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6E:   SCHEDULE F - R E I N S U R A N C E R E Q U I R E M E N T S / U S E S


            Donald P. Skrodenis, Director
              A l l s t a t e Insurance Company


          Kathryn P. Broderick, Partner
      Preston Gates Ellis & Rouvelas Meeds

            John J. Joyce, Sr. Consultant
                  Coopers & Lybrand

               Joseph Zubretsky, Manager
                   Coopers & Lybrand

MR. SKRODENIS:   This is Session 6E or Schedule F pertaining to
reinsurance recoverables and other uses for the schedule.     But
before we start there are some housekeeping comments I would like
to make.

The session is recorded, so please step up to the microphones to
ask any questions.   Those questions will be at the end of the

Please fill in the evaluation forms and hand them in at the door
as you are leaving.  If there are any problems, I've had several
up here already filled out, in case you wanted to advise the
opinion  of  the panel.   Also the tickets   for the continuing
professional education should be handed out at the end of the
session at the door.

I'd like to qualify that the views and statements made by the
panelists are those of the panelists and not necessarily those of
the firms that they represent.   Although they may be similar in
many cases.

Reinsurance recoverables and Schedule F.   Several years ago or
within the last decade, the industry has experienced a level of
insolvent companies and peer companies that is unequal since the
Great  Depression.    The NAIC has attempted to attack or to
evaluate what that reserve should be on company statements or to
point out what the reserve could be on company statements by the
new changes in the Schedule F in the annual statement.   We will
be going into that shortly.

The structure of this panel will be Joseph Zubretsky covering the
accounting issues and the details of filling out the schedule.
Jack Joyce will cover the IBNR considerations.        And Kathryn
Broderick will answer any legal questions and give her opinion.

To begin our discussion is Joseph Zubretsky.        He is a senior
manager for Coopers & Lybrand with nine years of experience in
the insurance industry.   His clients include major property and
casualty, life, pension and reinsurance companies.    Previously he
has   spent  two   years  experience   in   Europe,    focusing  on
international and London market, reinsurance,     reinaviation and
insolvent companies.   He is an improved instructor for Coopers &
Lybrand's casualty loss reserving course.    And he has also been
the author of the Implementation Guide for the Provision for
Overdue Authorized Reinsurance.  Thank you.

MR.   ZUBRETSKY:   Good morning.   Can everybody hear me okay?

Today's   topic    is  the   provision       for  overdue   authorized
reinsurance.    The nickname that has      been given commonly in the
industry is the ninety-day rule.

A little    background.   Late in 1988,     the NAIC Emerging Issues
Committee   was working with this issue.    The regulation was passed

in late 1988; through early 1989 it received a lot of publicity.
As with any major revision to the accounting rules the industry
gets upset and the issue itself gets a lot of publicity.                     But
since that time, the publicity waned a bit, and the industry
really turned its attention to what they consider to be more
p r e s s i n g problems. If you remember during 1989, P r o p o s i t i o n 103
was a major concern of many insurers as were bigger tax bites and
just, in general, the soft market conditions.                And really the
industry looks at those as real surplus p r e s e r v a t i o n problems; we
are not going to worry about this paper entry that we have to
make in our annual statement.

Well, what happened was that when companies went to prepare their
annual statements for 1989, insurers generally were very much
surprised by the complexity of the calculation, the issues that
were raised during the preparation and the result.

I want to preface today's conversation to give you an idea of the
significance of the asset that we're talking about; to put the
whole issue into a context.              Industry surplus is currently, I
believe a p p r o x i m a t e l y 125 or 130 billion dollars and it is
e s t i m a t e d that 54 or 55 percent of that surplus is represented by
recoverables on paid losses.              And that equals about 60 or 65
billion dollars.              To go one step further,    total reinsurance
recoverables which would include IBNR and recoverables on unpaid
losses is twice industry surplus.             So that puts it in the range
of 260 billion dollars.

There   is a   lot of uncertainty      in how much       is u l t i m a t e l y
collectible.    One of the major accounting firms did a study in
1988 that put a price tag on uncollectible reinsurance at about 2
or 3 billion dollars.       Industry analyst, Myron Picoult, raised
the price tag to i0 to 20 billion dollars.         The only indication
we have of how much the Schedule F penalty has a c t u a l l y cost
insurance companies has been, I believe is Best's gathered data,
and the most recent data has said that 543 million dollars is the
amount of Schedule F penalty that has been calculated based on
annual statement filings to date.        That number should grow as
they compile more data.        And they say, well, why is the 543
million   dollars   so   much   less  than   these    very   pessimistic
projections    that   other    people  have   put    on    uncollectible
reinsurance?    And the answer is very simple.       One is Schedule F
penalty hopefully is a good measure of what is uncollectible, but
not necessarily so.      And secondly, they haven't completed the

TO put the $543 million in context, it may sound low c o m p a r e d to
the ten to twenty billion dollar estimate of uncollectibles, but
to translate it into what it might mean for insurance c o m p a n y
c a p a c i t y at a three to one written surplus ratio. There is a
billion and a half dollars of written premium capacity that's
gone out of the industry by virtue of this new rule.

In   terms   of  the  uncertainty   in estimating   the  ultimate
recoverable, the estimates are all over the lot.   And the reason
is because the rules of the game have changed.      The world has
changed in the last ten years and reinsurance and insurance
transactions have become that much more complex.   We are dealing
with complex litigation,    complex coverages.    And the world,
really,   has changed from one in which we would follow the
fortunes to...well, we'll follow the fortunes but we will not
follow your misfortunes .

What are some of the collection issues?                     I think the industry
concern           over       uncollectible   reinsurance   was   voiced   best by
R e p r e s e n t a t i v e John Dingell in his rather passionate novel that
we have all come to know as Failed Promises.                  And my apologies to
R e p r e s e n t a t i v e Dingell, but I am going to paraphrase an item that
he has included in his summary where he makes ten r e c o m m e n d a t i o n s
that        the       industry     needs  to address,    and the    third one  is
reinsurance.                He says the reinsurance chain has been weakened.
R e i n s u r e r s have resorted to slow payment and litigation in order
to avoid              their     responsibility  for payment     and as a result
insurance company solvency has been threatened.                    Then he asks a
q u e s t i o n that you and I, as consulting actuaries and accountants,
and auditors,                 really need to be concerned with.          And that
q u e s t i o n is how far do auditors, actuaries and regulators need to
go to check the adequacy and solvency of a company's reinsurance?

In terms of the heightened awareness, I've seen a steady growth
in the amount of time and effort that ceding companies have put
into m o n i t o r i n g reinsurance programs. Ten years ago, not all
companies had a security committee and, I think now, you will see
most companies have senior executives p a r t i c i p a t i n g in a security
c o m m i t t e e where they are evaluating the financial stability of
the companies they are dealing with.           You will see companies,
very often, sacrificing price for security and dealing with only
A plus companies for long-tail liability coverages and maybe only
a c c e p t i n g lesser security on short-tail property covers.           So
there d e f i n i t e l y  is a heightened awareness       in the industry
regarding this problem.

Which brings us to the ninety day rule.              The rule was really
p u s h e d by a gentleman by the name of Ken Smith of the Illinois
Insurance Department.            And as the rule worked its way through
the NAIC, two lobbying camps emerged.           On one side, you had the
direct writing reinsurers who were cheering the working group
on.        "This is a great rule."     And on the other side, you had the
b r o k e r a g e market companies and perhaps some of the international
companies who were taking the opposite view.              And the reason is
simple.          Direct writers of reinsurance have more control over the
speed of payment of their claims.              They t h o u g h t . . . t h e y could
p o s s i b l y have a competitive advantage in the m a r k e t p l a c e if the
rule was passed.

AS a d e m o n s t r a t i o n of that, for you avid readers of the trade
press, if in the last six or eight months you open up to the

centerfold   of Business   Insurance   or Best's   or  one of  the
publications, you'll see the jousting that has taken place by two
very prominent direct writing companies.     I think it was about
ten months ago, one advertisement, full page ad, had a c l a i m
notice that was stamped "May ist received", and stamped "May 5th
paid."    We pay in five days.       About two months later,   the
competitor came up with a three day payment scheme where they
would pay in three days.    Now the last one, you'll see the two
fingers that are being held up by another reinsurer that says
they will pay in two days.    And I guess we can't go much further
than that unless we have electronic transfer or we just give the
money up front a n d say take what you need.     So, it has had an
impact on the industry and we'll get into that later, in terms of
what some of the competitive issues are with regard to this rule.

How should companies react?     Companies should react by paying
attention   to the calculation   and understanding what          it all
means.    And the reason is that surplus is expensive.              I've
already said that 543 million dollars of industry surplus has
been eaten up by the calculation.     Surplus is expensive and to
replace it you might have to engage in some type of surplus
relief transaction, a sale of some type of n o n a d m i t t e d asset,
salvage   and  subrogation, over ninety day receivable,           agents
balances, etc. and there is a real cost, a tangible, hard dollar
cost associated with those transactions.     So by proper p l a n n i n g
for this penalty you could avoid taking some surplus hits.

Let's get into the calculation itself.    I hate to get m e c h a n i c a l
on you, but I think it is important.    The ninety day rule really
consists of three important components.   There is an aging of the
recoverable balances themselves.    There is the p e r f o r m a n c e of
what is called a "slow pay test."    And then the surplus p e n a l t y

In your handout, which follows along the slides and I didn't put
these on the slides and I apologize for that.   You will see Part
l(a), Part 2(b), and Part 2(b)2 of Schedule F.    And I p a t t e r n e d
out an example to try to demonstrate how the calculation works.


Part l(a) section 1 I've got three reinsurers listed, XYZ, ABC
and AAA.   This is really an informational schedule.  You can see
that in column one there's four aging columns, one to t w e n t y - n i n e
days, thirty to ninety days, etc. and it totals across to the
column E, the total column.    Then recoverables on unpaid losses
are  listed and unearned premiums.       And then the amount of
reinsurance premiums ceded to that reinsurer.

I point you to the asterisk on the $600,000.     That's over 180
days overdue from AAA.  Assume that 200,000 of that 600,000 is in
dispute.   And it really does not make any difference for the
purposes of this schedule, but it will later.

So again, this is purely an informational schedule.   One note of
caution here.   Notice that it does say "name of reinsurer," not
name of broker, or name of underwriting association, or whatever
basis you happen to have your data accumulated on.    You have to
list the reinsurers individually.  But we'll get into that later.


The next page, Part 2(b) section 1 is what is called the "slow
pay test."    I have termed it the "trigger ratio", because it
triggers an excess penalty.  And I think we are going to have to
walk through this one carefully.    Let's go across the page for
XYZ reinsurance.  The total ninety days overdue merely comes from
columns l(c) and (d) of the prior page.     It is merely the sum

Now we get into the denominator of the ratio.    Columns 2 and 3
will be the denominator of the slow pay ratio, and it comprises
the recoverables on paid losses from the prior page and also the
amounts received in cash from that reinsurer in the prior ninety
days.   Let's just go through the calculation and I'll come back
to that.    So, it's 100 over 550 is 18.2% and since that 18.2%
does not exceed 20%, XY and Z reinsurance company is not a slow

Now the reason I structured it that way is that I want to bring
up an example here showing that...why do we add in amounts
received in the last ninety days?        Well, some companies screamed
a little bit and said, look, there could be an a b e r r a t i o n in my
b a l a n c e sheet at 12/31 of any one year or maybe a balance has
gotten a little bit out of control and it is a little bit
delayed.        I don't want to get penalized for that.   So what they
did was they said, okay, we'll allow you to water down the ratio
by the amount of cash you receive from that reinsurer from
October through December.         So if the reinsurer truly is paying
and turning over those balances, you'll get credit for that and
we'll be able to water down the ratio a bit.          And the reason I
had it at 150 is, that without the a m o u n t s received in cash, it
would have been I00,000 over 400,000 for 25% and that reinsurer
w o u l d have been a slow payer.

Because it is not a slow payer the $i00,000 ninety day overdue
balance gets popped out of the right hand column and we will deal
with that on the next page.

ABC reinsurance is really straightforward because it is m e r e l y
the over ninety day balances.  They have nothing received in cash
and the amount on recoverable unpaid losses was 500,000.        So
their ratio is 40% and they are clearly a slow payer.

AAA is really the example that I want to hit on.         And that is the
fact that $400,000 shows up in that first column, while on the
prior page it has $600,000.           And the reason is when amounts are
c o n s i d e r e d to be in dispute you do not have to include them in

the calculation of the slow pay test.  You can exclude them.      So
for instance, the $400,000 that shows up in this table, is the
$600,000 less the $200,000.  And likewise the $800,000 in column
2 is the one million dollars from the prior page less $200,00
0.    But you can see that in any event it did not help this
reinsurers case.   He is a very slow payer.    The ratio is 50%.
So, excluding the item as a disputed item in this p a r t i c u l a r
example did not help to remove this reinsurer from the slow pay


Now       the calculation     of  the penalty  itself.    On this next
schedule, Part 2(b) section 2, you are only required to bring
forward the reinsurers that are slow payers.          On ABC r e i n s u r a n c e
we are merely taking the balances from the first schedule I
p r e s e n t e d and bringing them forward.  However, we are including
some amounts that are important.

When a reinsurer is a slow payer, you not only calculate the
penalty on the amount that is billed on paid recoverables, but
you also have to bring in the recoverable amount on unpaid
losses, allocated loss adjustment expenses, IBNR and u n e a r n e d
premiums and any amounts that reinsurer owes you. So you are now
required to take a 20% penalty on all balances due from that

Now if you notice way out to the right hand column in columns 4
and   5,  we've  got  two  other   items,  "deposits"        and   "funds
withheld",  and "miscellaneous balances".      And what they are
allowing here is for you to take credit for items that we owe to
the reinsurer.   I really don't particularly u n d e r s t a n d why they
have done that since the right of setoff is such a major issue in
the insurance industry today.    I'm not sure why the NAIC a l l o w e d
us to offset those amounts, but they have.

AAA reinsurance.            If you remember, were a slow payer and they
also had an amount in dispute.           However, even with that amount in
dispute they were still a slow payer and therefore the p e n a l t y is
c a l c u l a t e d on the total amount due from that reinsurer.    Notice
that the amount in column A is the $1,250,000 which was the total
recoverable.           It is not reduced by the amount in dispute.   Thus,
d i s p u t e d items really only help you if it reduces one of your
slow pay ratios down to below 20%.            If you are over 20%, you are
going to take the hit on the total recoverable anyway.

Coming down to the bottom of the page, this is the calculation.
The penalty is 20% of the $i00,000, which was the amount o v e r d u e
from the reinsurer which was not a slow payer.      That was the
amount ninety days overdue.   The 2,725 is from column 3 of this
schedule, which was the total amounts due from the slow payers
and then the negative 250 is the total amount of funds that are
being withheld and we are allowed to take credit for that.         So
the 20% applied to the 2,575 is a $515,000 penalty for this
particular insurance company.

I know that was fast.             You've got to spend some time w i t h the
s c h e d u l e s , but it all makes sense.  And as we work t h r o u g h some
of these issues I think it will b e c o m e a little bit clearer.


The        next   part        of       the  presentation   covers      four     or  five
implementation           considerations         that we have w o r k e d on w i t h our
c l i e n t s and n o n - c l i e n t s .  We've done a lot of r e s e a r c h and there
are a lot of r u m b l i n g s in the industry about data c o l l e c t i o n .

It's really a sad c o m m e n t a r y that b e c a u s e of the new a c c o u n t i n g
rules, c o m p a n i e s had to scurry and get data that they o t h e r w i s e
w o u l d n ' t have had b e c a u s e a b u s i n e s s m a n w o u l d sit back and say,
you n e e d e d that data to m a n a g e your r e i n s u r a n c e p r o g r a m s anyway.
And, again, that's w h e r e the industry is.                      I t h i n k . . . I don't like
to g e n e r a l i z e ,   but if I had to I w o u l d say that on the whole,
reinsurance              systems     within       ceding      companies            are    not   as
sophisticated             as   their     direct     writing       systems.             It  is not
u n c o m m o n to see a c o m p a n y with a r t i f i c i a l i n t e l l i g e n c e to h e l p
u n d e r w r i t e an auto policy.            And you go to the ceded r e i n s u r a n c e
unit         and    see     fourteen      column    paper      and      people        with   green
e y e s h a d e s w i t h their sleeves rolled up.                 It's just the way the
i n d u s t r y is and I think the S c h e d u l e F p e n a l t y has i n c r e a s e d the
a w a r e n e s s in the i n d u s t r y about the lack of technology.                     I think
y o u ' l l see some e n h a n c e m e n t s .

L e t ' s talk about some of these data c o l l e c t i o n issues.         The first
one, i d e n t i f y i n g the reinsurers.       That sounds like an easy chore,
but it is not.                And one of the reasons is there are a lot of
c e d i n g c o m p a n i e s out there that deal with the b r o k e r a g e market.
A n d in d e a l i n g with the b r o k e r a g e market, they m a y not know who
their r e i n s u r e r s are.      Or they may know who they are, but just
d o n ' t have any clue as to how much each one owes them.                   W e l l now
it's important, b e c a u s e now you need to include that i n f o r m a t i o n
on S c h e d u l e F.

I think just r e c e n t l y there is an o r g a n i z a t i o n c a l l e d t h e . . . h e l p
me out if I get this wrong, D o n . . . B r o k e r R e i n s u r a n c e M a r k e t i n g
Association.                Thank you . . . .           that has s t a r t e d to a d d r e s s this
issue          as     they        see     that        brokerage    companies      may      have     an
uncompetitive               advantage         with       direct   writing      companies.          Now
they've           gone     to s t a n d a r d i z e d    accounting   forms so that c e d i n g
companies,            if they are dealing with thirty or forty u l t i m a t e
r e i n s u r a n c e c o m p a n i e s , may be g e t t i n g one type of b o r d e r e a u x , one
type of a c c o u n t i n g form, one type of loss notice w h i c h will m a k e
processing            that m u c h easier.                But in any event,         you can not
i n c l u d e b r o k e r s on S c h e d u l e F.          And I can tell you, b e c a u s e I
h a v e seen it.              If you go back five or six years, y o u ' l l see the
big       brokerage           houses       listed       right   out   there     on S c h e d u l e  F.
T h a t ' s a quick way to get a regulator to give you a p h o n e call.

The next thing you can't put on S c h e d u l e F, b e c a u s e they                     are not
r e a l l y a reinsurer, is Lloyd's.   I mean, you have to                                include

Lloyd syndicates on Schedule F.           But there is an i n t e r p r e t a t i o n
by the state of Illinois that says syndicates should be reported
separately.           One line is fine if you are dealing with one
syndicate,         but companies with complex programs,      if they are
writing liability property and marine and aviation, they are
o b v i o u s l y dealing with multiple syndicates and these s y n d i c a t e s
aren't cross collateralized.           If one is a slow payer, you are
pretty much relying on the fortunes of the names behind that
syndicate and you can't tap the cash of another syndicate.                        So
you really are supposed to list syndicates s e p a r a t e l y .      And this
in itself is going to be an accounting nightmare for ceding

To take that one step further, there is another i n t e r p r e t a t i o n
that says if you want to get technical about it, every s y n d i c a t e
for  every  Lloyd's  underwriting  year  is  really a different
reinsurance company that you should list on Schedule F.      And the
reason is technically correct.     That the names behind these
syndicates can change from year to year and, therefore,               the
security for that syndicate could be different from u n d e r w r i t i n g
year to underwriting year.    I have approached clients of mine
with  that and after    they stop laughing,   they decided          they
wouldn't do it.

The aging of balances.              It sounds relatively simple.   You go into
any m a n u f a c t u r i n g concern and you see accounts receivable, aged,
thirty,       sixty,         ninety   days  and   so  on  and  so  forth,       but
reinsurance systems in ceding companies typically had no billing
date and no due date in the system or on the bill, for that
matter.       And this is a problem.          Companies have run into p r o b l e m s
with aging the balances.

Segregating components of loss from LA&E is an issue as we'll get
to later.            You don't have to take a penalty on LA&E if your
reinsurance           company   isn't a slow payer.      But the problem,
depending on how you are buying your reinsurance, is if your
reinsurance is priced in such a way that LA&E is included in the
d e f i n i t i o n of ultimate net loss, you probably never b o t h e r e d to
try to segregate the two because it really didn't matter.              It was
all subject to one retention and it really didn't matter to
segregate the two.            If you have a type of excess of loss p r o g r a m
where LA&E is pulled out and done on some kind of p r o p o r t i o n a l
method, than you probably have that detail.             But you'll want to
go back and take a look at whether LA&E is included in your
losses and whether it has any impact on the calculation.

U n e a r n e d premium is the same issue.    Everybody knows what their
u n e a r n e d premiums are on this treaty and that treaty, but nobody
has ever gone through the painful exercise, e s p e c i a l l y if there
is m u l t i p l e reinsurers on the treaty, to allocate that u n e a r n e d
p r e m i u m back to actual reinsurers.   And that's a problem.

HOW is the industry going to react? Hopefully, they will enhance
their systems.    I think we are going to see more i n t e g r a t i o n

between reinsurance and direct systems.   I think we are going to
see fields added, for instance, the due date and hilling date.
And you are going to need to see enhancements to treaty systems.
I think companies that have already done this to better m a n a g e
their business are probably a step ahead in the game.

The next issue is due date determination.  Well, you are p r o b a b l y
saying, I can read a calendar.   Why are we going to cover that?
When this regulation was first passed I made ten phone calls to
different  companies  and colleagues   and I got ten different
answers as to what they thought ninety days overdue meant and
when the clock started running.

The NAIC said that the due date for a recoverable is when the
contract says it is due. So if the treaty says thirty days, then
the recoverable balances, the bill is due in thirty days.     It
also said that if the treaty is silent that they would impute a
thirty day due date.

To give you an easy example...if a bill goes out on July ist and
the treaty says forty-five days, that balance is due on August
15th and is ninety days overdue on November 15th.      Same bill,
different reinsurance contract that happens to be silent, where
as one of these London market type contracts that calls for
payment in a reasonable time.   But the treaty is silent.    That
July ist bill is due on July 31st and is ninety days over on
October 31st.  Thus, unless the treaty stipulates payment in less
than thirty days, a bill can never be more than ninety days
overdue if it is billed out to September ist.

Other issues that we have had to deal with...intermediaries.      As
you know to take credit for reinsurance, a contract g e n e r a l l y
have to have an intermediary clause which says that the credit
risk is really on the reinsurer.  Therefore, payment made by a re
insurer to a broker is probably constructive payment from the
reinsurer's point of view, but is not constructive receipt from
the ceding company's point of view.   Thus, you also have risk as
to the solvency of the intermediaries that you are dealing
with.  So there is risk at the intermediary level.

What are some of the strategies that have been discussed in order
to deal with this problem? Well, the first one is to a g g r e s s i v e l y
bill and aggressively collect the recoverables, but we know that
is not always easy to do.

The first one was rather simple.   Well, let's amend our treaties.
If the treaty had been silent so the NAIC would have imputed a
thirty day period for collection, the practice has been for the
reinsurance company that pays in ninety, then we are taking a
penalty, most likely, about sixty days into the normal credit
period, when we know, in fact, we are going to get paid.      So if
there   is a   practice  that  has   been  established   with  your
reinsurer, you might want to amend the treaty to make it reflect
actual practice.    There is a risk here though.      And the risk

revolves around the relationship with the reinsurer and the
ceding company.              You know, if it said thirty and they paid in
ninety and you have always accepted it, that's great.              Well, what
happens if you put ninety in.                Does that mean it is going to
happen in ninety or is it going to happen in 180 now?                So there
could be some cash flow risk in amending the treaty and e x t e n d i n g
the Credit period out, but, again, I think that depends on the
r e l a t i o n s h i p the ceding company has with the reinsurer.

Some companies ask whether we can do this retroactively, which
really means that I have these recoverables that are aging on the
right side of Schedule F and I'm just going to bill back and
amend retroactively; amend my treaty so that they will no longer
be overdue.   Well, that's an abuse and I think that regulators
will look at the business purpose of a treaty revisions and if it
was merely to avoid the penalty,      I think you would have a
regulatory problem.

Delayed billings.   I think there is a presumption in the Schedule
F penalty that there is an incentive to bill promptly; there is a
cash flow incentive to bill promptly.    However, I don't think it
is an unreasonable strategy that if you have a large bill that
you are preparing late in August and it could p o s s i b l y be some
type of asbestos bill or environmental bill that is going into
the London market and you know darn well that it is going to go
to 120 - 180 days, you could delay it into early September to
avoid taking a penalty.   And I don't think that's an u n r e a s o n a b l e
strategy, but, again, I think the regulators would look at abuses
here.   Delayed billing would only help if the reinsurer is not a
slow payer.    You have to remember if the reinsurer is a slow
payer, there are very few ways to avoid penalty.     You are going
to take 20% on everything that that reinsurer owes you.

W i t h d r a w n bills.    Some companies ask us, well, we didn't really
m e a n to send that one or it still is in the negotiation stage but
we billed anyway.             Can we pull it back?    That sounds like an
abuse and we have pretty much informed our clients that we
thought it was.           However, there is a real issue here and I'll use
an example.            Claims due on asbestos from the Lloyd's market.
Lloyd's has a set up where they have a group of solicitors called
the Lloyd's Asbestos Council.            Things will get delayed when they
a re being evaluated.              We have heard complaints that Lloyd's
never really considers evaluating the coverage issues, the basic
issues that need to be evaluated, until they get a bill.            So the
ceding company is between a rock and a hard place.             In order to
get the ball rolling, they need to bill the reinsurer and they
know they are not going to get this paid on for maybe three or
four months.

So we have told companies to work with their legal counsel and
maybe recharacterize what they consider to be a notice of loss, a
proof of loss, or a demand for payment.              And that, possibly,
could be a reasonable strategy in trying to avoid penalty,
e s p e c i a l l y in this situation. You have to send the bill in order

for them to evaluate coverage.               It seems unfair       to get p e n a l i z e d
in that situation.

And the last thing is really good common sense.                    And it would
really be a shame to have to take a surplus hit because you
didn't give your reinsurer what you promised you would give
them.         G e n e r a l l y there are the three stages of loss notification;
when you             reach some percentage of your retention, when you
a c t u a l l y pierce the retention, and when the claim gets paid.          And
I think it is incumbent upon all ceding companies to really look
hard at the claims procedures and the accounting procedures they
have in place and make sure that the reinsurer has everything
that they need to evaluate the claim.                 Because when we talk about
disputes later, we will make it clear that a dispute is not the
time in which a reinsurer needs to gather more information or is
e v a l u a t i n g coverage.        There is a clear distinction.

Disputed            recoverables.      This   is probably   one  of   the most
m i s u n d e r s t o o d aspects of the rule because what happened was the
NAIC came in and said, we're going to give you an allowance for
dispute, everybody said, this is great, because we're dealing
with brokers and companies and everything we sent them they
dispute.               So just about everything we have that is old, by
definition, must be a dispute.               Well, the NAIC made it very clear
as to what a dispute was.               A claim can be in dispute if it is in
a r b i t r a t i o n or litigation.       And that is fairly clear and it
should be very easy to document.               There is one more definition of
a dispute and that is you can document a dispute by way of
n o t i f i c a t i o n from the reinsurer.      That notification most be in
writing and it must clearly represent the denial of validity of
coverage.              And that's a distinction I want to make.     It is not I
need more information to do my evaluation, you didn't send me
this piece of paper.               It is clearly a denial of the validity of
coverage.             And that would constitute a dispute.

Required           disclosures.   No matter what the impact from the
Schedule F penalty, companies are required to disclose disputes
if individually they represent 5% of surplus or more, or in the
aggregate           or  10% of surplus or more.    So there are some
d i s c l o s u r e requirements.

NOW let's talk about the impact on the surplus penalty and I will
refer back to the earlier example.                    Disputes only really help if
they reduce a reinsurer's slow pay ratio from over 20% to under
20%.          Because if that reinsurer is a slow payer the d i s p u t e d
items are included in the calculation of the penalty.                        So it is
o b v i o u s l y w o r t h w h i l e finding out which recoverable is a dispute
because you need to collect them.                        But for purposes of the
penalty we saw companies go to an awful lot of trouble of trying
to pull together some really flimsy documentation of what they
c o n s i d e r e d to be disputes and in the final analysis they cranked
through            the    calculation       and   it didn't   matter  because          the
reinsurers were slow payers.                   They didn't pay enough a t t e n t i o n to
the mechanics of the rules and how that would impact it.

Dealing with recoverables in disputes.         There's a couple of
strategies that one could consider.   And I say that because I'm
not advocating any one of these in particular.               Some c o m p a n i e s
have talked about requesting written notice.            They said, look,
reinsurers are not the type that write a lot to us.               You know,
you look at a file on a very complicated case and it tends to be
very flimsy.  They just don't write down a lot on paper.              There's
a lot of phone calls, but there is not a lot written.                  We are
never going to get a letter that says, dear ceding company, I'm
denying the validity of coverage.  So some companies have thought
about actually taking a more proactive view and writing to the
reinsurers, basically claiming that there is a dispute and w o u l d
you either confirm or deny that there is one.               And if you did
that, would that constitute adequate d o c u m e n t a t i o n for dispute.
I don't   know the answer to that.       It is just one of the
strategies that has been recommended.     And there is a d e f i n i t e
down side, that if your reinsurer really never c o n s i d e r e d the
item in dispute to begin with, you are raising a red flag when
really one didn't exist at all.

The other one has to do with obtaining legal opinions.          Again, we
said that the claim is in dispute by way of a r b i t r a t i o n or
litigation or by way of notification.          Well, what if it is not an
a r b i t r a t i o n or litigation, but it is more or less pending.
Whereas it is more or less an unasserted claim.               Can we get
in-house counsel to give us a legal opinion that the i t e m is in
dispute and use that as documentation for the dispute?          Again, we
don't have an answer to that.          We think there are some c o m p a n i e s
out there that have done that.          We know there are other c o m p a n i e s
that considered doing it and in the final analysis, chose not
to.       Maybe Kathryn later can speak to that point.

The other impact that this could possibly have is on the London
market.            Based on what I've read, the London market is scared.
And one of the reasons they are scared is that they do not like
to put a lot in writing and document disputes, as I said before.
And       they      think   that ceding   companies  in order   to d o c u m e n t
disputes are going to initiate law suits, either more law suits
or faster than they would have in the past.              Then you are going
to see a rush of law suits flooding into the London market and
tying up the manpower that exists there.               I don't think it has
h a p p e n e d yet.      I don't know if it will, but it could.    There is
one issue that one attorney wrote about that I read just recently
and that            is Rule ii of the Federal Court, which a d d r e s s e s
frivolous law suits and I guess some of these law suits could be
c o n s i d e r e d frivolous if all we are doing is initiating a law suit
in order to document a dispute.               Maybe Kathryn, you will also
address that later because I'm certainly not a lawyer, as you can

One of the other issues that we want to deal with is direct
write-offs.   Companies that really work through the c a l c u l a t i o n
noticed kind of an anomaly in the calculation that in certain
situations,  if you wrote off a balance,     you got a surplus

pick-up.           And they were right.           Before I get into that let me
just go over my personal views on this.                  The ninety day rule is a
minimum          penalty.          If  in   your   analysis    of   your  financial
statements, you believe that there is additional reinsurance that
is u n c o l l e c t i b l e , I would say that prudency, and I think even in
the spirit of statutory accounting, you would have to record
additional penalty.               Write-off should be encouraged when valid no
matter what the impact on the penalty is.                    Whether it decreases
surplus, increases surplus, or has no impact at all, we think
from an accounting point of view, you should continue to evaluate
your recoverables and when the criteria that you have always used
to      write-off           exist   then   you   continue   to    write  them  off.
G e n e r a l l y those would be the criteria that you might use to
document a tax deduction.                 Write-off merely to avoid the penalty
p r o b a b l y would be considered an abuse.

In the paper that I've handed out, the Implementation Guide, if
you go pages 16 and 17 there's an example of when a write-off
a c t u a l l y results in a surplus pick-up when you work through the

Schedule 1 and 2 is merely a fake reinsurance company and you've
got   amounts  ninety  days  overdue.     You've got  reinsurers
recoverable on paid losses, etc., etc. for a 40% trigger ratio.
Okay?   And when you work your way down just the way that we did
in the other example, your result in all balances due from that
reinsurer of $2,500 and the 20% penalty is $500.

We are going to take that same situation and we're going to
w r i t e - o f f $250 of the over ninety day amount.  So the new numbers
are 150 and 550.           Amounts received in the past ninety days stays
the same and the ratio has been reduced to 20%.          And for purposes
of this example we are going to say it is 19.5% so he is not a
slow payer.          Here's what happened.

The over ninety day amount is now $150.       The 20% penalty is
$30.   However, you wrote off $250 for a total of $280, but the
Schedule F penalty before the write-off was $500.  What happened?

What h a p p e n e d was that this was probably a type of long-tail
c o v e r a g e where the ceded reserves on the unpaid balances were
very,         very high.     Okay?    So the relationship of the paid
recoverables to the total was very low and thus if these other
balances exceeded 20% of the amount overdue, through the math of
the transaction, you get a surplus pick-up by w r i t i n g - o f f a
balance.          Not only that, but on a statutory basis, you get a 34%
tax d e d u c t i o n and you take the benefit that way as well.

Again, we have seen companies say, well, we thought that the
Schedule           F rule was more or   less implemented to e n c o u r a g e
w r i t e - o f f s so we are going to continue to do it.     And other
companies said, well, we are not going to write-off because we've
got the Schedule F penalty now.        And kind of our personal view is
you should be somewhere in the middle.           The Schedule F penalty

is a buffer.                  It is not the be all and end all of what your
uncollectible                problem    is.    You   should continue   to    record
u n c o l l e c t i b l e reserves in excess of the Schedule F p e n a l t y if you
feel        they         are    uncollectible.     And  you should   continue    to
w r i t e - o f f balances when they meet certain criteria such as the
IRS criteria are as good as any.

Some other considerations.         When'we were talking about g a t h e r i n g
some of this data before, we mentioned ALA&E.            And, again,           I
think we d i s c u s s e d it there.   I won't go into it, but if the
reinsurer is not a slow payer and you know that ALA&E is included
in your paid loss recoverable, you might want to analyze how to
get it out of there because you are taking a 20% penalty on it if
you have amounts ninety days overdue.           And you don't have to.
ALA&E, by the mechanics of the NAIC's calculation, only enters
into the calculation when the reinsurer is a slow payer.

Let's talk about some of the business impacts of the new rule.
We talked about the brokerage market versus the direct w r i t e r s
and what some of the competitive advantages and d i s a d v a n t a g e s may
be.    Of course the direct writers thought they were sitting
pretty when the new rule came out.

There is a view in the industry that you might s e e . . . s l o w p a y i n g
companies,  authorized slow paying companies being required to
post letters of credit, other forms of collateral, being c h a r g e d
interest on over ninety day balances, and vehicles of this sort.
And this is really to put them on parity with the fast paying
companies.   Fast paying companies, you'll take no p e n a l t y on your
Schedule F.    And slow paying companies, you might.          So to put
them in parity,    there might be an additional cost to running
their business, and that is posting collateral.

I think one of the most fascinating things that we have seen
is...and this is...I'll tell you the reinsurance market ought to
be c o m m e n d e d because they are really proactive.          As soon as an
issue is out there somebody is right on top of it issuing a
reinsurance product.          And that is reinsurance on over ninety day
amounts.          We saw two or three product illustrations where the
reinsurance treaty was actually an indemnification to the other
reinsurer for not collecting its over ninety day balances.               And I
saw various forms of it.              One was almost a prefunding, where you
a c t u a l l y got the cash.     And then as you collected your balances,
it was almost treated as a subrogation or a salvage recovery and
you, the reinsurer, would be paid back.               And another one wasn't a
prefunding.          It was a p r e m i u m paid and if you didn't collect the
amounts they would be prefunded.

There's          some issues with that.       The product   illustrations   I
saw...let           me preface   this,   were   attached  to   letters  from
a t t o r n e y s that were being sent to regulators to see if they w o u l d
treat this as reinsurance.            Okay?   So there were some issues as
to whether if you did buy this reinsurance whether you could then
take credit for it in your Schedule F and not take a penalty.
And the answer we got back was there was no yes or no.                    The

answer we got back is, you know, we evaluate every reinsurance
contract on its own merits, etc., etc., which is the response you
would expect to get.

Has anybody bought this type of reinsurance?         I don't know of
a n y b o d y who has. I know there are products out there.  Whether
they were approved or not, I'm not certain, but I would venture
to say that there probably is.        Some company out there who is
writing over ninety day balance indemnification reinsurance.      So
that was very interesting.

In terms of additional or revised NAIC requirements, I think one
of the problems that you are going to have in planning for the
Schedule F penalty is that right now the rules are very rigid.
They are very strict.             They are very mechanical.    There has been
talk about making the penalty a progressive penalty.              And that is
fairly           simple.      Why   penalize   someone  whose   balances  are
ninety-one days overdue, the same amount as somebody's balances
who are two years overdue.                Does that mean they are going to
lower the 20% to the younger age categories?              I don't know, but I
really don't think so.             I think you are going to see some type of
stiffer penalty             for the real problem accounts that are out
there.           So I think you need to keep this in mind if you d e v e l o p
some type of model to plan for the surplus penalty calculation.
I think you need to keep in mind that the penalty may be a
p r o g r e s s i v e penalty in the future.

I guess just to wrap up my piece, I just want to say that this
list of implementation issues is not meant to be all inclusive.
It      is our           view  that  the   issues  that  will   arise in   this
c a l c u l a t i o n will be as complex to the reinsurance transactions to
which they apply.              And we also don't want to give the impression
that this is just some frivolous rule and one more nagging
regulatory constraint that we all have to deal with.                  That the
spirit of the new rule is really to make insurance companies look
at themselves and to protect their policyholders interests by
reinsuring              in   a  responsible   manner  and   that   if this   is
a c c o m p l i s h e d we are probably all better off.    Thank you.


MR.      SKRODENIS:          Moving along, the next c o n s i d e r a t i o n in the
c a l c u l a t i o n of the amount is our ceded IBNR reserves which are
needed in the statement.               This particular topic will be covered
by Jack Joyce.                Jack is the senior consultant for Coopers &
Lybrand's casualty actuarial practice in Chicago.                 He is a Fellow
of the Casualty Actuarial Society, and a Member of the A m e r i c a n
A c a d e m y of Actuaries.          At Coopers & Lybrand, Jack has been an
actuary on the audits of many of Coopers & Lybrand's insurance
clients.              He   has   consulted  on  self-insurance      programs      for
hospitals, municipalities, and other organizations.                          Prior to
working for Coopers & Lybrand, he worked for C&A Insurance for
four and a half years in various areas.               He has a Masters degree
from N o r t h w e s t e r n University's School of Management.           With that,
Jack Joyce.

       1990 C A S U A L T Y   LOSS R E S E R V E   SEMINAR


                        Presented        by

                       John J. J o y c e


                     Joseph      Zubretsky

       T h e Provision for Overdue

          Authorized Reinsurance
                 "The 90-Day Rule"

        Reinsurance Recoverables

• Very significant asset

• Uncertainty in estimating ultimate recoverable

• Long-term nature of asset

       Collection Of Recoverables

• Recent reinsurers' insolvencies

• Lack of information/disclosure on collection issues

• Heightened awareness


                                                                            • Recoverable aging

                                                                           • "Slow pay" test

                                                                           ,         Surplus penalty calculation

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                                                                               ,S'L o o o

                     The 90-Day Rule

      Implementation Considerations

• Data collection

                      Data Collection

• Identifying reinsurers

• Aging of balances

•' S e g r e g a t i n g c o m p o n e n t s (Loss and LAE)

• U n e a r n e d p r e m i u m detail

                    The 90-Day Rule

     Implementation Considerations

• Data collection

• Due date determination

         Due Date Determination

• Contract wording

• Treaty's silence

• Payment to intermediaries

          Due Date Determination

• Treaty amendments

• Delayed billings

• Withdrawn bills

• Improve loss notification procedures

                 The 90-Day Rule

      Implementation Considerations

    Data collection

    Due date determination

    Disputed recoverables

              Disputed Recoverables

• Arbitration or litigation

• Definition - must:

   -be      written from reinsurers
   -     represent denial of validity of coverage

• Required disclosures

• Impact on surplus p e n a l t y

• Dealing with r e c o v e r a b l e s in dispute

                        The 90-Day Rule
         Implementation Considerations

 • Data c o l l e c t i o n

 • Due date d e t e r m i n a t i o n

 • Disputed r e c o v e r a b l e s

 • Direct write-offs

                 Direct Write-Offs

• 90 day rule is minimum penalty

•   Write-offs encouraged when valid

°   Write-off vs. dispute

    Write-off to avoid penalty is abusive

                 The 90-Day Rule

      Implementation Considerations

• Data collection

• Due date determination

• ' Disputed recoverables

• Direct write-offs

• Ceded IBNR

                     Ceded IBNR

Allocation to reinsurers

Reinsurance programs:
 - -proportional reinsurance
 -- aggregate excess
 - -catastrophe
 --excess-of-loss; complex placements of layers
 - -facultative

                Other Considerations

• Segregating ALAE

• The impact of timing of payments

• Business impact
       -   brokerage market vs. direct writers
       - u s e of LOC's
       -   reinsurance

• Additional/revised NAIC requirements

• Congressional hearings

• SEC/AICPA requirements


        A Practical Guide to Implementation
                     June 1990

                     Written by

                Joseph M. Zubretsky
                   Senior Manager
     Coopers & Lybrand Insurance Industry Group

                 Terrence M. O'Brien
Coopers & Lybrand Casualty Actuarial Consulting Group

                               "The 90 Day Rule"

                      A Practical Guide To Implementation


In December of 1988 the NAIC adopted a revolutionary proposal of the NAIC's
Property and Casualty Reinsurance Working Group of the Blank Task Force,
chaired by the late Ken Smith of the Illinois Insurance Department~ The
adopted proposal revises Schedule F beginning with the 1989 Annual
Statement to include an aging of reinsurance recoverables from authorized
companies on paid losses, the calculation of a surplus penalty based on
that aging and disclosures of the amount of recoverables being disputed by

Why the New Rule?

Over the past few years, regulators have claimed that their effectiveness
has been hampered by the lack of information being filed with regard to a
ceding company's reinsurance.  This claim has been heightened by recent
insolvencies in which uncollectible reinsurance has either caused or
greatly contributed to the ceding company's downfall.  More pressure has
been applied through the Congressional hearings, a forum that has
scrutinized the financial health of the insurance industry and evaluated
recent insolvencies.

The new reporting requirements may give regulators the necessary
information to evaluate a ceding company's reinsurance program and also
forces a charge to surplus for balances which, by application of a formula,
are deemed to be uncollectible.

T h e Impact on the Industry

A. M. Best reported that the property and casualty's admitted surplus at
the end of 1987 was $104 billion.  Of this surplus, it was estimated that
nearly 57% or $59.3 billion represented amounts due from reinsurers
including intercompany reinsurance balances.  Coopers & Lybrand has
performed a study recently which estimated that as much as 4% or $4 billion
of the industry's surplus could disappear as a result of the new reporting
requirements and surplus penalty.  Since the estimate does not apply
ratably to all insurers, certain insurers may experience problems in
maintaining a surplus level to support the level of business they now
write.  It remains to be seen whether any ceding company would become
technically insolvent as a result of the new rules. As of this date, we do
not have figures on the total reported industry penalty for 1989.

As the new reporting requirements were being developed two lobbying camps
emerged:  direct writing reinsurers who supported the rule and brokerage
market reinsurers and primary carriers who were opposed to it. It is no
industry secret that payments made to ceding companies from reinsurers
through intermediaries generally take longer to reach the ceding company
than those received directly from the reinsurer.  As bills for losses work
their way through the maze of brokers and reinsurers and through manual and
inefficient reporting systems, the recoverables age on the books of the
ceding company.  Direct writers, on the other hand, are in direct control
of the timing of their payments and can generally deliver the cash more
promptly.  As a result, direct writers believe that their competitive
position in the market place has been enhanced.  There is also an
opportunity for brokers to enhance their position in the marketplace by
improving their "backroom" operations; speedier payments may mean more

Along these same lines, foreign and unauthorized reinsurers also believe
their competitive position has been enhanced.  The new reporting rules
allow ceding companies to take credit for assets held in trust or letters
of credit as an offset to balances owed to them by the reinsurer.
Likewise, unauthorized reinsurance has been unaffected by the new rule, so
a ceding company's surplus charge for unauthorized reinsurance continues to
take credit for compensating balances.

Slow paying reinsurers may discover that they will need to issue letters of
credit (LOC) to remain competitive.   The LOCs could mitigate the impac t of
the ceding company's surplus penalty.   In addition, new companies may find
it difficult to enter the reinsurance market because they have not had the
opportunity to demonstrate their ability to settle and pay claims quickly.

Can a new Annual Statement reporting requirement alter the course of the
reinsurance industry?  The answer will emerge over time.

How Should the Industry React?

Ceding companies should obtain a thorough understanding of the rules,
re-examine their reinsurance portfolio and plan for the implementation of
the rule.  Like any general rule, minute differences in circumstances.will
result in inequitable charges to some ceding companies' books. However,
the reason for the new rules is valid; protecting the rights of
policyholders by ensuring that ceding companies are reinsuring in a
responsible manner.

The new rule has been cumbersome to implement.   Implementation has involved
increased work for data processing departments in compiling the appropriate
data, and for accountants and legal counsel in interpreting provisions of
reinsurance contracts and dispute issues.   In determining how much effort
to apply to this exercise, the cost should be weighed against the perceived
benefit.  Many companies were surprised at the complexity of the rules and
the surplus impact of the rule when they actually completed Schedule F for
the 1989 Annual Statement.

Although regulators have cracked down on certain "band-ald" approaches to
creating surplus many companies still take the time and spend the money on
short-term surplus creation.   Financial reinsurance and securitization
transactions do cost something.   We believe that properly planning for and
implementing the new rules may be a less costly surplus conservation

The importance of the new reporting requirements should not be
underestimated nor should the complexities and the practical implementation
issues.  The industry has been quiet since the rule was formally adopted in
December of 1988. As Coopers & Lybrand performed postmortems on 1989, many
implementation problems were identified.

We have prepared this paper as a guide to dealing with some of the
practical implementation issues related to the new rule. We have heard of
some of the problems being experienced by ceding companies and are
anticipating others.  While we are unable to be company specific in this
paper, our goal is to touch on many of the issues and to offer some
guidance on how to deal with them.

                                EXECUTIVE SEMMARY

Section i   An Overview of the New Schedule F Reporting Requirements

In this first section we present the step by step methodology of completing
the new Schedule F. The new schedules are attached to this paper and we
recommend referring to them as you read the methodology.  The schedules
discussed in this section are:

   Part iA-Section i, which is.the recoverable aging,

   Part 2B-Sectlon i, which is the calculation of the "slow pay" test,

   Part 2B-Section 2, which is the development of the information necessary
   to calculate the surplus penalty for the slow payers, and

   The surplus penalty calculation.

Section 2 What is a Recoverable and When is it Due?

In this section we explain that a reinsurance recoverable is 90 days
overdue when 90 days have expired after the due date according to the terms
of the reinsurance contract.  We discuss the problems presented when the
treaty is silent as to the due date or when payment has been received by
the broker, but not by the ceding company.

We discuss the pros and cons of various strategies to reduce the 90-day
overdue amount, s u c h as delaying billings, extending the due date by treaty
amendment and withdrawing bills or rebilling.

Section 3 Recoverables   in Dispute

In this section we explai n that recoverables in dispute needn't be included
in the calculation of the slow payer test. A recoverable is defined as
being in dispute only if it is subject to arbitration or litigation or when
written notification of dispute has been received from the reinsurer.

If a recoverable is in dispute and is excluded from certain calculations
disclosure must be made if the disputed item exceeds 5% of surplus, or, if
disputed items in the aggregate exceed 10% of surplus.

The pros and cons of strategies for dealing with the dispute issue are
discussed.  These include having the ceding company provide written
documentation to the reinsurer for confirmation or obtaining a legal
opinion from counsel.

Section 4   The Potential Surplus Impact of Wrltlng-0ff an Account Balance

There are two schools of thought on direct write-offs; one camp believes
that a write-off to avoid excess penalties is a disregard for the spirit of
the rule while the others believe that the rule was structured to encourage

Write-offs and their impact on the surplus penalty are discussed.

Section 5   Data Collection

The new rules require the compilation of data which is not currently
captured by many systems.  A brief listing of the types of data which are
now required and some broad suggestions for re-designing reinsurance
systems and integrating them with direct underwriting and loss systems are

Section 6   Actuarial Considerations

In the past the allocation of the ceded IBNR to authorized Schedule F
reinsurers did not matter.  Under the new rules the amount of these
balances allocated to a slow paying reinsurer will affect the penalty

Some broad guidelines regarding the problems you may encounter in
allocating these balances to reinsurers are provided.  Acceptable actuarial
estimation techniques are discussed.

Section 7   Other Issues

This section involves the impact of ALAE on the calculation, the effect of
reinsurers recent payments, the possibility of a progressively rated
penalty in the future and how the market has responded to the penalty.

                                    Section i

             An Overview of the Schedule F Reporting Requirements

In this first section we provide an   overview of the reporting requirements
and the mechanics of certain of the   calculations.  Attached to this paper
are the various tables and exhibits   of Schedule F. We suggest that you
refer to those exhibits as you read   this section.

A°   Schedule F-Part iA-Section i

     This table requires the ceding company to disclose the aging of the
     amounts recoverable from reinsurers on paid losses.  Four aging buckets
     are provided in Column i; Current and 1-29 days, 30-90 days, 91-180
     days and over 180 days.  The amounts are provided for each reinsurer
     with which a ceding company has amounts outstanding.  Accompanying the
     aging schedule are columns 2-4, requiring the total amounts of
     recoverables on unpaid losses, unearned premiums, and premiums ceded.
     Wedged between column i and the column for the location of the
     reinsurer is a column requiring the ceding company tO insert a code
     letter disclosing whether the reinsurer is subject to a delinquency
     proceeding, such as rehabilitation, liquidation or conservation.

     The total reinsurance recoverable on paid losses from this schedule
     should tie directly to Line 12 on the Balance Sheet.  This means that
     all recoverables are included in the aging, including those considered
     to be in dispute.

B.   Schedule F-Part 2B-Section i

      This schedule begins the calculation of the surplus penalty.  The
      ceding company must add the amounts in columns l(c) and l(d) from
      Part-iA-Section i; this represents the total recoverables on paid
      losses greater than 90 days overdue.  From this total the ceding
      company is allowed to exclude any amounts which are considered to be in
      dispute.  The remaining over-90 day amounts are then entered in
      column i of Part 2B-Section i. The total considered to be disputed is
      subtracted from the amount of total recoverables on paid losses from
      column l(e) in Part IA   Section I, and entered in column 2 in
      Part 2B-Section I. In column 3 the ceding company enters the total
      cash received with respect to paid losses during the prior 90 days;
      that is, from October ist through December 31st of the year being

     In column 4, the ratio of the amounts more than 90 days overdue to the
     sum of total recoverables on paid losses and amounts received within
     the last 90 days is calculated.  If the ratio is less than 20%, the
     total 90 day overdue amounts from column i are entered in column 5.

     This c a l c u l a t l o n l s often referred to as the "slow payer" test or the
     "trigger" test.             The ratio is designed to identify reinsurers which
     have a history of being slow payers.             Amounts received in the prior 90
     days are added to the denominator of the ratio to depress the ratio by
     giving credit to the reinsurer for recent payments.             A buildup of
     outstanding bills with very little in the way of recent payments will
     increase the trigger ratio.             If the resulting ratio is greater than
     20%, an additional penalty will have to be calculated in excess of the
     20% penalty taken on amounts greater than 90 days overdue.

     The losses recoverable used in these calculations do not incl~de loss
     adjustment expenses.  In addition, the amounts recoverable may not be
     netted with amounts owed to the ceding company with respect to

C.   Schedule F-Part 2 B - S e c t i o n - 2

     The information developed in this table is used to calculate the
     penalty related tO the slow paying reinsurers identified in Part
     2B-Section I. All reinsurers with ratios of 20% or greater from
     Part 2B-Section 1 are listed in this table.  In column i, the unearned
     premium debit related to the reinsurer is entered.   In column 2(a) the
     total paid and unpaid losses recoverable are entered.   Since this
     information is taken from Part IA-Section l, the amounts include
     recoverables in dispute.  In columns 2(b) and 2(c) ceded IBNR and the
     total recoverable on paid and unpaid ALAE, respectively, are entered.
     The sum in column 3 represents all amounts due from the reinsurer.

     Columns 4 and 5 quantify the reduced exposure by giving credit for
     funds held and amounts owed to the reinsurer.  In column 4 the ceding
     company enters the value of deposits, trust accounts and letters of
     credit held as security for the particular reinsurer.  In column 5 the
     ceding company enters reinsurance payables, that is, amounts owed to
     the reinsurer for premiums net of commissions or reserve funds held.
     The sum of columns 4 and 5 or the value of amounts owed to the
     reinsurer is limited to the amounts owed by the reinsurer and is
     entered in column 6.

D.   The Penalty Calculation

     At the bottom of Schedule F-Part 2B-Section 2 the formula for the
     penalty calculation is displayed.  The 20% surplus penalty is applied
     to the sum of three figures previously calculated:

         The total of column 5 from Part 2B-Section I (recoverables on paid
         losses greater than 90 days overdue for all reinsurers not deemed to
         be slow payers), plus

         The total of column 3 from Part 2B-Section 2 (all balances owed by
         reinsurers deemed to be slow payers), less

       The total of column 6 from Part 2B-Section 2 (all amounts owed and
       the value of security withheld from reinsurers deemed to be slow

     The resulting penalty is entered as a liability on Line 13e of the
     balance sheet with the corresponding debit directly to the company's

E.   Summary

     Ceding companies should spend some time becoming familiar with the
     mechanics of the Schedule F exhibits. Depending on a company's
     reinsurance program and available data, practical problems will surface
     concerning the new reporting requirement. This brief overview provides
     the framework for the purpose of this paper; dealing with the practical
     problems of implementing rigid, mechanical rules to the complex
     business of reinsurance.

     In the remaining sections of this paper we focus on some of these
     issues and offer some practical solutions. A ceding company should
     evaluate its particular circumstances before implementing any of the
     proposed solutions contained in this paper.

                                           Section       2

          The Basic    Issue   - What   is a R e c o v e r a b l e   and When is it Due?

A.   The Overdue Rule

     In our view, ceding companies will have a difficult time answering this
     rather simple, non-threatening question.                The NAIC defines a paid loss
     recoverable as a balance arising in presenting a reinsurer a notice of
     loss or demand for payment.       The date on which payment is due to the
     c e d i n g company is determined by the wording in the reinsurance
     agreement.       If no such specific d e f i n i t i o n of "due date" is evident in
     the contract, the NAIC has stipulated that 30 days should be used.                An
     example follows:

     Assume that on July i a ceding company submits a loss notification to a
     reinsurer.   Further assume that the treaty with this reinsurer calls
     for payment within 45 days of billing.   The recoverable is considered
     due on August 15 and thus would be considered 90 days overdue on
     November 15.   If, in this same situation the treaty was silent as to
     when payment was due, payment would be considered due on July 31 or 30
     days after billing, and be considered 90 days overdue on October 31.
     Thus, bills submitted after September I of any year could never be 90
     days overdue at December 31, unless the reinsurance contract called for
     payment in less than 30 days.

B.   Practical   Issues

     In practice, there are lags in payments from reinsurers to ceding
     companies, especially from brokerage market reinsurers.  The problems
     that ceding companies will be confronted with may include situations
     similar to the following:

        A treaty is silent as to the due date for payment but practice has
        been for an extended credit period, say 90 days.  The treaty's
        silence will call for the imputation of a 30 day credit period for
        purposes of the Schedule F penalty.  Thus the recoverable will be
        considered 90 days overdue 30 days into the normal credit period.

        Even when claims are uncontested, receipt of payment frequently
        takes longer than 120 days in the brokerage market.  Internationally
        placed reinsurance normally increases the delay.

        While payments from a reinsurer to an intermediary are often
        considered constructive payment by the reinsurer they are usually
        not considered constructive receipt by the reinsured.
        Intermediaries are usually considered agents of the reinsurer and
        thus collection problems with an intermediary could also trigger a

C.   Reducin~   the 90 Day Overdue Amount

     What can a ceding company do to legitimately reduce the level of 90 day
     overdue amounts?  We have heard various strategies throughout the
     industry and present some of them below along with the benefits and

     i.   Delay billin~ until after September i Ceding companies obviously
          have the cash flow incentives to bill promptly.   We're sure it was
          not the NAIC's intention that ceding companies build up an
          inventory of recoverables on unpaid losses to avoid the surplus
          penalty, but there is no current requirement to bill when the
          direct loss is paid; it is assumed that there is enough incentive
          to do so. If there is a particularly large loss that is expected
          to have a delayed receipt and the choice is to bill it in late
          August or early SePtember , then a short billing delay would appear
          to be a reasonable strategy.   However it would only avoid an
          additional.penalty if it reduced the trigger ratio to less tha~ 20%
          or the ratio was already below 20%.   If the trigger ratio would
          have been exceeded in any event, the penalty would be taken on the
          unbilled balance as an unpaid loss recoverable.

     2.   Extendin~ the due date by treaty amendment    This strategy seems
          fairly simple to implement and one in which complete cooperation
          from the reinsurer is virtually assured.   In our view the benefit
          in extending the due date depends on the relationship between the
          ceding company and the reinsurer and also what the practice has
          been historically.  If the treaty specifies a 30 day payment but
          practice has been 90 days and this practice has been agreeable to
          both parties, then it would seem reasonable to have the treaty
          extended to 90 days to reflect actual practice.   However, this must
          be weighed carefully against the prospect of having the reinsurer
          delay payment even longer and thus the relationship with the
          reinsurer becomes an important consideration.

          If the treaty is silent and the practice has been for payment
          beyond 30 days, then the ceding company benefits by making the
          treaty specific as to the due date.  A 30 day due date would be
          imputed if the treaty is silent on that point.  The surplus benefit
          would be 20Z of amounts that would have been overdue if not for the

          These are practical, prospective solutions.   Can this strategy be
          used retrospectively?   Can a contract amendment be applied
          retroactively to a recoverable which is already billed or even 90
          days overdue?   This is a question better asked of legal counsel.
          However, a retroactive extension of the due date solely to avoid
          the penalty would probably not be viewed favorably by state
          regulators.   Upon examination, they would most likely focus on the
          business purpose of the contract amendment and, if none existed,
          would probably require that the 90 day overdue balances be
          reinstated based on the original contract wording.


.   Withdrawing bills or rebillinK Can a ceding company withdraw a
    bill from the market and rebill the loss to have the aging process
    start over? While this may sound abusive this strategy raises some
    interesting questions relating to the definition of a bill. A bill
    is a demand for payment.  It is the intention of the rule for the
    aging to begin when this demand occurs.    Some ceding companies have
    complained that the definitions of initial notification of loss and
    bill have become obscured in today's market, especially with
    complex liability claims.  Some reinsurers, including Lloyd's
    syndicates, only begin to seriously evaluate a claim upon billing.
    For instance, an asbestos related bill s u b m i t t e d to the London
    market will immediately be sent to the Lloyd's Asbestos Council for
    review by the Council's solicitors. Ceding companies are forced to
    bill before reasonably expecting payment because they know payment
    is preceded by this evaluation and the evaluation will take place
    only upon the submission of a bill.

     This is a very gray area. We understand companies may consider
     recharacterizing proofs of loss and demands for payment but only
     after consulting with legal counsel.    Whether this
     recharacterization can be performed retroactively is another valid
     question for legal counsel.    Rebilling may be a legitimate strategy
    w h e n the characterization of a "bill" is questionable but would be
     considered an abuse if done merely to avoid the penalty.

.   Evaluate the quality of information submitted to reinsurers
    Undoubtedly, situations occur in which reinsurers delay payment on
    a bill because the ceding company has not submitted all of the
    information the reinsurer needs to adequately assess the loss.
    Ceding companies should evaluate and strengthen their loss
    reporting procedures to ensure that delays are never caused by
    inaccurate or incomplete reporting.  These procedures generally
    apply to the three stages of loss notification:

       Preliminary notification,   generally w h e n s o m e   percentage of
       retention is exceeded;

       Notification upon piercing the retention;        and

       Notification upon payment of the direct loss.


                                    Section 3

                             Recoverables    in Dispute

A.   The Rules

     There has been much confusion as to the appropriate treatment of
     disputed items.  It is best to begin our discussion with a detailed
     description of the rules:

        A recoverable is in dispute if validity of coverage is being denied
        by way of arbitration, litigation or by notice from the reinsurer.

        Reeoverables in dispute should be included in the aging schedule in
        Part 1A- Section I.

        For the calculation of the slow payer test, Part 2B- Section I, the
        items in dispute should be excluded from columns i and 2. Thus the
        slow pay test will not be adversely affected by disputed items.

        In calculating the penalty for the slow payers, Part 2B-Section 2,
        the items in dispute ar___~eincluded, and thus a 20% penalty is taken
        on the disputed items.

        If any one item in dispute is in excess of 5% of surplus or if in
        the aggregate all disputed items are in excess of 10% of surplus,
        appropriate disclosure must be made in the footnotes to the Annual

     Some companies assume that a disputed item provides for surplus relief
     in all cases but this isn't true.   The exclusion of a disputed item can
     be used to reduce a ceding company's penalty by reducing a reinsurer's
     slow payer test ratio to below 20%, thus avoiding penalties on unpaid
     losses, unearned premiums, etc.   The exclusion of a disputed item also
     reduces the penalty for reinsurers who are not slow payers.   However,
     if a reinsurer is deemed a slow payer even with the exclusion of the
     disputed item, then a 20% penalty is taken on the disputed item.

     While written interpretations are scarce, it is safe to say that the
     NAIC did not intend for ceding companies to tag every old balance as a
     disputed item.  Ceding companies need to carefully evaluate each of the
     outstanding balances for the characteristics of dispute and should not
     just apply this label liberally to their older recoverable items
     without such an evaluation.


B.   Practical Issues

     The NAIC defined a dispute narrowly to avoid abuses.  It is difficult
     to apply rigid definitions to the very dynamic and complicated
     reinsurancemarket.   We have heard many concerns raised by ceding
     companies with regard to the nature and treatment of disputed items.
     The following is a brief discussion of some of these issues.

        Some ceding companies would allege that it would be atypical for a
        reinsurer to notify them promptly, in writing, that the reinsurer is
        disputing coverage.  Even when a claim is obviously being disputed,
        the first sign of written documentation may be the litigation or
        arbitration papers.  Our experience somewhat corroborates these
        contentions; correspondence files for even contentious claims can be

        The NAIC believes that the written notification from the reinsurer
        must contain very specific language, to the affect that "validity of
        coverage is denied".  This may cause ceding companies even more
        concern as obtaining any form of written notice is thought to be
        difficult enough.

        There may be instances, such as when multiple coverage, layers,
        years or claims exist, when one p~rtion of the recoverable would be
        paid with no delay if the other portion was not an issue.   If the
        entire payment is being withheld due to a valid dispute about
        coverage that pertains only to a part of the recoverable, it seems
        appropriate to consider the entire recoverable in dispute for
        Schedule F purposes.   The problem becomes more complex when tenuous
        coverage questions are cited by a troubled reinsurer mostly as a
        negotiating tool to delay payment and reduce ultimate settlement.
        The 20Z surplus penalty was probably designed with recoverables from
        such reinsurers in mind.

     The list of questions could be endless, but those shown above serve to
     demonstrate the basic issues.  Next we will discuss potential solutions
     which are currently being evaluated, and their benefits anddrawbacks.

C.   How'To Deal With the Dispute Issue

     Dealing with the issue of disputes involves legal matters on which
     legal counsel should be consulted.  Recoverables which are being
     disputed by way of arbitration or litigation should not be difficult to
     document.  However the ceding company would be at risk if an item is
     excluded by way of dispute without having appropriate written
     documentation from the reinsurer.

i.   Requesting written notice Some companies, realizing that some
     reinsurers would not be inclined to offer written documentation,
     have considered requesting written notice.   Some have even
     considered preparing the written documentation, sending it to the
     reinsurer and having them confirm it, similar to the process an
     auditor would use to confirm an account balance.   This strategy
     creates a dilemma for the ceding company in that they may alarm
     the reinsurer by raising a red flag when the situation may not
     require one.  Ceding companies fear that alerting a reinsurer to a
     possible dispute may, in fact, cause one. This proactive strategy
     may be appropriate when it is obvious to all parties that a
     dispute exists but it should not be used recklessly.     ~

 .   Obtaining legal opinions Other companies have asked whether an
     opinion from legal counsel regarding the existence of a dispute
     would constitute adequate documentation.   At this time we have not
     heard a definitive answer to this question.   This question itself
      is a matter for legal counsel.  However, there are some parallels
      to be drawn.  Generally accepted accounting and auditing
     principles recognize the nature of unasserted claims and
     assessments.   In accounting for loss contingencies, companies must
     consider their exposure to unasserted claims whether or not a
      formal suit or arbitration case has been filed.  While the dispute
      situation is reversed (a gain contingency via a reduced surplus
     penalty rather than a loss contingency), does the essence of the
      legal matter prevail over its form?

 .   The required disclosures Reinsurers will need to consider the
     sensitivity of the required disclosures.  If an item is clearly in
     dispute but undocumented, the reinsurer may be in the position of
     either having the balance with the ceding company disclosed as in
     dispute or having the company named as a slow payer.   These are
     not great choices.  However, the dispute will only be'disclosed if
     individually, the balance exceeds 5% of the ceding company's
     surplus.  The reinsurer would be tagged as a slow payer if the
     trigger test exceeds 20%, even by a small margin.   In the case of
     a true dispute, some incentive does exist for a reinsurer to
     provide adequate documentation for the dispute.

 .   Partial disputes The NAIC has cited denial of the validity of
     coverage as the definition of a dispute.  A reinsurer will
     withhold payment while negotiating with a ceding company even if
     part of the claim is certain to be paid.  If validity of coverage
     is the issue, clearly a dispute exists.  If the reinsurer is
     withholding payment primarily due to a lack of financial
     resources, then subjecting the entire claim to the penalty
     calculation would be appropriate.  In such a situation, a
     reinsurer may fabricate a coverage issue to justify withholding


      .     InitiatlnK suit Although it is too early to tell, the'dispute
            rules may cause ceding companies to initiate suits faster than
            they normally would have in order to have a dispute clearly
            identified.  Taking this one step further, it remains to be seen
            whether the dispute rules will increase the number of suits
            between ceding companies and reinsurers.  The decision to s u e
            early or at all will, invariably, involve consultation with
            company legal counsel.

                                                     Section      4

          The P o t e n t i a l   S u r p l u s I m p a c t o f W r i t i n g O f f a n A c c o u n t Balance

A.   The Issues

     We preface this section by reminding ceding companies that the surplus
     penalty is a minimum requirement.  Companies with uncollectible
     reinsurance balances in excess of the Schedule F p e n a l t y s h o u l d record
     additional reserves.  Further, companies should continue evaluating old
     balances and write off those that are truly uncollectible.            Typically,
     write-offs would relate to balances due from insolvent companies,
     balances in litigation where the probability of collection is low or
     balances in dispute.  Normally the circumstances leading to the
     write-off should be well documented to support the deductibility of the
     write-off for tax purposes.

     We have heard various views on write-offs with respect to the new
     Schedule F rules.   Some companies have maintained that to write off
     account balances to avoid excess penalties is to circumvent the spirit
     of the new rules.   Others believe that the rules were designed to
     encourage write-offs.   Our view is that companies should continue to
     write off balances when the criteria for write-off exist, that is, a
     loss is probable and measurable.   The advent of the Schedule F penalty
     should not impact the criteria.

     The purpose of this section is neither to encourage or dissuade
     companies from writing reinsurance balances off but rather to display
     the effect of doing so on the Schedule F penalty and surplus.

     In certain circumstances, a ceding company may increase surplus by
     writing off an overdue balance.  This situation could arise on balances
     for a particular reinsurer tagged as a slow payer when working through
     the Schedule F Part 2B-Section I. There is a very simple rule of thumb
     to evaluate whether a write-off increases surplus.  The rule of thumb
     is that an increase occurs when:

     a)    The ra~io of 90-day overdue recoverables to the sum of total
           recoverables and amounts received in the prior 90 days (the trigger
           ratio) is greater than 20%; an__~d


b)   When the 90-day overdue recoverables are less than 20% of all
     balances due from that particular reinsurer.

When the balances relating to a particular reinsurer satisfy these
criteria, a write-off increases surplus because the penalty saved by
avoiding the slow payer trigger will always exceed the write-off.  This
situation is most likely to occur when, under a reinsurance contract,
there is a high balance of unpaid ceded losses outstanding.  The effect
is best demonstrated in the following example:

Schedule i

                                       Reinsurance       Amounts received
                        Amounts 90     Recoverable       in the Prior 90
Reinsurer              Days Overdue   on Paid Losses          Days          Ratio

EYE Co.                      400                 800           200           40%

Schedule 2
                         Paid Loss    Outstanding Loss     Unearned   Total All
Reinsurer              Recoverables     Recoverables       Premiums    Balances

XYZ Co.                     800                 1,600         i00        2,500

Penalty Calculation:
   Total all balances                           2,500
   Penalty rate                                   20%

     Surplus penalty                        $     500

Note the following:

     XYZ Co. has been deemed a slow payer:   the ratio of 90-day overdue
     amounts to the sum of total recoverables plus amounts received in
     the past 90 days is greater than 20%.

     Because outstanding loss recoverables of $1,600 are so high, total
     credits due from that reinsurer are $2,500.

     The resulting penalty is $500, or 20% of the total credits.

Using the same example, let's assume that $250 of the 90 day overdue
amounts are written off for some valid reason.  The same calculation
would yield the following result:


Schedule 3

                                    Reinsurance               Received
                      Amounts 90    Recoverable on          in the Prior
Reinsurer            Days Overdue    Paid Losses              90 days      Ratio

XYZ Co.                   150                  550               200        20%*

* an additional $.01 of write-off reduces the ratio to below the 20%
  trigger.  Figures are left in round numbers.

Since the reinsurer is no longer a slow payer the penalty would be
calculated as follows:

   90 Day overdue recoverables                150
   Surplus penalty rate                   X    20%

   Schedule F penalty                          30

   Surplus Impact:

          Schedule F Penalty                           30
          Write-off                                   250
          Schedule F penalty before write-off        5oo
   Difference                                        $220
Note the following:

   The slow payer t a g w a s avoided by writing off $250 of the original
   $400 90-day overdue balance.

   As such, the penalty is limited to 20% of the overdue amounts only.

   The sum of the write-off of $250 plus the revised surplus penalty of
   $30 is still less than the penalty in the first example. The $220
   difference arises because the 90-day overdue amounts are less than
   20% of all balances owed.

   The optimum level of write-off is the amount which reduces the slow
   payer ratio to just below 20%. Reducing the ratio further below 20%
   through additional write-offs actually decreases surplus.

   The surplus impact would be further enhanced by the tax deduction
   which would be allowed on the balance written off. In our above
   example, the actual surplus increase would be $305 ($220 as
   calculated + (34% x $250 written off)).


B.   Implications

     There are many implications of opting to writing off an account balance
     aggressively.  We do not advocate write-offs unless all of the
     implications have been thought out.  Some of the negative aspects of
     taking this course of action are as follows:

        The write-off is charged against profit and loss rather than as a
        direct charge to surplus.  Companies concerned with operating
        results may distort key ratios.

        Once the balance is written off it should not be reinstated~unless
        the balance is collected.  Thus if the over 90-day amount and the
        slow payer tag is an aberration with that particular reinsurer, a
        balance should not be written off merely to avoid a penalty.   The
        write-off is valid only when a balance is truly uncollectible.

        The 20% penalty is not a safe harbor.  If experience shows that a
        more substantial penalty is needed, there is a requirement to record
        it. In a very poor collectibility posture, a ceding company may
        have to write off balances which exceed the Schedule F penalty.

        A question that comes to mind with regard to this strategy is "why
        write off a balance when the dispute mechanism is available to
        mitigate the penalty?"  First, as was discussed in Section 3,
        disputes may be difficult to document.  Secondly, the dispute
        mechanism can not be invoked for a financially troubled reinsurer
        which has not really denied coverage.  Thirdly, the dispute
        mechanism is only available to avoid the slow pay ratio of 20Z; once
        the 20Z is triggered, disputed items are subject to the full 20Z

It is important to remember that the overall goal of the financial
statements is "fair presentation".  If collection of a balance is "not
probable", it should be written off no matter what the Schedule F mechanics


                                     Section 5

                                  Data Collection

One of the most burdensome problems ceding companies have faced in
connection with the new Schedule F reporting requirements relate to the
collection of the necessary data. Companies which, in the past, realized
that certain of the information now required was important to the
management of their reinsurance programs will be a step ahead of their
peers.   In many companies, reinsurance information systems were given less
emphasis than information related to direct business.   One benefit of the
new rule may be that insurers will now focus on reinsurance information
systems,   automate manual records, and integrate automated reinsurance
records with the mainframe underwriting and loss systems.

The problems that will be encountered will vary with the quality of the
ceding.companies' systems.  Below, we present a representative list of
issues in connection with data collection:

   Aging the recoverable   loss    reinsurance systems typically omit billing
   dates and due dates.

   Segregating the components of recoverables - in many systems, ceded
   losses and allocated loss adjustment expenses (ALAE) are not identified
   separately, especially when ALAE is included in the definition of
   ultimate net loss per the reinsurance contract.

   Identifying the reinsurers - many companies still maintain their
   recoverables on the basis of the intermediary from which they are due
   rather than on the basis of the actual reinsurer.  Still other companies
   report "Lloyds" as one line item on Schedule F. This line may actually
   represent many different syndicates with different attributes; a
   liability, marine, or property syndicate.  The payment histories of
   different syndicates vary significantly.

   An interpretation issued by the State of lllinois would appear to
   require each syndicate to be reported separately.    Thus, the good
   payment history of one syndicate may not be used to mitigate the poor
   payment history of another, just because they happen to be associated
   with Lloyds.   To complicate matters further, one may make a case for
   reporting each syndicate for each underwriting year as a separate
   reinsurer.   Each underwriting year for each syndicate may be viewed as a
   different reinsurer because each may be backed by different "Names."
   Thus, the underlying security, for the 19.85 and 1986 underwriting years
   of a particular syndicate may differ if Names were lost and added during
   the year.   In addition, many syndicates have been experiencing
   difficulty in purchasing "reinsurance to close," so old underwriting
   years have been left open under Lloyds' three-year accounting system.
   In these "unprofitable" years payments may tend to be slower.


   Unearned premiums detail    for purposes of the slow payer penalty the
   allocation of unearned premiums to treaties and to underlying reinsurers
   will become important.   Very often, ceded unearned premiums are
   calculated on an overall basis, rather than by treaty.

For years many insurers have struggled to identify reinsurance recoverables
without the additional concern of this new reporting requirement.  Special
projects to analyze historical losses have been performed in order to
recalculate reinsurance recoveries, resulting in the identification of
millions of dollars of otherwise lost recoveries.  Better reinsurance and
underwriting systems are much needed in the industry.

It is difficult to make specific recommendations with regard to systems and
to data gathering.  However, generally speaking, ceding companies should
focus on the following areas:

   Reinsurance systems should be integrated with the direct underwriting
   and loss systems whenever practicable.  This will help ensure the
   completeness, accuracy, and timeliness of reinsurance management and
   financial information.  This has been difficult in practice because each
   reinsurance contract is unique and may present some Challenging
   programming problems.

   Fields should be added to the reinsurance billing system corresponding
   to billing dates a n d d u e dates. This data could be extracted from the
   treaty system, based on the number of days credit given in the treaty.
   This will facilitate the recoverable aging.process.

   Reinsurance accounting systems may have to be better integrated with
   treaty systems.  Accounting may be more efficient if performed by
   treaty.  Treaties could then be converted to individual reinsurers by
   reference to that particular underwriting year's treaty participants.
   Thus, information such as unearned premium, could easily be associated
   with a particular reinsurer and that reinsurer's balances on all
   treaties could eas.ily be aggregated.

   Companies may find it useful to develop a surplus penalty planning model
   which could be integrated with the main reinsurance systems.  Such a
   model could be designed to recognize surplus preservation planning
   opportunities with regard to billing, cash collection, and management of
   the deterioration of the aging of recoverables.

The information needed to calculate the penalty is secondary to the
information needed to manage the company's reinsurance program.  The
surplus penalty may just be a painful reminder that better information
systems are needed.


                                     Section 9

                             Actuarial Considerations

The aging of amounts recoverable on Schedule F emphasized the actuarial
problems related to estimating reinsurance recoverables both in the
aggregate and by reinsurer.  Inadvertent surplus penalties may result from
poorly constructed methods of estimating and allocating IBNR.

Not very long ago, most companies ignored I B N R w h e n recording Schedule F
recoverables.  Through 1988, it was impossible to monitor the accuracy of
estimates of recoverables via the Annual Statement.         Many companies were
content with a token estimate of ceded reserves.         As long as the direct and
the ceded estimates were understated by the same amount, there was no
impact on surplus.  Beginning with 1989, Schedule P now requires
identification of ceded case reserves and IBNR for each category and year.
The total recoverable on unpaid losses in Schedule F should tie to the
ceded reserves in Schedule P - Summary.  Ineffective methods of estimating
ceded reserves in the aggregate should quickly become evident.

For many companies, the task of translating the aggregate ceded reserve to
recoverables for each reinsurer will be a detailed effort requiring a
degree of accuracy which is almost statistically unachievable.   Companies
writing liability coverages with numerous levels of excess reinsurance with
different reinsurers on each level will be forced to predict losses that
were reinsured because of their lack of predictability.  Companies making
heavy use of facultative reinsurance will have similar problems.

A.   A~reKateCeded    Reserves

     The techniques used to estimate the aggregate ceded reserve will depend
     on the business written by a company and the related reinsurance
     program.   Personal lines companies will generally face a simpler
     problem than multi-line companies with heavy commercial lines or
     professional liability exposures.   Retroceded business will probably
     cause the greatest problems.   Stable reinsurance programs will have the
     advantage of meaningful historical data, while volatile reinsurance
     programs will require separate calculations for each change.   The type
     of reinsurance will usually dictate how the ceded reserve should be

     Quota Share

     For a quota share treaty, the problem of calculating a net reserve and
     a ceded reserve are the same.  The loss development patterns for
     direct, net, or ceded are all identical for a quota share treaty.  With
     a little arithmetic, the ceded reserve can be derived from the net


     Aggregate Excess

     Generally, an aggregate excess attachment point will be based on a loss
     ratio or dollar amount after deduction of other reinsurance.  The net
     development pattern, exclusive of any reduction for aggregate excess
     coverage, should provide the best statistical base for projecting both
     net reserves and those ceded to an aggregate excess coverage, assuming
     that individual claim retention levels have been consistent over the


     Direct losses ceded to a catastrophe treaty can be handled like an
     aggregate excess coverage.  The uncertainty for a property catastrophe
     occurrence should be significantly less than for a liability aggregate
     excess coverage because of the short reporting lag for property losses.


     Excess-of-loss cessions can be highly complicated to estimate,
     especially if the excess-of-loss retention has changed over the
     experience period, and if the direct policy limits are considerably
     higher than the retention.  Much of the volatility in direct
     development patterns arises from the excess layers that are likely to
     be ceded.  Projections based only on case incurred losses are likely to
     exaggerate ceded losses in years were large losses are present a n d
     understate losses in other years.  A technique that emphasizes
     stability of results, such as a Bornhuetter-Ferguson method, generally
     produces more accurate results.


     Facultative reinsurance, because it is specific to an individual
     policy, is even more unpredictable than excess-of-loss treaty
     experience.  Unless facultative reinsurance is used on an entire class
     of business, it is extremely difficult to improve upon case reserves as
     an indicator of total ceded reserves.  If an entire class of business
     is ceded through facultative reinsurance then the reserve can be
     calculated like an excess-of-loss projection.

B.   Allocation to Reinsurer

     The allocation of ceded reserves related to quota share, aggregate
     excess, or catastrophe reserves should simply follow the terms of the
     participation on treaties.  However, allocating excess-of-loss ceded
     reserves can be a great deal more involved.  Excess-of-loss treaties
     are usually divided into several layers with different participants on
     each layer.  There is some room for adjustment concerning the portion
     of the losses that should be allocated to the higher layers.


The recognition of large losses through case reserves is frequently
delayed.  Losses which appear similar during early review and discovery
may produce significantly different settlements.   Most companies have
some layers that are penetrated only once every three or more years.
For such a layer, should an amount such as the pure p r e m l u m b e
allocated to a high layer due to the delayed recognition of large
losses?  Or should no allocation be made because for an individual year
the greatest likelihood is that no specific loss has penetrated the
layer? A compromise would seem logical and a Bornhuetter-Ferguson
technique provides a reasonable framework.   It would make sense to
consider the effect on a layer with a participating reinsurer that has
triggered the inclusion of IBNR in the penalty calculation.          When a
calculation has a high degree of uncertainty, its application should
retain some measure of flexibility.

                                   Section 7

                                 Other Issues

A.   The Effects of Allocated Loss Adiustment Expenses   (ALAE) on the
     Schedule F Penalt~ Calculation

     The rules require that ceded ALAE be excluded from ceded losses and
     treated separately in the penalty calculation.  Ceded ALAE should be
     excluded from the aging of recoverables, the slow-payer test and the
     penalty calculation unless the reinsurer is a slow payer.  For a slow
     paying reinsurer, AIAE would be included with all other balances due
     from the reinsurer and subjected to the 20% penalty.

     Practically speaking, many companies do not maintain ceded loss and
     ceded ALAE data separately.  In the old Schedule F, ceded ALAE was a
     disclosure requirement for balances due from unauthorized companies
     only.  Another reason this information may not have been compiled in
     the past is that the definition of ultimate net loss includes AIAE in
     many reinsurance contracts.  Separate data would have been needed only
     if loss expenses were ceded pro-rata on an excess-of-loss contract.

     The issue for ceding companies which do not have an accurate
     segregation of the loss and ALAE will be:

        Should you continue to include the ALAE in the penalty calculation
        and obtain permission for doing so from your state of domicile? and

        What impact does this have on your penalty calculation and how much
        incentive is there to segregate the data?

     Based on analyses we performed, we believe there are surplus saving
     opportunities from obtaining the information necessary to exclude ALAE
     from the calculation.  In summary we believe the following
     generalizations provide the incentive:

        Excluding ALAE will avoid a trigger situation, if one exists, only
        if the ~    content in the overdue recoverables is greater than the
        AIAE conten~ of the sum of nonoverdue recoverables and amounts paid
        in the last 90 days.  The higher the trigger ratio, the greater the
        differential in ALAE would have to be to decrease the ratio to less
        than 20%.

        There is no effect on the surplus penalty if the trigger ratio of
        20% would be exceeded both with and without ALAE.


         For those reinsurers on Schedule F whose trigger ratios are less
         than 20% (with or without ALAE) the benefit to be obtained by
         excluding ~    is 20% of the ~    content of the overdue

   Ceding companies with casualty reinsurance programs and with reinsurers
   which have not met the slow payer test should consider developing the
   data necessary to account for ceded ALAE separately.

B..The    Impact and Timin~ of Payments from Reinsurers

   Cash received from reinsurers in the 90 days prior to the reporting
   date may be used to depress the slow payer or trigger ratio.  By
   including these payments in the denominator of the ratio, the effect of
   the over 90 day amounts may be reduced.  Obviously this is only a
   factor if there are amounts 90 days overdue from reinsurers.

   S o m e ceding companies believe reinsurers are more likely to delay
    payments until the fourth quarter so that these payments qualify for
    inclusion in the formula and shield the reinsurer from the slow payer
    tag.    Still other ceding companies may plan collections for the fourth
    quarter to avoid failing the slow pay test. The incentive to both
    parties to delay payments until the fourth quarter may cause some
    insurers cash flow problems.

   Coopers & Lybrand has performed various analyses demonstrating the
   surplus impact of delaying payments until the 4th quarter.  The
   following statements would generally be true:

         The impact of cash received on the trigger ratio will be directly
         related to the quality of the aging.  The worse the aging, the
         higher the cash receipts required to improve the trigger ratio.

         If the ratio stays above 20%, irrespective of the level of cash
         received, then the amount of cash received is more important than
         the age bucket to which it applies.

         If the ratio remains below 20%, irrespective of the amount of cash
         received, then the cash received provides a surplus benefit only to
         the extent it is applied to the over 90-day category.

   Furthermore, companies should consider whether the receipt of cash from
   a reinsurer with respect to a recent balance, while older balances
   exist with that same reinsurer, is adequate support for tagging the
   older balance as a disputed item.  Should it be assumed that cash is
   generally received from reinsurers and applied to balances on a
   first-in first-out basis?


C.   Future Considerations,   A Progressive Surplus Penalty

     The Blanks Committee of the NAIC had discussed at one time accelerating
     the surplus penalty rate depending on the age of the recoverables.
     This progressive rate structure is premised on the assumption that the
     older the recoverable, the more likely it is that the balance will not
     be collected and, as such, should warrant a higher penalty.   This logic
     has been used for many years in developing bad debt reserves for trade
     accounts receivable.  Currently there is no exposure draft or
     discussion paper disclosing exactly how this would be applied in
     practice.  However, we do not believe that this potential change means
     the 20% penalty will be reduced; the 20% will probably represent the
     minimum penalty for the younger overdue amounts and the rate will be
     increased for older accounts.

     Because any change in the current rule is uncertain at this time, it i s
     difficult to discuss itspotential impact on ceding companies, except
     that it will result in a more severe penalty;  However one thing is
     fairly certain; a progressive rate schedule takes away many of the
     surplus management opportunities discussed in this paper.

     As demonstrated herein, under the current rule the penalty could be
     managed without aggressively collecting overdue amounts.  The constant
     rate penalty can be mitigated by aggressive billing and collection of
     newer balances depending on whether or not the reinsurer is in the slow
     payer situation.  A progressive rate would obviously provide the
     incentive to collect older balances first. This is more consistent
     with the spirit of the new rule, which is to protect policyholders
     against uncollectible reinsurance.

     It would be advisable to consider this possible change when developing
     systems to gather information and when developing models to help
     calculate and manage the penalty.  Systems and models should be
     flexible enough to provide for different penalty rates for the various
     aging categories.

D.   Chan~es in the Market

     The reinsurance market has responded in many ways.  Some direct-writing
     reinsurers have been boasting about their ability to pay quickly and
     have designed entire advertising campaigns around this theme.  Some
     reinsurers have developed products which reinsure ceding companies
     against non-receipt of overdue items.  Presumably, entering into such a
     contract constitutes constructive receipt, relieves the overdue balance
     and avoids a penalty.  While these products are available, ceding
     companies should be careful to ensure that such products have been
     approved as reinsurance by regulators.

Unauthorized reinsurers were thought to have been given a competitive
edge as such edtities post collateral in the normal course of business,
so ceding companies can take credit for ceded reserves.  Some industry
watchers believe that certain authorized companies with tainted payment
histories may now have to follow suit in order to remain competitive.

Some brokers have been criticized in the past for late payments and
shoddy recordkeeping.  Reinsurance intermediaries with strong backroom
operations may be enjoying an advantage over their competitors.
Backroom operations that have lagged behind, now have an increased
incentive to improve.

There has been discussion in the industry about the potential for slow
paying authorized reinsurers to issue LOCs to reduce the reinsured's
penalty without paying cash.  If a slow paying reinsurer collateralized
its entire net balance due to a ceding company, the surplus penalty
would be zero.  This nuance in the calculation may increase the use of
LOCs and care should be taken to ensure that these instruments meet all
of the requirements for credit to be taken for them.



MR.       SKRODENIS:        Our last speaker will be Kathryn Broderick
representing           the legal issues.    Kathryn is a partner in the
W a s h i n g t o n D.C. firm of Preston, Thorgrimson, Ellis & Holman.
She        devotes      the  entirety   of her  practice to   reinsurance,
concentrating on environmental, ~ asbestos, savings and loan, and
other areas currently generating controversy over coverage.             She
has published            extensively  in the reinsurance  field, and has
testified in London as an expert witness on U.S. insurance and
reinsurance law.

MS. BRODERICK:   Now that Don has given me that nice introduction
which was designed to highlight my credentials and impress you
all, I have to dispel that by admitting that there is an error in
my paper, which I would like you to go ahead and correct because
it might cause some confusion.   On page 3 in both subparagraph A
and subparagraph B, the words "and loss adjustment expenses"
should be deleted.   The NAIC is, in fact, looking at the idea of
including loss adjustment expenses in the penalty calculation,
but as my paper and the Coopers & Lybrand papers both make clear,
it has not done so up to this time.      So I apologize for that
confusion, which reflects an error that just didn't get caught in
final proofreading.

I've been asked to give the reinsurance lawyer's perspective on
the ninety day rule.     And I think it is worth bearing in mind
that reinsurers, since they are themselves reinsured to at least
some degree, we hope, are affected by the ninety day rule both as
reinsurers     and   as     ceding    insurers    vis-a-vis  their
retrocessionaires.   And this is by no means a theoretical dual
affect.    I would say that I have been asked by reinsurers to
institute     arbitrations      against     their     slow  paying
retrocessionaires about as often as a result of the ninety day
rule as I've been asked to defend reinsurers who have been
noticed by primary and excess carriers at year end, presumably in
response to the ninety day rule.

I think we can take as given that we all recognize the rule as
directed  toward  a genuine   problem  -- that   of  slow  paying
reinsurers -- and as intended to accomplish a very legitimate and
worthwhile result: "Let's expose the slow paying reinsurers or
the no -paying reinsurers so that the competitive marketplace can
work its forces and give a deserved competitive advantage to
companies that conduct themselves responsibly."

I think, however, that one can question whether the rule, in its
present form, is such that those purposes will be accomplished in
full without undesirable side effects.    And it is probably the
case that no rule could be written to accomplish those purposes
in their entirety without undesirable side effects.   I certainly
don't have the definitive answer to the problem, but I think it
is worth pointing out some of the respects in which the rule, can
be criticized.

The most obvious of those is something t h a t was alluded to in
Joe's remarks: the exception from the penalty calculation for
items in dispute.   As has been made clear in Joe's comments and
in the written papers, the dispute has got to be reflected in
either  a written   denial  of coverage   from the reinsurer   or
arbitration or litigation.   In case there is any lack of clarity
on that point, reservations of rights do not count.

Now let me address some of the things that Joe indicated might be
of interest.   First, the notion of Rule ii as a deterrent to
putting things in dispute in litigation on frivolous grounds,
merely to preserve them as collectible items.

Number one, Rule Ii applies only in the Federal courts and many
disputes  between   insurers do not qualify    to go to Federal
court.   Simplifying things greatly, if you've got two companies
each of whom is either headquartered or has a principal place of
business in the same state, there is unlikely to be any basis for
Federal court jurisdiction over that dispute.    Some state courts
have comparable provisions    for sanctioning counsel and their
clients for frivolous litigation, but not all do.     And Rule ii,
per se, is a Federal rule of civil procedure.

Number two, many if not most reinsurance disputes are not subject
to litigation at all.   They are subject to arbitration.  One can
argue  that arbitrators   ought to have the inherent power     to
sanction parties who file frivolous arbitrations, but I think
arbitrators generally are going to find themselves much more
reluctant to do so than a judge would be.       And not even all
Federal judges are that wild about sanctioning people under Rule
ii, unless it is a particularly egregious case.

Number three, Rule ii sanctions, in many instances compared to
taking a surplus penalty, are not going to be a ' significant
deterrent.   What you are talking about, generally, is being able
to recover your legal fees.     If you are talking about a truly
frivolous case, you probably can get the case dismissed without
expending very much in the way of legal fees.   A company that is
inclined to put things in dispute by filing litigation merely to
preserve something as a collectible item is likely to regard Rule
Ii sanctions as a cost of doing business.    So I really wouldn't
hold out much hope for Rule ii to prevent abuses of the rule.

The other issue that I was asked to address is whether a legal
opinion from in-house counsel can serve to form the basis for a
conclusion that something is in dispute.     Generally, that will
probably not work because that, on its face, does not meet the
criterion  and,  of  being  a written    notification   from   ones
reinsurer.   I think there could possibly be an exception where
you've  had a long history of written correspondence        with a
reinsurer  in which the reinsurer has clearly gone on record
asserting a generic position on coverage.   I think, perhaps, one
could conclude that there is really no need to go through the
paperwork of restating that position on each and every specific

billing that comes in if the reinsurer's position clearly a p p l i e s
to future billings that raise the same issue.       But it is an
interesting question.

Well, let's look at why we should even have an e x c e p t i o n for
mounts in dispute, and whether we should.              If the claim is in
dispute because the ceding company has filed a r b i t r a t i o n based on
truly believing that it is a recoverable item and based on a
legal opinion that they have got a strong case, maybe there is
some basis for treating that differently than something that is
m e r e l y overdue.       But this may or may not be true.  The fact that
something is the subject of arbitration or litigation -- and I
can tell you this as someone who litigates and a r b i t r a t e s these
cases for a living -- tells you nothing about the validity of the
claim.             It is the easiest thing in the world to gin up an
a r b i t r a t i o n notice, or even a complaint in litigation, on fairly
short notice.             If companies are determined to avoid a surplus
penalty by these devices, they can easily do so.                I think it
remains to be seen how strong the NAIC is going to be in
insisting that those cases, once filed, be pursued with some kind
of vigor.             But even cases where people, with all good faith in
the world, intend to pursue them to decision, can drag on for
reasons beyond the control of the other party.

More importantly, it is entirely possible that when claims are
the subject of arbitration or litigation, the reason is because
those claims are questionable and, therefore, are perhaps not
going to be paid in full.     The ninety day rule, of course,
assumes that those claims are more likely to be paid in full.
But that is just not a conclusion that follows as a s t r i c t l y
logical matter.

That also gets us to one basic problem with the rule.       It is
aimed at slow payers.     It is not aimed, I don't believe, at
reinsurers who pay claims they believe they owe, but in good
faith assert coverage defenses when they think they have them.
But in my view, there is little way to tell, based solely on the
schedules, which reinsurers on specific items fall into w h i c h
group.  It is probably easier to defend the part of the rule that
imposes   the  penalty  on   all  reinsurance  recoverables   from
companies that meet the threshold of being across the board slow

There has also been mention of contract provisions being d r a f t e d
in response to the rule.   And I think there are s o m e areas where
that does make sense.    However, there are some areas where the
contract provisions being offered in the m a r k e t p l a c e have very
little to do with the ninety day rule and the p r o b l e m s that it
creates.  The classic example of this is a provision imposing an
interest penalty on an amount ultimately found to have been
improperly withheld.   That does nothing to change the status of
the amount as overdue and,      therefore, leading to a surplus
penalty.   You may get more interest on it when it e v e n t u a l l y
comes due, but in the interim there is really no relief from the

ninety day rule simply because you have got an interest penalty
provision in your contract.    And it's not likely to change the
behavior of slow paying reinsurers.   If they are not deterred by
the prospect of losing an arbitration,     they are probably not
going to be deterred by the prospect of paying interest.

On the other hand, if the problem is not so much with the
reinsurer's  payment practices,  but with the ceding insurer's
reporting practices   or with the speed of the intermediary's
transmission to reinsurers, than such a provision is particularly
useless be cause it does nothing to address those problems.

More productive areas to focus on for individual companies that
want to address some of the implications of the ninety day rule
would be contractual provisions that are targeted toward the
nature of the communication    between cedent and reinsurer    --
perhaps a more particularized definition of what notice is due,
what constitutes an adequate proof of loss, and the like.    Most
contracts have very general provisions that are not of much help,
frankly, when dealing with complex situations such as asbestos
and environmental and the other areas that are generating the
most difficulty in compliance.

I   think  you   are  also  starting    to    see    ceding insurers,
particularly   in the broker   market,     and    sometimes with  the
cooperation and encouragement of the brokers, do more advance
consulting with their reinsurers.    Not so much advanced billing,
but advanced sessions in which they explain the background of
complex losses and how they were settled and try to get questions
answered up front.

The stress that these suggestions place on cooperative efforts is
no accident.  Last year two colleagues of mine and I published an
article which we called "Silver Linings in the Ninety Day Rule."
That title was meant to suggest that if the rule did what it was
supposed to do, it would be good for the industry, and that
reinsurers have their part to do by paying promptly that which
is  owed and abandoning any strategy of delay.   But I think that
it is important to emphasize, and Joe made this point very well
in his remarks, that the ceding insurers' practices may have as
much to do with how successful the rule is, and the ceding
insurer's quality and timeliness of information transmittal to
its reinsurers is likely to be a central component as well.

To sum up, since I know we want to leave some time for questions,
the rule is addressed to genuine problems and seeks to accomplish
legitimate purposes.   If it succeeds it will be a good thing. As
it is drafted, it is subject to some criticism, but the jury is
very much out on the effect of the rule, and is likely to be for
some time.  Thank you.