2017 Q12

tdowns17tdowns17
in Odomirok.22-23-GAAP

For a iii, the sample answer is NI increases due to other income increasing, where sample 2 says it will change by the difference of the consideration paid and the paid loss recovered. Are these not conflicting answers?

One states that NI strictly increases, which doesn't seem true. The other is closer to our note on gain, where the impact is only positive if the negative write in liab > cost of reinsurance.

Don't we expect that to not be true, as we expect the reinsurance company would charge a surcharge in exchange for taking on the risk of the losses?

Comments

  • grahamgraham

    You raise a good point. I double-checked the source text under the section "Ceded Reinsurance - Prospective and Retroactive" in chapter 22 of Odomirok and this is what it says:

    The highlighted sentence definitely makes it seem like there is a true positive gain. I suppose technically the gain could be negative but the way it's phrased doesn't imply that. As you pointed out, the reinsurer wouldn't generally accept the contract unless they were going to make profit themselves and it doesn't make sense that both the primary insurer and reinsurer can make a gain simultaneously.

    The first sample answer in the examiners' report pretty much just quotes Odomirok. The second answer is actually more clever because the person didn't commit to saying whether income increases or decreases. They just made the general statement that the change equals the difference between the consideration paid and paid loss recovered.

    Maybe there's some sort of nuance with retroactive reinsurance that you wouldn't know about unless you worked in that field?

    I googled "retroactive reinsurance" and found a pretty good web page at Munich Re:

    What I read on the web page seems to imply that if the reinsurance contract is structured appropriately then the primary insurer receives a benefit in the current accounting period (so the losses are redistributed which may help the primary insurer manage their results?) This is an excerpt from the Munich Re page:

    • Typically, your reserve risk includes the risk of accelerated claims pay-outs and adverse development risk – whether incurred but not reported (IBNR) or incurred but not enough reported (IBNER). It grows when risks taken on in an insurance business accumulate faster than run-off obligations from the past can be resolved, which disproportionately impact results in a given financial period. Our retroactive reinsurance solutions protect organisations like yours from adverse reserve development and free up capital for more profitable application elsewhere in your business.

    None of this is explained in Odomirok however. Generally, the graders will accept whatever is written in the source text.

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