridor • Lower net cost Milliman

  10. Common Features • Time value of money (via experience account) • Cedant participation • Sub-limits of liability • Multiple years • Cancellation, commutation provisions Milliman

  11. Reserving Issues Milliman

  12. Understand Deal Structure • Line(s) of business, coverage type • Limits, sub-limits for reinsurer • Reinsurance or deposit accounting • Loss reserve discounting • Experience account • Commutation provision Milliman

  13. Experience Account • EAB = premium – margin – loss payments + interest credit • What if EA is exhausted? Milliman

  14. Monitor Emergence • Issue 1: temporary speed-up • Could exhaust EA too quickly • Issue 2: actual > expected • Initial estimate of nominal loss may be understated • Under-reporting will delay triggering additional premium Milliman

  15. Interest Credit • Based on risk-free rate (e.g., U.S. Treasury spot rates) • Spread is larger for deals on a funds withheld basis Milliman

  16. Sensitivity Testing • Both magnitude and timing of reinsurer payment are key • Nominal loss amounts • Retroactive: usually use more simplistic approach to produce range • Prospective: stochastic simulation • Use alternative payout patterns to evaluate impact of timing Milliman

  17. Bulk Reserves • Law of large numbers doesn’t apply • How is best estimate determined (mode, mean, confidence level)? • Not commonly used in practice Milliman

  18. Financial Reporting Issues Milliman

  19. Type of Accounting • Reinsurance treatment is based on SFAS 113 or SSAP 62 • Reinsurer must assume significant risk • It must be reasonably possible to realize a significant loss • Deposit accounting is required unless both conditions are met Milliman

  20. Prospective vs. Retroactive Reinsurance The following exceptions should be treated as prospective reinsurance • Structured settlements • Novations • Reduced participation in reinsurance treaties • Intercompany agreements that do not produce gain in surplus Milliman

  21. Deposit Accounting • No initial impact on balance sheet or income statement for cedant or reinsurer • Emerges in financial statements as actual payments are made/received • Note: deposit liabilities are not part of lines 1 or 3 on statutory balance sheet Milliman

  22. http://www.casact.org/pubs/forum/04fforum/04ff073.pdf derek.jones@milliman.com 646.473.3416

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