Schedule F is a section in an annual insurance statement in which reinsurance transactions are disclosed. It is used by regulators to identify the different reinsurance arrangements that an insurer may be taking part in, and provides an indicator of whether the insurer will be able to collect reinsurance recoverables if losses are incurred.
Breaking Down Schedule F
Insurance companies are required to disclose their financials to state regulators on an annual basis. This information is fed into the National Associated of Insurance Commissioners (NAIC) Financial Data Repository, which is a database used by the Insurance Regulatory Information System (IRIS) and other organizations to evaluate the financial ratios of insurers. Regulators use these ratios to evaluate the financial health of the insurer and to determine whether the insurer is increasing its liabilities and thus, its risk of insolvency.
Schedule F is one of the components of an insurer’s annual report. It is designed to provide regulators with three key data points. First, it shows assumed and ceded reinsurance by reinsured and reinsurer, as well as premiums on portfolio insurance. This includes losses payable to the reinsurer, and commissions payable to or owed by reinsurers. Second, it shows the provisions for reinsurance recoverables from both unauthorized reinsurers and reinsurers who are slow in making payments. Third, it restates the insurer’s balance sheet to be gross of ceded reinsurance.
Insurance regulators pay keen attention to an insurer’s use of reinsurance. While reinsurance allows an insurer to reduce its potential losses in exchange for premiums, the insurer is still ultimately responsible for all policyholder liabilities. If an insurer is overly reliant on reinsurance and a reinsurer becomes insolvent, the insurer may also run into financial trouble and become insolvent. Regulators want to protect policyholders and may punish insurers that overuse reinsurance or provide misleading information on the collectability of reinsurance recoverables.
The Schedule F Penalty
While US insurers may reinsure risk with any reinsurance company, regulatory guidelines require that the reinsurance be obtained from an admitted carrier for the insurer to be able to take credit for the reinsurance purchased and avoid seeing a statutory reduction to its surplus balance. This statutory accounting adjustment is commonly known as the Schedule F penalty, referring to the reinsurance schedules in the National Association of Insurance Commissioners (NAIC) Annual Statement. Under current rules, for an insurer to take credit for reinsurance ceded to a non-admitted carrier, the insurer must be provided an approved form of collateral from the reinsurer in an amount equal to at least the amount of reinsurance reserves the insurer is recording in its financial statements.