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Seminar on Reinsurance
Chester J. Szczepanski
Chief Actuary
Pennsylvania Insurance
Department
Risk Transfer - What
Changes Are On The
Horizon?
A Regulatory / NAIC
Perspective
Risk Transfer
Why the concern?
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Finite Reinsurance!
Investigations into
insurance industry
accounting practices
Finite Reinsurance
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A form of reinsurance that specifically
incorporates the time value of money!
Unlike most reinsurance, contracts are
usually multi-year.
They spread risk over time and take into
account investment income generated
over the period.
Appropriate

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Risk actually
transferred
Accounted for in a
manner that reflects
economic reality
Rule of Thumb

10% chance of loss
amounting to 10% of
the premium paid for
the coverage
In practice

Very difficult to apply test because its
application rests upon valuations and
assumptions that might strongly
influence the results.
NAIC and
State Insurance Regulators
What efforts are underway?
• Actively looking into issues surrounding
• Considerable scrutiny because of misuse by
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some high profile insurers
NAIC’s P&C Reinsurance Study Group has
been evaluating existing statutory disclosure
requirements
Considering amendments to statutory
accounting guidance
Proposed New Disclosures
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Require an insurer to report to state insurance
regulators any agreement that has the effect of
altering surplus by more than 3% or which
affects more than 3% of premiums or losses.
Identify any reinsurance contract accounted for
differently under SAP compared to general
financial statement purposes.
Additional reporting requirements to increase
transparency.
Additional Measures

Developing a standard attestation form
by CEO and CFO acknowledging
reinsurance contracts for which the
company has taken credit.
Result?
NAIC Quote:
“The proposed enhanced disclosure requirements, in
addition to the attestation by company management of
entities that engage in these transactions, should
clarify the overall impact of finite reinsurance on the
industry. These issues need to be addressed with a
sense of urgency. State insurance regulators have
seen nothing to alleviate our concerns since we began
our rigorous review of these practices.”
NAIC &
Transfer of Insurance Risk
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The NAIC’s Casualty
Actuarial Task Force is
reviewing the issue of
“transfer of insurance
risk”
Slated to provide
information to the study
group by the end of the
summer.
Considering whether the
10/10 rule should be
eliminated
Why is transfer of risk so
important?
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If it is determined that companies do not meet
risk transfer requirements, the companies do
not get to utilize reinsurance accounting
treatment.
Underwriting files required at inception to
determine risk transfer are often incomplete at
time of regulatory inspection.
Some forms of abuse have included side
agreements guaranteeing a profit for the
reinsurer.
Conclusions:
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A complex subject
Tension between
legitimate business
needs and potential
abuses
Subjective
evaluations
Actuaries!