Factors that could mitigate RMAD
in COPLFR.SAO
"It should be noted, however, that the company has entered into a retroactive reinsurance contract which would serve to mitigate the impact of adverse deviation in loss and LAE reserves on the company’s statutory surplus if recoverables from that contract were considered as a reduction in net loss and LAE reserves."
Above is the illustrative language from sec 5.2.3 about one situation where retroactive reinsurance as a mitigating factor. Since retroactive reinsurance contracts do not affect net loss & LAE reserves from Sch P or balance sheet becuase they are recorded as contra- liablities for the ceding Co., can you please explain how a reduction in net loss and LAE reserves resulted from retro insurances is possible? Thanks.
Comments
Retroactive reinsurance contracts don't directly reduce the net loss & LAE (Loss Adjustment Expenses) reserves on Schedule P or the balance sheet, as you've pointed out. They are typically accounted for as "contra-liabilities," which offset the ceding company's liabilities rather than directly reducing them.
However, the language you provided from the Statement of Actuarial Opinion is focused on the economic or practical impact of such a contract on the company's financials. If the reinsurance contract kicks in due to adverse deviation in loss and LAE reserves, the ceding company would receive reimbursements. While these don't reduce the net loss & LAE reserves directly, they do effectively "mitigate the impact" on the company's overall statutory surplus by adding an offsetting amount to assets or reducing liabilities elsewhere.
In summary, while retroactive reinsurance doesn't technically reduce net loss & LAE reserves, it can serve to mitigate their impact economically, which seems to be the point being made in the Statement of Actuarial Opinion.