Reinsurance text page 141

[Sparky111]

Someone throw me a bone here,

On page 141 of the tiller/tiller Reinsurance text, for disadvantages of Mod-co it says:

"Transfer of assets back to the reinsurer in the event of treaty termination can create exposure to capital losses for the ceding company..."

Are they talking about the recapture fees = surplus account that would need to be paid?

Agree/disagree?

thanks

[UWWF]

Someone throw me a bone here,

On page 141 of the tiller/tiller Reinsurance text, for disadvantages of Mod-co it says:

"Transfer of assets back to the reinsurer in the event of treaty termination can create exposure to capital losses for the ceding company..."

Are they talking about the recapture fees = surplus account that would need to be paid?

Agree/disagree?

thanks
I believe the capital loss issue would occur when the transfer of assets would require the ceding company to realise the assets at current market value.

[Sparky111]

Transfer of assets due to what?

[familyman]

I believe it is that the ceding company is holding the assets for the reinsurer during the life of the contract. If the contract were to be terminated for some reason, the assets would have to be transferred to the reinsurer. In this case, the change of owner of the assets would require the companies to value the assets at fair value and realize any capital gains/losses immediately.

[wat?]

Transfer of assets due to what?

It's part of how Modified Coinsurance works. If you have the LIPF book near you, turn to page 404 (section 7.5). It's not part of the ILA syllabus, but it still has a good description of how Modco works.

In particular, pay attention to table 7.5.1 on page 405 - usually the subject of who holds assets and who holds reserves is somehow tested/covered.

[Sparky111]

Sorry, still not buying it.

1)
Under normal coinsurance, when the contract terminates, assets backing reserves move back from reinsurer to ceding co. , after having initially moved the opposite way. When the contract terminates, the ceding co. needs those assets back to support the policies.

2)
Okay, now for Mod-co, the ceding co always holds these same assets. On contract termination no transfer would be necesssary. Why on contract term, would assets backing reserves move from ceding co. to reinsurer? That makes no sense.

So I still stand my initial guess that the asset transferred to reinsurer under Modco would be the recapture payment, if any.

Or am I out to lunch? Doesn't make sense that assets backing reserves move to reinsurer on termination. Reinsurance is over.

[wat?]

Sorry, still not buying it.

1)
Under normal coinsurance, when the contract terminates, assets backing reserves move back from reinsurer to ceding co. , after having initially moved the opposite way. When the contract terminates, the ceding co. needs those assets back to support the policies.

2)
Okay, now for Mod-co, the ceding co always holds these same assets. On contract termination no transfer would be necesssary. Why on contract term, would assets backing reserves move from ceding co. to reinsurer? That makes no sense.

So I still stand my initial guess that the asset transferred to reinsurer under Modco would be the recapture payment, if any.

Or am I out to lunch? Doesn't make sense that assets backing reserves move to reinsurer on termination. Reinsurance is over.

I just read the passage you're referencing - to me, your answer is in the second part of that sentence.

... just as transfer of the initial mod-co adjustment to the ceding company can create problems for the reinsurer.

So, there is an initial transfer of assets from the reinsurer to the ceding insurer - that amount is described in the 2nd paragraph under Modified Coinsurance on page 140: Under the typical reinsurance arrangement involving modified coinsurance on an existing block of policies, the premium in the initial transaction equals the reserves on the portion of th epolicies reinsured.

[UWWF]

I just read the passage you're referencing - to me, your answer is in the second part of that sentence.



So, there is an initial transfer of assets from the reinsurer to the ceding insurer - that amount is described in the 2nd paragraph under Modified Coinsurance on page 140:
I see the confusion now.
Mod-co reinsurance is benefitial to the ceding company if the reinsurer were to default as the ceding company already has the assets backing the reserves. I believe when a reinsurance agreement terminates as appose to defaulting, the reinsurer can still be on the hook for the policies. In that case, the ceding company would then pass back the assets backing the reserves.
Remember, this is also in 'textbook' world. In practice, reinsurance agreements are normally tailored to both party's.

[wat?]

Mod-co reinsurance is benefitial to the ceding company if the reinsurer were to default as the ceding company already has the assets backing the reserves. I believe when a reinsurance agreement terminates as appose to defaulting, the reinsurer can still be on the hook for the policies. In that case, the ceding company would then pass back the assets backing the reserves.

I agree with your first sentence. In the second sentence, to the extent that the reinsurer is still responsible for the policies/claims from the reinsurance agreement, wouldn't the ceding insurer retain an appropriate amount of assets to back those reserves?

An oversimplified example I'm thinking of: suppose the reinsurance agreemnt terminates when there's one $1mil life claim that's reported and 75% ceded to the reinsurer - this is the only claim that has been incurred as of the reinsurance termination date. I would think that the ceding company would relinquish all assets to the reinsurer that do not back the $750K ceded coverage. Is that what you'd meant?

Remember, this is also in 'textbook' world. In practice, reinsurance agreements are normally tailored to both party's.

Yeah, but unfortunately (or maybe fortunately, with all the simplifications), "textbook" world is where this CSP exam takes place. :shrug:

[UWWF]

I agree with your first sentence. In the second sentence, to the extent that the reinsurer is still responsible for the policies/claims from the reinsurance agreement, wouldn't the ceding insurer retain an appropriate amount of assets to back those reserves?

An oversimplified example I'm thinking of: suppose the reinsurance agreemnt terminates when there's one $1mil life claim that's reported and 75% ceded to the reinsurer - this is the only claim that has been incurred as of the reinsurance termination date. I would think that the ceding company would relinquish all assets to the reinsurer that do not back the $750K ceded coverage. Is that what you'd meant?



Yeah, but unfortunately (or maybe fortunately, with all the simplifications), "textbook" world is where this CSP exam takes place. :shrug:
If 75% was ceded to the reinsurer, wouldn't you relinquish the assets that are backing the 750K, as that's what the reinsurer is responsible for?

[wat?]

If 75% was ceded to the reinsurer, wouldn't you relinquish the assets that are backing the 750K, as that's what the reinsurer is responsible for?

Under Modco, the ceding insurer retains control of the assets. So, they'd return the assets that aren't covered by the Modco agreement, which is all ceded coverage, minus the assets allocated to the $750K coverage (this appears consistent with how Modco works - reinsurers are responsible for paying for the change in reserves, or at least, a % of the change).

At least, that's how I'm thinking about it. Modco agreements were never something that seemed intuitive to me.

[edit] The situation I set up called for the reinsurance agreement no longer being applicable. Is that the assumption you're going with? Also, I don't think the ceding insurer would relinquish any assets - rather, wouldn't the reinsurer have to pay an additional sum of money to fully cover the $750K? Say reserves are 88% of face amount for this particular claim. Wouldn't the ceding insurer have control of (0.88)*(750K) of assets from the reinsurer and still need an additional (0.12)*(750K) to cover the entire reinsured amount per the reinsurance agreement?

[Nankai.Univ]

It's a good question. Upon the termination of a Mod-Co treaty, the cedant does refund some of the assets backing the reinsurance reserves to the re'er. While, after the termination, the re'er does have nothing to do with the direct insured since the reinsurance treaty has terminated.

In fact, in each of reinsurance accounting statements of Mod-Co, there is an item of receivables for the re'er. This item is a reinsurence reserves deposit. The reserves can be seen as Unearned Premiums. In practice, the reinsurance deposit will be refunded to the re'er in some time specified in the treaty (such as 1 year,ect).

Now, assuming that the treaty is terminated, it is reasonable that the reinsurance deposit will be refunded to the re'er. But what's important, not all of the deposit, but the Earned portion of the deposit is refunded. The Unearned portion of the deposit is still hold by the cedant for the future payment to the direct insured. And then, the re'er has nothing to do with the future payment to the direct insured.