Schedule F used to monitor the solvency of an insurer

Jaarndt

Hello,
I was wondering if you can help clarify something with me on this section. Under the Question: "how can Schedule F be used to monitor the solvency of an insurer" it is stated "quality of reinsurance impacts risk of uncollectability from reinsurer which impacts solvency of the insurer" this made me think that Schedule F must assess the quality of reinsurance but then in battle quiz three question 3 says that Schedule F does not measure the quality of an insurer's reinsurance. This was listed in perenthasis next to "disclose details of reinsurance arrangements." What exactly is the quality of their reinsurance referring to? It seems like question three may be referring to how much reinsurance they have. Since if we disclosed their reinsurance arrangements we would be able to see if they don't have enough reinsurance. But in any case it seems there is a contradiction between these statements.

graham

You know, I'm not sure why I included that statement in parentheses. I checked the examiners' report for the question that BattleCard was based on:

• https://battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(16).pdf

I couldn't find any reference to Schedule F not measuring the quality of reinsurance. Schedule F does just that - it tries to measure the quality of reinsurance by calculating a provision. I have deleted that parenthetical statement from the BattleCard.

Maybe what I had meant to say was that Schedule F doesn't measure the quality of the reinsurer in terms of things like the quality of their management, or the quality of their internal operations. That sort of information would not be in Schedule F, although it could be important in assessing the likelihood of collectability.

jchen0501

One of the strengths you mentioned of Schedule F being a solvency monitor:

• Schedule F shows impact to surplus if reinsurance contracts are canceled

Intuitively this makes sense, but in the calculation problem (restating BS as if no reinsurance) in the prior section shows no changes to surplus

• https://www.battleacts6us.ca/pdf/Odomirok.Ch14_(17F.14)_v03.pdf

graham

Actually, I got that bullet point from part (b) of that 2017 exam problem. You're right that the restatement of the balance sheet always shows no change to surplus. That's because the balancing item in line 6 (see exam problem) is calculated specifically to leave the surplus unchanged.

So the way I understand it is this:

• The Cedar source text on reinsurance accounting lists one of the purposes of reinsurance as "surplus relief", where the reinsurer's surplus is used to underwrite a portion of the primary insurer's risks. (Without reinsurance, the primary insurer might not have been able to underwrite certain policies due to insufficient surplus.)
• So in that sense, removal of reinsurance has an impact on the "effectiveness" of the primary insurer's surplus. And although the restatement of the balance sheet without reinsurance doesn't reflect that, Schedule F can nevertheless give you some idea of how the removal of reinsurance can place more pressure on an insurer's surplus.

I'm not sure if that's the interpretation the examiners' report had in mind. If you aren't comfortable with that explanation, then try to avoid listing "impact to surplus" if you get that question on the exam. Normally, they only ask for a couple of strengths or weaknesses, so you can stick to the ones that are more obvious.