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Old 03-02-2014, 12:00 PM
brophymj brophymj is offline
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Default Reinsurance reserving difficulties

Hi

I'm studying for a reserving exam and I'm a little stuck in the topic of outwards reinsurance reserving. The core reading provides details of 5 methods of reserving for reinsurance from the perspective of a direct insurer. The methods covered include 'gross less net', 'application of standard techniques to reinsurance data', 'use of appropriate factors' etc.

My first question is why a direct insurer needs to reserve for reinsurance recoveries? I get why an insurer would need to reserve for future claims but since the reinsurance premium is know and recoveries are a positive cash flow , where does the need to reserve apply?

My second question relates to the methods covered. The detail given in the core reading is very concise and does not give examples illustrating the various approaches. Does anyone know any resources that might illustrate by way if examples the various methods of outwards reinsurance reserving.

There is an article called 'reinsurance reserving' by Michael Radtke in the 'Encyclopedia of Actuarial Science' published in 2006 but I don't have access to it - does anyone know of any good resources in this area as I'm pretty lost! Thank you in advance.
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Old 03-02-2014, 12:59 PM
kmbrunskill kmbrunskill is offline
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Pretty sure the reserve in that case (from the direct insurer's perspective) is negative. That's why you account for it.
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Old 03-03-2014, 03:56 AM
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Shaft Shaft is offline
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Are you studying for an actuarial exam? If so, there should be reinsurance reserving descriptions/methodology in the study material. Provide more information about the exam you are sitting and perhaps we can help you more.
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Old 03-03-2014, 07:37 AM
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MountainHawk MountainHawk is offline
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As stated, the reserve the carrier is going to carry is net, so they have to know how much to take off hte gross reserve to be able to book the reinsurance credit. The financial statements show both set of values.

If you have basic quota share reinsurance, it's pretty easy. You just take x% of your reserve and call it ceded. However, what if you have per risk excess of loss? Well, let's say the reinsurer covers the loss layer from $3M to $10M per occurrence. You can do a gross analysis with all losses included), a second analysis where all losses are capped at $3M (which means there will be less development), and a third analysis with all losses capped at $10M (assuming this is different that the gross review).

The reserves ceded to the reinsurer are then the difference between the reserves capped at $10M and the reserves capped at $3M, and the net reserve is (Reserve_Gross - (Reserve_10 - Reserve_3)).
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Old 03-03-2014, 08:19 AM
Abnormal Abnormal is offline
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Quote:
Originally Posted by brophymj View Post
My first question is why a direct insurer needs to reserve for reinsurance recoveries? I get why an insurer would need to reserve for future claims but since the reinsurance premium is know and recoveries are a positive cash flow , where does the need to reserve apply?
An insurer is required to report their liabilities on a gross basis and then reinsurance recoverables as an asset.

http://www.ey.com/publication/vwluassetsdld/financialreportingdevelopments_bb2433_reinsurance_ november2012/$file/financialreportingdevelopments_bb2433_reinsurance_ november2012.pdf?OpenElement

I'm sure that article includes more information than you want but enjoy.
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Old 03-03-2014, 08:28 AM
brophymj brophymj is offline
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Thanks Abnormal, but the link isn't working - i keep getting a 'page not found' error

Regards
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Old 03-03-2014, 09:46 AM
Abnormal Abnormal is offline
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It's the first link on this page

https://www.google.com/search?q=fasb...sm=93&ie=UTF-8
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