If the reinsurer is unauthorized and recoverables are more than 90 days overdue, which provision formula applies?

• A. Provision = Unsecured total recoverables + 20% * recoverables over 90 days overdue + 20% * amounts in dispute
• B. Provision = 20% x recoverables over 90 days overdue
• C. Provision = max [ 20% * unsecured total recoverables, 20% * paid recoverables over 90 days overdue]
• D. Provision = 25% x unsecured total recoverables

Answer: (A)

When a reinsurer is unauthorized, recoverables carry higher credit risk and you need a conservative cushion to reflect that uncertainty. The method that adds up all the risky parts captures this best: you provision for the unsecured total recoverables in full because there’s no security backing them. Then you add 20% of the recoverables that are over 90 days overdue to recognize the greater likelihood of non-payment as delays stretch on. Finally, you add 20% of the amounts in dispute to account for unsettled items where settlement terms aren’t fixed yet and could change.

This combination ensures you’re not only safeguarding against non-collected amounts that lack security but also accounting for the additional risk from long delays and ongoing disputes. The other options miss one or more of these risk signals, either under-provisioning by omitting the unsecured portion, or by not incorporating overdue and disputed amounts separately, or by using a less appropriate aggregation.