A Statistical Simulation Approach for Estimating the Reserve for Uncollectible Reinsurance

Recent insolvencies and catastrophic events have heightened concern in the insurance industry over the risk of uncollectible reinsurance. The current approach for estimating reserves for this line in the Annual Statement is relatively unscientific and, as a result, may not reflect the company's true reinsurance recoverability risk. The objective of this paper is to introduce a statistical approach for estimating this reserve that considers more specifically the risks of the company's reinsurers and the potential for correlations between reinsure failures with in a given period as well as over time. The paper will describe the basic framework for this model, including: 1. Defining the data required 2. Setting up the basic structure of the model 3. Consideration of the timing of future payments and potential offsets 4. Consideration of correlations 5. Potential applications