Estimating a Provision for Ceded Reinsurance Bad Debt

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: b Unsecured Recoverables from Unauthorized Reinsurers b Unsecured Recoverables from Slow-Paying (Authorized) Reinsurers b Overdue Recoverables b Recoverables in Dispute

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

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

Unauthorized Provision

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

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

Authorized Fast-Paying Provision

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

Authorized Slow-Paying Provision:

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

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

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

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