Common Pitfalls and Practical Considerations in Risk Transfer Analysis

The current papers available on risk transfer have provided background and a general description of the tools available for analysis. Risk transfer analysis has many nuances that can trip up an actuary testing a contract. This paper discusses several of these pitfalls and provides direction on how to address them based on previously published materials from the accounting boards, the American Academy of Actuaries (AAA), and the Casualty Actuarial Society (CAS). This paper also addresses several outstanding risk transfer concerns that have no easy answers. While these issues do not have obvious solutions, the intent of the paper is to shed some light on these topics and open the door for further discussion.

To facilitate the discussion of these common pitfalls and practical considerations two example contracts are reviewed with an Expected Reinsurer Deficit (ERD) calculated for both.

Keywords: Risk transfer, Expected Reinsurer Deficit (ERD), FAS 113, Reinsurance Attestation Supplement (RAS), SSAP 62.