Casualty Actuarial Society – Washington, D.C. September 18-19, 2008 Ian Sterling, FCAS, MAAA Risk Transfer – Actuarial Perspective

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  • Slide 1
  • Casualty Actuarial Society Washington, D.C. September 18-19, 2008 Ian Sterling, FCAS, MAAA Risk Transfer Actuarial Perspective
  • Slide 2
  • Presentation titlePage 2 Agenda FAS 113/SSAP 62 Methods of Testing Metrics Next Steps
  • Slide 3
  • Presentation titlePage 3 Reinsurance Accounting Guidance GAAP FASB Statement No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts Statutory SSAP No. 62, Property and Casualty Reinsurance Similar to FAS 113
  • Slide 4
  • Presentation titlePage 4 Risk Transfer Conditions: Paragraph 11 Test: The reinsurer assumes substantially all of the insurance risk relating to the reinsured portion of the underlying insurance contracts, or Paragraph 9 Test: (a) The reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance policies. Transfer of insurance risk refers to: Ultimate amount of net cash flows between parties, and Timing of the receipt of cash (b) It is reasonably possible that the reinsurer may realize a significant loss from the transaction. Risk factors do not include recognition of reinsurance costs, investment risk, taxes, or credit risk Short-Duration Risk Transfer FAS 113
  • Slide 5
  • Presentation titlePage 5 Risk Transfer Conditions: Indemnification of the entity company against loss or liability relating to insurance risk in reinsurance requires both of the following: a. The reinsurer assumes significant risk under the reinsured portions of the underlying insurance agreements; and b. It is reasonably possible that the reinsurer may realize a significant loss from the transaction SSAP 62
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  • Presentation titlePage 6 Risk Transfer Testing Practice Note American Academy of Actuaries Committee on Property and Liability Financial Reporting November 2005 Reinsurance Attestation Supplement 20-1
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  • Presentation titlePage 7 (1) Reasonably Self-Evident Purpose Need to Document Considerations Substance of the arrangement Existence, impact and role of risk-limiting factors Use of professional judgment Contract Terms to make this less likely? Methods of Testing
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  • Presentation titlePage 8 (1) Reasonably Self-Evident Examples of Safe Harbors: A straight QS with no risk-limiting features other than a loss ratio cap with negligible effect on the economics of the transaction Single year property cat and casualty clash contracts with little or no risk limiting features apart from a reinstatement premium common to these types of contracts Most facultative and treaty per risk excess of loss arrangements with rates on line well below the present value of the limit of coverage, or without aggregate limites, sub-limits, or contingent features Methods of Testing
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  • Presentation titlePage 9 (1) Reasonably Self-Evident Examples of contracts not reasonably self-evident: Aggregate excess of loss contracts Contracts with experience accounts, experience rating refunds, or similar provisions, if such provisions have a significant impact on the contracts economics Multiple year contracts QS contracts with risk limiting features Methods of Testing
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  • Presentation titlePage 10 Methods of Testing Reasonably Self- Evident Yes Document No Risk Transfer Analysis Scenario Testing Simulation/Modeling Techniques
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  • Presentation titlePage 11 (2) Scenario Testing Historical results by year Comparison of All Underwriting Downside Scenarios Comparison of Cedent and Reinsurer Expected Underwriting Deficits Methods of Testing
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  • Presentation titlePage 12 Historical Results by Year Methods of Testing
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  • Presentation titlePage 13 Comparison of All U/W Downside Scenarios Methods of Testing
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  • Presentation titlePage 14 Comparison of Cedent and Reinsurer Expected Underwriting Deficits (EUD) Methods of Testing
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  • Presentation titlePage 15 (3) Simulation Testing Types of Models Aggregate Loss Models Frequency-Severity Models Combination Models Considerations Methods of Testing
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  • Presentation titlePage 16 Modeling Considerations Need to model: Contract losses Contingent Premium Commissions Other Contract Features Reinsurance Underwriting Expenses Potentially not considered: Tax impacts Methods of Testing
  • Slide 17
  • Presentation titlePage 17 (1) 10-10 Rule (Value at Risk) Initial rule of thumb, and still somewhat used today Definition Shortcomings Unintended Consequences Metrics
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  • Presentation titlePage 18 (2) Tail Value at Risk (TVaR) Definition Criteria similar to 10-10 = TVaR > 10% at 10 th percentile Advantages Disadvantages Does this solve the shortcomings of VaR? Metrics
  • Slide 19
  • Presentation titlePage 19 Var and TVaR Example Metrics
  • Slide 20
  • Presentation titlePage 20 (3) Expected Reinsurer Deficit (ERD) Definition How relates to previous methods Criteria of ERD > 1% similar to 10-10 (1% = 10% x 10%) Avg Loss Severity = TVaR at the economic breakeven LR Advantages Does this solve Shortcoming 2? Similar to Financial? Metrics
  • Slide 21
  • Presentation titlePage 21 (4) Other Methods Other methods: 1. Right Tail Deviation (RTD) - Wang 2. Mean Square Adverse Deviation 3. Conditional Expected Downside 4. Some combination of (2) and TVaR Advantage Disadvantage Metrics
  • Slide 22
  • Presentation titlePage 22 Can a bright-line test be used? Advantage Disadvantage Guides 10-10, TVaR, ERD, RTD, etc. Methods of Testing Risk Transfer Reasonably Self-Evident, Scenario Testing, Simulation Next Steps Summary

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