CAS Exam 6C Spring 2015, Question 27
Study guide: Exam 6C
A risk transfer test is being conducted on a quota share reinsurance contract with the following characteristics:
| Characteristic | Value |
|---|---|
| Inception Date | January 1, 2014 |
| Cession | 75.0% |
| Ceding Commission | 10.0% |
| Profit Commission | |
| Loss Ratio | 65.0% |
| Profit Swing | 5.0% |
| Reinsurers Expenses as a % of Premium | |
| Brokerage | 1.5% |
| Operating Expenses | 2.0% |
| Fees related to letters of credit | 0.5% |
The Expected Reinsurer Deficit (ERD) risk measuring method is used in determining whether there is risk transfer in a reinsurance contract.
Part a (0.5 points)
Describe the two conditions required for a contract to receive reinsurance accounting treatment.
Part b (0.5 points)
Describe how the profit commission should be incorporated into the ERD method.
Part c (0.25 points)
Briefly describe the impact the reinsurer's expenses will have on the ERD calculation.
Part d (0.25 points)
Given an ERD of 2.5%, determine whether the contract is considered to exhibit risk transfer.
Answer this question and see the worked solution