CIA.Reins

Reading: “Report of the CIA Task Force on the Appropriate Treatment of Reinsurance,” October 2007. Candidates will be responsible for the following sections:

pages 11-12	Key Principles of Risk Transfer
pages 13	Qualitative Assessment
pages 15-18	Limitations of Risk Transfer
pages 18-23	Other Issues

Authour: CIA (Canadian Institute of Actuaries)

Forum

Pop Quiz

• From Frei.RskTrans, what are 4 basic tests for assessing risk transfer?
• Hint: 2 of them are qualitative, and 2 are quantitative

Study Tips

The purpose of reinsurance is to transfer risk, but it isn't always obvious that risk has really been transferred. A reinsurer may find subtle ways to limit their liability in the event of a claim. These are referred to as risk-limiting features. This paper discusses the 4 key principles in determining the existence of risk transfer. See Frei.RskTrans for further details.

Memorize:

• 4 key principles for assessing risk transfer
• 2 broad categories of risk-limiting features of a reinsurance agreement
• examples with each category of risk-limiting feature
• defns: side agreement, mirroring, bifurcation (see Full BattleQuiz)
• considerations in estimating a credit provision for a counter-party: cred-BEDD (see Full BattleQuiz)

Conceptual:

• apply qualitative principles to assess transfer of risk

Calculations:

• none

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• risk-limiting features types & examples
• key principles of risk transfer
• testing risk transfer (this is discussed more fully in Frei.RskTrans)

Top Questions ← Questions you absolutely need to know!

reference	part (a)	part (b)	part (c)	part (d)
E (2018.Fall #18)	key principles: - of risk transfer	Frei.RskTrans	risk-limiting features: - identify examples
E (2018.Spring #16)	key principles: - of risk transfer	see BK.Reins	see BK.Reins
E (2017.Spring #17)	testing risk transfer: - qualitative assessment	see Frei.RskTrans	see OSFI.Eqk
E (2016.Fall #16)	see Frei.RskTrans	risk-limiting features: - identify examples
E (2016.Spring #16)	key principles: - of risk transfer	risk-limiting features: - identify examples
E (2014.Fall #24)	risk-limiting features: - identify examples
E (2014.Spring #29)	outdated	outdated

In Plain English!

Intro

• There is some overlap between this CIA reading on reinsurance and the FreiHaut/Vendetti reading Frei.RskTrans. That reading was more technical (and more important) and this CIA reading is more conversational. (* The first 10 pages covers really basic terminology and concepts. You can skip this and go straight to the section entitled, THE CONCEPT OF RISK TRANSFER)

Key Principles of Risk Transfer (p11-12)

• A good place to start is the 4 key principles for assessing risk transfer:
  • KP1: use quantitative and/or qualitative approaches, depending on information available
  • KP2: use professional judgment
  • KP3: consider overall agreement (includes all written & verbal agreements)
  • KP4: re-check risk transfer when certain conditions occur (at inception or when contract changes significantly affect future cash flows)
• Recall that in the Frei.RskTrans BattleWiki article, we started by listing 4 basic tests for assessing risk transfer, 2 qualitative methods and 2 quantitative methods. Key principles 2, 3, & 4 listed here are a mixture of qualitative and quantitative methods, depending on how you choose to apply them. Note that (2016.Spring #16a) asked you to list a couple of these key principles, so it's a list you should memorize.

mini BattleQuiz 1 You must be logged in or this will not work.

---

Qualitative Assessment (p13)

This section is a mostly a rehash of stuff you already know. The BattleQuiz has an exam question that requires a short set-up:

• An insurer is considering purchasing a catastrophic treaty but can't accurately quantify their earthquake risk. Their earthquake model shows the probability of an earthquake to be extremely low. Is risk transfer self-evident?

Note: There is a typo in the examiner's report for part (a) of the following problem:

E (2017.Spring #17)

The first sample answer should say that the risk transfer is reasonably self-evident if:

1. done at arms-length
2. there are NO risk-limiting features (the examiner's report omitted the "NO")

(See here in the forum for user chrisboersma's detailed explanation. Thx chrisboersma!)

mini BattleQuiz 2 You must be logged in or this will not work.

---

Limitations of Risk Transfer and Other Issues (p15-23)

• Risk-limiting features is the most frequently tested topic from reinsurance, (2016.Fall #16b), (2016.Spring #16b), (2014.Fall #24). There are 2 types of risk-limiting features:
  • terms set in advance: a contract may have sneaky little clauses that don't seem important, but can later be used by the reinsurer to limit coverage
  • experience-based renewals: the reinsurer looks at your claims experience then forces you into renewal terms that guarantee a profit for the reinsurer (that's a non-no!)
• Details in the mini BattleQuiz.

mini BattleQuiz 3 ← limitations of risk transfer

mini BattleQuiz 4 ← other issues

Full BattleQuiz

  Forum

POP QUIZ ANSWERS

• 4 basic tests for assessing risk transfer, from Frei.RskTrans:
  • Method 1: Qualitative
    • Is transfer of risk self-evident? (Maybe the reinsurance premium is very low, or the potential loss is very high, like with hurricanes or earthquakes.)
  • Method 2: Qualitative
    • "Substantially All" exception: IF (SigLoss NOT reasonably possible) BUT (reinsurer assumes "substantially all" risk) THEN (RskTrans may still exist)
    • (Often applies to quota-share contracts with a high % transferred)
  • Method 3: Quantitative
    • Calculate ERD (Expected Reinsurer Deficit): ERD = Freq x Sev (If ERD > 1% then there has been transfer of loss.)
  • Method 4: Quantitative
    • 10-10 rule: IF reinsurer has a 10% chance of suffering a 10% loss THEN the contract is deemed to have transferred risk