NAIC SSAP 63

gsawhneygsawhney
in NAIC.SSAP-65

Hi Graham (and everyone), I came across this question from SOA GI FREU exam:

You are preparing statutory financial statements in the U.S. and are given the following
information:

  • Insurance Company A is the parent company of insurance Subsidiary X and insurance Subsidiary Z.
  • Subsidiaries X and Z both cede 50% of all their business to parent Company A.
  • Parent Company A retrocedes the same business back to both subsidiaries using the following shares: 100% to Subsidiary X, and 0% to Subsidiary Z

Explain why the reinsurance arrangement described above does, or does not, meet the definition of an intercompany pooling arrangement under SSAP No. 63, Underwriting Pools

Soln Provided:
This arrangement does meet the definition of an intercompany pooling arrangement because it has the following features:

  • All the pooled business is reinsured under a quota share to the lead entity.
  • The lead entity is retroceding the pooled business back to the pool participants in accordance with their stipulated shares.

I get the first point, but the second point seems to be a bit confusing. Why is 100% share retroceded to X and that's correct? It should be 50% to X and 50% to Z?

Comments

  • grahamgraham

    Interesting question. The big picture, I think, is that the examiner's were testing whether you knew the definition/process for inter-company pooling but they didn't want to just ask you to recite the definition. Instead, they provided a real-life scenario and asked you to interpret it. (Bloom's taxonomy and higher-level thinking.)

    So, they key elements of inter-company pooling are (as mentioned in the official answer):

    • the subsidiaries cede a percentage of their business to the lead company
    • the lead company then retrocedes a percentage back to each subsidiary (but not necessarily the same percentages that were ceded in the first place)

    To your question: There is nothing in the definition that specifies the percentages. It's perfectly acceptable to cede 100% back to X and nothing back to Z. The whole benefit of inter-company pooling is that the risk can be shifted among subsidiaries in whatever way is best for achieving the company's goals.

    I'm going to link to your post in the wiki. Thanks!

  • gsawhneygsawhney

    Got it, a bit slippery. SOA examiners are cheeky.

  • grahamgraham

    They certainly are!

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