Financial guarantee insurers (FGI) traditionally provided guarantees of timely interest and principal on municipal bond issuance's. However, FGI’s expanded their product offering to include insuring structured finance securities such as asset/mortgage backed securities. As the mortgage meltdown materialized, loss reserving has become a more significant operation for FGI’s. This session discusses key considerations and approaches of loss reserving for financial guarantee insurance of asset backed securities.
This session also discusses an approach to calculate loss and premium under the recognition approach consistent with FAS 163 (Accounting for Financial Guarantee Insurance Contracts). The changes to current practice in accounting for financial guarantee insurance contracts that result from applying FAS 163 relate to recognition and measurement of premium revenue and claim liabilities. Effective for fiscal years beginning after December 15, 2008, FAS 163 requires financial guarantee insurers “to measure the claim liability equal to the present value of expected net cash outflows. Expected net cash outflows are probability-weighted cash flows that reflect the likelihood of all possible outcomes for payments by the insurance enterprise under the insurance contract.” This change poses the opportunity for increased actuarial involvement in financial guarantee loss reserving.