Accounting Session Provides Clarity Around Reinsurance Risk Transfer

In the session, participants will explore the characteristics of risk transfer analysis and perform the analysis on a basic reinsurance contract. They also will learn techniques for identifying and assessing risk transfer for unusual characteristics of reinsurance agreements.

"Since management must attest annually to regulators that the reinsurance agreements the company undertakes meet the requirements of SSAP 62, it is imperative the right questions are asked in the risk transfer evaluation process," says Paul LiCausi, session presenter and senior vice president of finance at Swiss Re America.

"Although the ultimate decision relative to risk transfer is up to each individual company, we will explore a number of qualitative and quantitative questions that companies may want to consider when deciding how much analysis they need to do for risk transfer," LiCausi adds. "Turning those types of questions into a checklist that provides documentation for every underwriting file helps give management peace of mind in signing off on the attestation."

Attendees also will examine real-life examples of risk transfer analysis on different types of structured and unstructured contracts as well as output forms that make analyses easy to understand.

"These examples bring the discussion down to earth," LiCausi says. "Some of the deals presented to Swiss Re are heavily structured and require the review of a myriad of issues. We're able to bring that experience to the session."

"The examples also demonstrate, while the analysis itself may be complex, it is important to produce a final output that is clear and understandable in order to support the management attestation," Gibson says.

Changing Landscape

Beyond examining the technical detail of risk transfer analysis, the session promises to explore the constantly changing marketplace that is making accounting for reinsurance contracts more challenging and complex than ever. For primary insurers, new products and pricing are key concerns.

"In a softening pricing environment, companies tend to be more cognizant of the cost of their reinsurance, especially with respect to casualty business," LiCausi says. "At the same time, more and more reinsurance transactions are becoming structured, with sublimits, loss ratio caps, sliding scale commissions, and other features in them. The more features you have, the more necessary and complex the risk transfer analysis becomes. New products also can add complications, including potential accounting questions."

In this environment, interaction of accounting and finance with marketing and underwriting is vital to the successful assessment of risk transfer and to the creation of a product that is both competitive and compliant. "Accounting staff members need to get ahead of the game, working directly with the underwriting and sales force as deals are being designed," LiCausi says. "Otherwise, underwriting could structure a deal the counterparty, be it the cedant or the reinsurer, is ready to accept but the accounting staff is forced to put a damper on. All the details should be scoped out and modeled as early as possible, including choosing different scenarios for reinsurance that allow you to restructure the deal quickly."

LiCausi is part of Swiss Re's own Risk Transfer Analysis Group (RTAG), which also consists of the company's chief reserving actuary, a pricing actuary, and another senior vice president in finance. "We engage early in the negotiation process," LiCausi says. "It's absolutely critical to engage experts from other disciplines because, although finance makes the decision about how deals are going to be reported in the financial statements, there are no 'bright lines' in the evaluation process."

New and changing standards are an additional complication for insurers. This includes work on the international front, such as the planned convergence of IASB and FASB standards, as well as domestic developments, such as amendments to SSAP standards. Tossed into the mix is a somewhat volatile political and judicial environment for both primary carriers and reinsurers.

"I applaud what the IASB and FASB are trying to accomplish, but there still are a lot of details to be worked out in the process, and it's unclear how risk transfer will be factored into convergence," LiCausi says. "Insurers shouldn't make any assumptions about the final version of standards until they actually are final."

"The political and judicial arenas are ever evolving," Gibson adds. "On one hand, primary carriers are looking for protection, while on the other hand, reinsurers must assess how the view of the future impacts the expected results of the reinsurance agreement. It makes the calculation of risk transfer more difficult."

Being Vigilant

To add to the complexity, insurers' accounting staff members contend with differing philosophies and risk assessment practices among auditing firms.

"There's a lot of judgment involved in risk transfer," Gibson says. "There's no guarantee two people will look at things the same way. Therefore, if carriers are considering a change in auditors, one of the things they should consider in their evaluation process is the auditor's philosophy and experience."

The best prescription in this rapidly evolving environment is for accounting professionals to be informed, engaged, and vigilant. "Even though the requirement to assess risk transfer has been the norm for more than a decade, there's always uncertainty in the practical application of a risk transfer analysis process," Gibson says. "Accounting professionals have a lot of questions, and we hope to provide them with answers in this session."