Additional Flashcards
Additional strength of the Us regulatory system
formulaic standards such as IRIS tests and RBC may reduce forbearance since they have required action levels
RBC vs Rating Agency capital requirements
RBC does not consider reserve adequacy
RBC can trigger regulatory intervention, whereas financial rating cannot
Rating agency capital requirements are very tailored to the individual insurer being evaluated
Risk Management Agency (RMA)
- created by USDA to operate and manage federal crop insurance corp (FCIC)
- assesses how crop coverage is performing and whether any changes need to be made. Help monitor and control risks
- RMA will aggregate all data available to be able to price accurately
DIC policy
a policy that covers on “all risks” basis to fill gaps in the insured’s underlying property coverage
AOS is used by
regulator and board of directors
Why should commutation agreements be disclosed
because some exhibits will be distorted by a commutation
Insurance Advisory Organization purposes
- providing prospective loss costs used in rate filings
- developing rating systems
- lobbying
- collecting and tabulating statistics
- filing support
Goal of the “unfair” act
to identify methods of unfair competition or trade practices in state laws to reduce the amount of federal intervention
limitations of schedule P to assess reserve adequacy:
- judgements/selections involved in how it is assembled
- segmentation may be different than what is necessary
- commutations can distort triangles
- net of reinsurance: may be difficult to see impacts of various agreements
- only shows 10 years worth of data: not good for long tail
Bright Line Indicator test
if 10% of loss and lae reserves is greater than the difference between adjusted surplus and company action level capital and surplus, regulators will need an explanation of why the actuary doesn’t think there exists MAD
currency risk is NOT
an aspect of insurance risk
sections of 5 yr historical data exhibit
WP (by 5 LOBs) Balance sheet RBC components Operating Percentages (loss, lae, und exp, profit ratios) One and two year loss development
Unrealized capital gains cause
DTA/DTL
negative income will
erode surplus
What is updated retroactively for pooling % changes?
Schedule P, but not Schedule F
long tail lines should maintain lower
IRIS 1 and 2 ratios
Net DTA is an
admitted asset
fair value discount rate
risk free rate + illiquidity premium
far value risk cost of capital
cost of capital - discount rate
AOS does not discuss
RMAD
Revenue offset
adds back into income those prepaid acquisition expenses which have not yet been earned buy were expensed
Reserve discounting adjustment (fair value)
needed because tax accounting calculates income using discounted reserves, when statutory accounting uses undiscounted reserves
Business of Insurance definition is based on
Royal Drug case of 1979
Duties of regulators
license insurers financial reporting review of insurers periodic examinations impose sanctinos
Equity in UEPR
UEPR * prepaid acquisition cost %
Equity in Undiscounted Reserve
Undiscounted Reserve * (1- disc factor)`
An omission, understatement, or overstatement in a work product is material if
it is likely to affect the intended user’s decision making process or reasonable expectation
In a commutation, surplus for the primary insurer will decrease if
the price is less than the ceded reserves
IMF FSAP
financial sector assessments programs is an international in-depth look at regulation, especially on group community
An improvement to schedule F from the regulator’s perspective
to show the reinsurance company’s agency rating. this would help regulators better understand any insolvency concerns with the reinsurer or potential uncollectibility issues
increased risk increases
surplus
RBC requirements attempt to
individualize minimum capital requirements for each insurer
RBC does not take into account
rate or reserve adequacy
In 2 year operating ratio, subtract this out from the expense ratio
other income
Reasons for codification of SAP
- allow regulators and NAIC to aggregate financial information more easily
- financial information is comparable between companies
ceding insurers CANNOT take credit for recoverables in dispute with
an affiliate
tabular discount is for
specific claims. does not apply to LAE
required table in notes for asbestos is repeated 3 times for
direct, assumed, net
How to adjust for surplus aid
multiply PHS by (1-surplus aid ratio)
data testing auditor should be retained by
the insurance company
schedule P reconciliation is by
AY and LOB
realized capital gains are NOT
an asset
commutation price increases the primary insurer’s
ceded paid loss
Sherman Antitrust Act prompted
some states to pass similar laws
gross agents’ balances are analyzed in IRIS because
they usually cannot be converted to cash in the event of liquidiation
loss sensitive discount is calculated using
base RBC
what premium to use to measure excessive prem growth
direct and assumed from non-affiliates
excessive premium growth is added when
after loss concentration factor
most common coverage insured by RRGs
medical malpractice
less avialable, higher premiums, opportunities for diversification of policy terms
Surety Description
- insurance provides security to a 3rd party
- ensures construction firm will complete project
- principles may require construction firms obtain surety contracts from A rated insurers
why are guaranty funds more efficient for the economy/society
insureds do not need to put away resources to pay for claims in the event that an insurer is unable to pay
realized capital gains are NOT included in the
II ratio
If IRIS ratio 11 is unusual,
develoment needs to be subtracted from ratio 5 (operating)
investment gain ratio
use 1 company ratio for all LOBs
unsecured recoverables cannot be
negative
triangles in parts 2-4 of schedule P do not include
A&O
can break down part c of AOS into
total carried
excluded by opinion
covered by opinion
2 times when GAAP is more conservative
retroactive reinsurance: surplus benefit is deferred
structured settlement: SAP allows for claims to still be closed if release of liability is not signed. GAAP treats it like reinsurance contract
GLB
Graham Leach Bliley Act
GLB act addressed
issue of state vs federal regulation
GLB prohibits state actions that
would prevent bank-related firms from selling insurance on same basis as insurance producers
GLB prohibits national banks from
forming subsidiaries to underwrite insurance. however, can arrange financial holding companies to create insurance affiliates
GLB promotes information sharing among banks and insurance affiliaites by
requiring banks to disclose information sharing policies and practices
NAIC producer licensing model act (result of GLB)
compels states to facilitate insurance producers’ ability to operate in more than 1 state
deviations under traditional ratemaking are usually applied at class level,
but deviations under price optimization can be applied at policy level
Schedule P is presented __ of paid S&S and possibly unpaid S&S
net
Dividends to policyhohlders need to be added to
LR
audit responsibilities
report any deficiencies of internal controls
difficulties in reconciling to schedule P
different accounting for S&S
only contains 10 year of data
differnet breakouts for states
example of NAIC protecting public interest
prepares special reports on insurance issues such as redlining and auto competition
example of NAIC promoting competitive markets
model laws, regulators, and guidelines provide uniformity and reduce compliance expenses
example of NAIC promoting fair and equitable treatment of consumers
complaints database system
example of NAIC promoting solvency
databases to help regulators track solvency
example of NAIC supporting and improving state regulation
accreditation program
agents’ balances are subtracted from investable funds because
the insurer does not possess the money and therefore cannot invest it
apply the long duration UEPR tests how
annual basis for 3 recent years and aggregate for prior
if price optimization can be proven to be nondiscriminatory
it could have differentiation, which would provide more accurate rates reflecting true cost of risk transfer
reinsurers with higher financial ratings may be able to
charge more premium to primary insurer
most reinsurers are not in the US, so
ratings can provide an idea of financial strength
exclusive WC state funds are a monopoly, which
limits compeition
include cpaital gains tax in
net income
SAP recognizes acquisition costs immediately, but
GAAP defers to match earning of premium
if actuary only gives a range and no point estimate, the AOS
will have N/A in the point estimatie row
scope: filing is with
the state DOI
Scope: provider of data should be
a company officer
amount of reinsurance recoverables on paid losses is not
on the SAO or AOS
policyholder surplus can be found
in exhibit B of the SOA
NO class 1 bonds are included in
asset concentration
only non government class 1 bonds are included in
bond size factor
items in numerator for 2 year expense ratio
uw exp + write ins - other income
items in numerators for 2 year loss ratio
losses and lae + policyholder dividends
r0 components
directly owned alien affiliates
off-balance sheet items
investments in insurance subsidiaries
r1 components
bonds (bond size adj) mortgage loans LIHTC miscellaenous assets (cash and admitted coll loans) working capital finance asset concentration
r2 components
stocks parent/holding company non gov money market real estate other long term investments receivables for securities agg write ins for isnurance asset concentration
r3 components
reinsurance recoverable (1/2)
health credit
non-invested assets
Risk retention act of 1981
enabled companies to form their own risk retention groups to spread and assume their products and completed operations exposure
risk retention act permitted groups lincesed in one state
to be permitted to operate in any other
terrorism insurable risks criteria met
losses definite and measurable
losses not catastrophic (geographically)
terrorism insrable risks criteria unmet
sufficiently large number of insures to make losses reasonably predictable
losses must be fortuitous or accidental
total recoverables from a resinrer also include
UEPR associated with ceded premium and contingent commissions owed by reinsurer
disadvantage of profit in IEE
relies on allocating surplus to line, which is an artificial allocation
surveillance expenses are
DCC
3 types of discount rates the actuary could consider using
risk free rate
anticipated return on a selected asset portfolio
discount rate requested by another party
subtract beat payments when
calculating regular taxable income
BEAT tax is currently
10% UNTIL 2025
purpose of BEAT tax
to prevent insurers from avoiding US tax by transferring earnings to a related foreign entity
credit risk should not be
included in risk transfer
gain/loss for commutations is
underwriting income
what is recorded is deposit accounting total losses are valued upwards
interest expense
recoverables in accounting treatment of retroactive reinsurance
contra liability
consideration paid for retroactive reinsurance
reduces asses
payment in run-off accounting
paid loss
if the payment is less than the reserves transferred in a runoff agreement
decrease in incurred losses
example of NAIC protecting public interest
prepares special reports on insurance issues such as redlining and auto competition
example of NAIC promoting competitive markets
model laws, regulations, and guidelines promote uniformity and reduce compliance expenses
example of NAIC facilitating fair and equitable treatment of insurance consumers
keeps compliant database system which contains info about complaints made against insurers on a state or national basis
example of NAIC promoting the reliability, solvency, and financial solidity of insurance institutions
maintain computerized databases to help regulators track insurers’ financial solvency
example of NAIC supporting and improving state regulation of insurance
accreditation program to promote consistent, effective regulation across all states
Most frequent contributors to insurer insolvency
Rapid premium growth Inadequate rates/reserves Unusual expenses Lax controls over agents Uncollectable Reinsurance Fraud
