CAS Exam 5: Section 8

Salvage Recovery

Salvage refers to the proceeds from selling damaged property that the insurer collects

Subrogation Recovery

Subrogation refers to the insurer’s right to recover claim payments from a third party responsible for damages and/or injuries

Unpaid S&S =

Ultimate S&S - Received (Paid) S&S

Unreported (Not Incurred) S&S =

Ultimate S&S - Reported (Incurred) S&S

What are two common approaches used to estimate ultimate salvage and subrogation?

(1) Development Technique

(2) Ratio Method

• Less leverage in development factors (advantage)

• Refined selection of ultimate S&S ratios (advantage)

• Error in selecting ultimate losses will likely lead to an error in the S&S estimate (disadvantage)

Reinsurance Recovery

In a reinsurance contract, a primary insurer cedes (transfers) some or all of its risk to a reinsurance company

Because insurers are eligible to receive reimbursement from their underwritten policies, reinsurance serves as a type of recoverable

What are the two types of reinsurance?

(1) Quota share

• Both parties share a percentage of the total risk.

(2) Excess of loss

• Reinsurance covers all claim amounts above the primary insurer’s retention. This is similar to a deductible provision.

• Basis: Per-risk, Per-occurrence, or aggregate excess of loss

What should actuaries consider when estimating unpaid claims based on gross, ceded, or net of reinsurance perspectives?

1. Comparing net and gross data

2. Quota share analysis

3. Excess of loss analysis

4. Consistent assumptions

5. Net claim development patterns

What is the difference between net and gross?

Gross refers to the total amount charged or written - losses the insurer is responsible for before ceded reinsurance

Net refers to losses remaining with the insurer after ceded reinsurance

What is retention?

Retention: the amount the insurer pays; the reinsurer pays the rest

• i.e. Suppose an insurance company has a $1 million claim and its reinsurance contract has a $100,000 retention.

  The insurer pays/retains the first $100,000.

  The reinsurer covers the remaining $900,000.

• Gross Loss = $1,000,000

• Net Loss = $100,000