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Estimating a Provision for Ceded Reinsurance Bad Debt: Schedule F, etc.

Estimating a Provision for Ceded Reinsurance Bad Debt: Schedule F, etc. Presented By: Jeff Van Kley, FCAS, MAAA CNA Insurance. September 18, 2000. Types of Schedule F Provisions:. Unsecured Recoverables from Unauthorized Reinsurers

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Estimating a Provision for Ceded Reinsurance Bad Debt: Schedule F, etc.

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  1. Estimating a Provision for Ceded Reinsurance Bad Debt:Schedule F, etc. Presented By: Jeff Van Kley, FCAS, MAAA CNA Insurance September 18, 2000

  2. Types of Schedule F Provisions: • Unsecured Recoverables from Unauthorized Reinsurers • Unsecured Recoverables from Slow-Paying (Authorized) Reinsurers • Overdue Recoverables • Recoverables in Dispute

  3. Authorized vs. Unauthorized: • Unauthorized Reinsurers are those who are not Licensed or otherwise Accredited to do business in the Ceding Company’s State of Domicile. • Provision will typically be greater for Unauthorized Reinsurers due to lack of Capital Requirements in the State of Domicile.

  4. Provision for Unauthorized: • Unsecured TOTAL Recoverable (including Reserves and Amounts in Dispute) + 20% of (90 day Overdue amount + Disputed amount) Limited to the Total Offset (Collateral) amount • Provision is Capped at TOTAL Recoverable

  5. Unauthorized Provision

  6. Authorized Slow-Paying Test: Test Value = (Paid Recoverable over 90 days Overdue excluding Disputed Amounts)  [(Total Paid Recoverable excl. Disputed Amounts) + (Paid in Last 90 Days)] Test Value  20% ==> Authorized Slow-Paying Reinsurer

  7. Authorized Fast-Paying Provisions: • 20% of Paid Recoverable 90 days Overdue and not in Dispute + 20% of Paid Recoverable in Dispute

  8. Authorized Fast-Paying Provision

  9. Authorized Slow-Paying Provision: 20% of the Greater of the Following Values: • Unsecured TOTAL Recoverable (including Reserves and amounts in Dispute) • Paid Recoverable (including amounts in Dispute) over 90 days Overdue

  10. Authorized Slow-Paying Provision:

  11. Industry Schedule F Provisions: Source: A.M. Best 1999 Aggregates

  12. Accounting Treatment of Provision: • Provision is shown as a Liability separate from Loss and LAE Reserves on the Balance Sheet. • Changes in Provision are reflected as Gain or (Loss) in Surplus, NOT in Statutory Net Income.

  13. Actuarial Opinion Considerations: • Any actual Collectibility problems • Review Ratings given by a Recognized Rating Service • Examine Schedule F for indications of Regulatory Action or Overdue Recoverables • Reinsurer Willingness to pay claims • If Inadequate Bad Debt Reserve, shortfall may be Considered in the Reserve Opinion

  14. Other U.S. Accounting: • Risk-Based Capital: Additional Provision = 10% of (ALL Reinsurance Recoverable less Schedule F Provision) • GAAP: No Specific “Provision” or Method of Calculation, Assets are reduced or Liabilities increased for expected Uncollectible Amounts

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