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Seminar on Reinsurance

Seminar on Reinsurance. Chester J. Szczepanski Chief Actuary Pennsylvania Insurance Department. Risk Transfer - What Changes Are On The Horizon?. A Regulatory / NAIC Perspective. Risk Transfer. Why the concern? Finite Reinsurance!

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Seminar on Reinsurance

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  1. Seminar on Reinsurance Chester J. Szczepanski Chief Actuary Pennsylvania Insurance Department

  2. Risk Transfer - What Changes Are On The Horizon? A Regulatory / NAIC Perspective

  3. Risk Transfer Why the concern? • Finite Reinsurance! • Investigations into insurance industry accounting practices

  4. Finite Reinsurance • A form of reinsurance that specifically incorporates the time value of money! • Unlike most reinsurance, contracts are usually multi-year. • They spread risk over time and take into account investment income generated over the period.

  5. Appropriate • Risk actually transferred • Accounted for in a manner that reflects economic reality

  6. Rule of Thumb • 10% chance of loss amounting to 10% of the premium paid for the coverage

  7. In practice • Very difficult to apply test because its application rests upon valuations and assumptions that might strongly influence the results.

  8. NAIC and State Insurance Regulators What efforts are underway? • Actively looking into issues surrounding • Considerable scrutiny because of misuse by some high profile insurers • NAIC’s P&C Reinsurance Study Group has been evaluating existing statutory disclosure requirements • Considering amendments to statutory accounting guidance

  9. Proposed New Disclosures • Require an insurer to report to state insurance regulators any agreement that has the effect of altering surplus by more than 3% or which affects more than 3% of premiums or losses. • Identify any reinsurance contract accounted for differently under SAP compared to general financial statement purposes. • Additional reporting requirements to increase transparency.

  10. Additional Measures • Developing a standard attestation form by CEO and CFO acknowledging reinsurance contracts for which the company has taken credit.

  11. Result? NAIC Quote: “The proposed enhanced disclosure requirements, in addition to the attestation by company management of entities that engage in these transactions, should clarify the overall impact of finite reinsurance on the industry. These issues need to be addressed with a sense of urgency. State insurance regulators have seen nothing to alleviate our concerns since we began our rigorous review of these practices.”

  12. NAIC &Transfer of Insurance Risk • The NAIC’s Casualty Actuarial Task Force is reviewing the issue of “transfer of insurance risk” • Slated to provide information to the study group by the end of the summer. • Considering whether the 10/10 rule should be eliminated

  13. Why is transfer of risk so important? • If it is determined that companies do not meet risk transfer requirements, the companies do not get to utilize reinsurance accounting treatment. • Underwriting files required at inception to determine risk transfer are often incomplete at time of regulatory inspection. • Some forms of abuse have included side agreements guaranteeing a profit for the reinsurer.

  14. Conclusions: • A complex subject • Tension between legitimate business needs and potential abuses • Subjective evaluations • Actuaries!

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