CIA.Reins

Question 1

List the 4 key principles of risk transfer assessment

Answer 1

1. There is no one single way to assess the existence of risk transfer in every scenario
2. Use professional judgment
3. Consider overall agreement (all verbal & non-verbal agreements)
4. Check risk transfer at inception of contract
   (& re-check whenever changes affect future cash flows)

Question 2

When should existence of risk transfer be (re)checked

Answer 2

• at inception
• when contract change significantly affects expected future cash flows

Question 3

Identify 2 broad categories of risk-limiting contract and list 2 features for each category

Answer 3

1. Terms Set in Advance:
   - profit sharing
   - adjustable premiums/commissions
   - pre-set payment timing
   - expected duration features
   - high front-end commissions
   - related-party counterparties.
2. Experience-Based Renewals:
   - future terms based on past experience
   - forced renewals if the contract is in deficit (reinsurer is losing money)

Question 4

Identify 3 types of terms-set-in-advance risk limiting features

Answer 4

• ADJUSTABILITY of reinsurace premiums or commissions (Ex: LR caps)
• PRE-SET LIMITS on timing of loss payments from reinsurer to insurer (Ex: qtrly) - removes timing risk
• Profit Sharing
• Forced renewals
• Commutation clause: Can significantly limit risk transfer as risk can be just passed back after commutation.
• High retention (10% of limit)
• COUNTERPARTIES ceding back to original cedant

Question 5

Identify 2 examples of ‘EBR’ (Experience-Based Renewals) risk limiting features

Answer 5

• future terms BASED ON past experience (& reinsurer guaranteed to recover losses)
• forced renewals if the contract is in deficit (reinsurer is losing money)

Question 6

Define ‘side agreement’ in RE contract

Answer 6

Agreement between cedant & reinsurer NOT DIRECTLY INCORPORATED into contract - may obscure intent of contract

Question 7

Define ‘bifurcation’ of a reinsurance contract.

Answer 7

Separating a reinsurance contract into its basic constituents:
- insurance components (risk transfer)
- non-insurance/deposit components.

The CIA Task Force strongly believes mandatory bifurcation is NOT appropriate under Canadian GAAP or IFRS

Question 8

Identify 4 considerations in estimating a credit provision for a counter-party

Answer 8

1. BEST rating of reinsurer
2. EXPERTISE of reinsurer in relevant LOBs
3. DIVERSIFICATION of reinsurer
4. History of claims DISPUTES