Page 15 - Life Insurance Today June 2015 SAMPLE
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In this regard, there needs to be strong communication
between underwriting and the reinsurance buying function
to ensure that underwriters are aware of the provisions of
the reinsurance treaties being purchased. In particular,
awareness of exclusions or special acceptance criteria is
vital. On the facultative side, underwriters or facultative
buyers must be trained to have coverage afforded by the
facultative reinsurance be concurrent with the terms of the
underlying policy.
this regard, as are systems to monitor accumulations by The insurance enterprise is exposed to various risks when
class and line of business. purchasing reinsurance. These include: Credit Risk,
Regulatory Risk, Operational Risk (including Non-
Detailed data capture is especially critical for monitoring Concurrency (mentioned above) Lack of Contract Certainty,
property accumulations for catastrophic exposure to both and Accounting/Tax Risk) and potentially Reputational Risk.
natural and man-made events. Granular data including the
policyholder's type of business, number of employees, Credit risk has numerous aspects which must be managed.
construction type and age, values insured, business The starting point is the assessment of the credit
interruption coverage and limits, and so forth, for each worthiness of the reinsurer. This process generally leads to
precise location (street address, latitude and longitude) are an "approved list" of acceptable reinsurers and a limit on
critical. the aggregate credit exposure to an individual reinsurer
which is linked to its credit rating.
Experience from many insurers examining losses from
Katrina has shown that modeled catastrophic exposures Reinsurance may be purchased locally on a facultative basis
were understated. One reason for this was incomplete data by underwriters for individual accounts with peak exposures
capture of insured locations. Risk needs to be comfortable and also in multiple business offices on a portfolio, or treaty,
that data capture is complete and audited as necessary for basis. RM needs to ensure that adequate controls are in
the modeled accumulations to be meaningful. place so accumulations by reinsurer are monitored with
actions taken to mitigate peak exposures.
RM must also be forward thinking about data capture. It
is not sufficient to think about capturing data for risks that Accounting risk arises as accounting for reinsurance
are current and obvious, but to also think about where the transactions can be complex. Reinsurance transactions
emerging risks are arising and what data is necessary to need to have risk transfer characteristics in totality support
assess these risks. insurance/reinsurance accounting (to be included in
financial results as reinsurance) and these characteristics
Reinsurance Risk: Reinsurance is a widely used and need to be appropriately analyzed and documented. In
particular, the accounting must consider all aspects of the
valuable tool for mitigating peak risks on both individual agreement, including any written or verbal side
accounts and portfolios. Inherent in reinsurance are several agreements.
risks of concern to the Risk Officer of insurers. First and
foremost RM must be attentive that the reinsurance Also of concern is ensuring that reinsurance transactions
purchased is actually providing the appropriate coverage are not structured to obfuscate the true financial results
to mitigate the peak risks. of the company. Overly complex transactions and certain
"circular" transactions can lead to accounting difficulties.
For example, policyholders may have captive insurers or
reinsurers involved in their risk management program.
The most powerful element in advertising is the truth.
Life Insurance Today June 2015 11
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