C - CAS Financial Reporting Flashcards by Maxime Desrosiers

CAS FINANCIAL REPORTING - INTRO

National Association of Insurance Commissioners
(NAIC)

Role

Role : to facilitate governance between state regulators.

Each state in the US has a state regulator.
Each state has authority over its laws and regulations and can decide whether they adopt NAIC model laws and regulations

NAIC is not a regulator.

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CAS FINANCIAL REPORTING - INTRO

Statutory Accounting Principles (SAP)

1) Definition
2) Goal
3) Focus (in one word)

-definition-
ACCOUNTING FRAMEWORK. All US insurers are required to report under SAP for state regulatory purposes

-goal-
To provide regulators with a CONSERVATIVE early warning of deterioration of insurer

-focus-
Solvency

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CAS FINANCIAL REPORTING - INTRO

2 advantages of CODIFICATION OF SAP adopted by NAIC with regards to reporting practices ?

promotes consistency among states

smaller reporting burden for multi-state insurers

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CAS FINANCIAL REPORTING - INTRO

Generally Accepted Accounting Principles (GAAP)
Definition

ACCOUNTING FRAMEWORK providing a CONSISTENT set of rules under which cies can report their financial transactions.

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CAS FINANCIAL REPORTING - INTRO

1) Contrast expenses treatment in GAAP VS SAP
2) Which one is the most conservative?

GAAP : matches revenue and expenses
Expenses are deferred to match earning of associated premium

SAP : expenses expensed at the time they are incurred

2) SAP is conservative.

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CAS FINANCIAL REPORTING - INTRO

SEC:

1) Definition
2) 3 roles

Security and Exchange Commission

authority setting the accounting standards for insurance companies in US

TRUC : $EC

a) $ : protect investors
b) efficient : maintain fair and efficient markets
c) capital : facilitate formation of capital

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CAS FINANCIAL REPORTING - INTRO

IRS:
Definition

Internal Revenue Service

US govt agency that establish tax laws and collect taxes

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CAS FINANCIAL REPORTING - INTRO

2 items specific to the reporting of recorded liabilities under CGAAP.

1) discounted to reflect time value of money

2) includes a PfADs

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CAS FINANCIAL REPORTING - INTRO

How are loss reserves recorded in the Balance Sheet (net or gross of reinsurance) :
for GAAP?
for SAP?

GAAP : reserves recorded GROSS of reinsurance
(an asset is recorded to reflect the amt of liabilities expected to be recoverable from reinsurer)

SAP : reserves recorded NET of reinsurance.

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CAS FINANCIAL REPORTING - INTRO

Discuss the current pressure in US to create a consistent accounting framework.

Pressure to replace GAAP with IFRS in US, to have a consistent framework around the world in response to the growth of the global economy.

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CAS FINANCIAL REPORTING - INTRO

Currently, what does IFRS4 allow?

allows insurers to report under their countries’ current accounting rules, with slight modifications (such as requiring insurers to establish premium deficiency reserves)

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CAS FINANCIAL REPORTING - INTRO

7 reasons why actuary should know the accounting conventions

1) to help regulators monitoring financial health
2) to PRICE insurance and develop PROFIT MARGINS
3) to determine CAPITAL REQUIREMENT
4) to evaluate RISK TRANSFER
5) to prepare TAX RETURNS
6) to ASSESS RESERVE ADEQUACY
7) to value insurers in MERGERS and ACQUISITIONS

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CAS FINANCIAL REPORTING - INTRO

Statement of Actuarial Opinion (SAO)
Define

Actuary statement that the RESERVES MEETS THE REQUIREMENT of the insurance law of the state.

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

Define ASSETS (in the Balance Sheet)

Resources obtained from past events that have probable future economic benefit to company

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

Define LIABILITIES (in the Balance Sheet)

Obligation based on past events or transactions that will require the use of monetary resources

Probable sacrifice of economic benefits arising from:

-present obligation to transfer assets
-future services to provide as a result of past event

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

1) Define EQUITY (in the Balance Sheet)
2) another name for Equity?
3) What does it measures?
4) How is equity called under SAP?

1) Equity = Assets - Liabilities
2) Net Worth
3) the ability to use assets to satisfy its liabilities
4) Statutory Surplus or Policyholder Surplus

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

Define :
BALANCE SHEET
INCOME STATEMENT

Balance sheet
A/L AT A CERTAIN POINT IN TIME

Income Statement
financial results DURING A CERTAIN TIME PERIOD

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

1) 1 consideration making the Balance Sheet unique for insurers when compared to other industries?
2) Why is it important to the actuary to understand the policy liabilities?

1) UNCERTAINTY in the estimation of liabilities of loss reserves makes it unique
2) Actuary must opine on policy liabilities (premium liabilities and claims liabilities) because they are the largest liabilities on the balance sheet.

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

What is shown in the STATEMENT OF CAPITAL AND SURPLUS

shows changes in surplus not recorded in the Income statement, from beginning to end of the reporting period

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CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

In the INCOME STATEMENT, are the Revenue/Expenses :
At the time the cash flow is received
OR
At the time the service is provided?

At the time the service is provided

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

What is shown in the CASH FLOW STATEMENT
Why is it necessary?

operations from a cash perspective, when CF really occurred (not when the service is provided)

Because timing of CFs does not coincide with its recognition in the Income Statement.
(the time the service is provided VS the time the CF is received)

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

1) How is the statement of Cash Flow used in other industries?
2) Why is it less important for insurers?

1) used to detect liquidity issues (selling product on credit but unable to collect on timely basis)
2) because premium is paid at the onset of policy, not paid subsequently

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

What is included in the Notes to Financial Statements?

1) Qualitative/Quantitative disclosure to what is shown in financial statement which may be relevant to users
2) Basis of Accounting

3) Basis of Measurement
4) Basis of Presentation
5) Aspects of Estimates subject to uncertainty

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS

Contrast LIQUIDATION vs GOING CONCERN.

Between the 2, which one is preferred :

1) by the investor?
2) by the regulator?

Liquidation :
view the cie as a RUNOFF OF CURRENT ASSETS AND LIABILITIES

Going-Concern :
view the cie as ON-GOING BUSINESS

1) going concern (GAAP) (interested in the value of doing business)
2) liquidation (they are interested in policyholder’s protection (SAP)

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS Values of Assets and Liabilities are often uncertain. 1) Contrast FAIR VALUE vs HISTORICAL COSTS 2) Explain the trade-off between the 2.

``` 1) Fair Value : A/L PRICE AT OPEN MARKET Historical cost : ORIGINAL PURCHASE PRICE LESS DEPRECIATION ``` 2) historical costs are VERIFIABLE fair value is MORE CONSISTENT with market value. Trade-off is reached to determine the value

CAS FINANCIAL REPORTING - BASIC ACCOUNTING CONCEPTS 1) Contrast PRINCIPLE-BASED vs RULE-BASED 2) one advantage for each.

Principle-Based : DESCRIBE GENERAL APPROACH (advantage : adaptable to changes in environment), must be interpreted Rule-Based : SET HOW IT SHOULD BE DONE (advantage : easier to audit), more specific

CAS FINANCIAL REPORTING - CANADIAN REPORTING In Canada, insurance is regulated by which level of government? 2) Where must insurer be licensed? 3) Who is the federal regulator?

1) Federal or provincial (insurer can choose by which to be registered), but most companies are regulated federally 2) in each province where it writes business regardless of where it is registered 3) OSFI

CAS FINANCIAL REPORTING - CANADIAN REPORTING 4 mandates of OSFI

1) SUPERVISE FINANCIAL INSTITUTIONS 2) PROVIDE ACTUARIAL ADVICE TO GOVT 3) MONITOR PENSION PLANS IN CANADA 4) SAFETY AND SOUNDNESS OF FINANCIAL SYSTEM AND PUBLIC CONFIDENCE

CAS FINANCIAL REPORTING - CANADIAN REPORTING 2 differences between NAIC (US) and OSFI (Canada)?

1) NAIC only covers insurance companies, OSFI covers all FRFIs 2) OSFI has authority / NAIC does not (it coordinates the work between state regulators for multi-state insurers)

CAS FINANCIAL REPORTING - CANADIAN REPORTING 2 differences in accounting of FOREIGN BRANCH and DOMESTIC INSURER?

For FOREIGN BRANCH: 1) there is not share capital account (there is a HO Account instead) 2) assets must be placed in a trust and under the control of Minister of finance of Canada.

CAS FINANCIAL REPORTING - CANADIAN REPORTING Accepted Actuarial Practices (AAP) 3 steps to do if the AAP conflicts with law?

Manner of performing actuarial work in Canada in accordance with SoPs of the CIA 1) comply with law 2) report the conflict 3) report the result of applying the AAP instead.

CAS FINANCIAL REPORTING - CANADIAN REPORTING Who is the CIA SoPs binding for? There are 2 components in the SoPs : Define RECOMMENDATION What it means to deviate from a recommendation Define OTHER GUIDANCE

Fellows Associates Affiliates of CIA Highest order of guidance in the standards. Deviating from a recommendation = deviating from the AAP. definitions and useful practices supporting the recommendations

CAS FINANCIAL REPORTING - CANADIAN REPORTING Purpose of EDUCATIONAL NOTE? Are they binding on an actuary?

describe with illustrations the SoP but do not recommend the practice NOT BINDING

CAS FINANCIAL REPORTING - CANADIAN REPORTING SoPs can be either GENERAL or PRACTICE-SPECIFIC. Define both.

General: applies to all areas of actuarial practices Practice-Specific: applies to specific areas of actuarial practices

CAS FINANCIAL REPORTING - CANADIAN REPORTING Difference between IFRS and SAP

IFRS : CONSISTENCY of published financial statements (Used in Canada) SAP : SOLVENCY (used in US)

CAS FINANCIAL REPORTING - CANADIAN REPORTING Appointed Actuary Report (AAR)

Statement of whether the annual statement presents fairly the results of the valuation

CAS FINANCIAL REPORTING - CANADIAN REPORTING 4 components of premium liabilities

- (gross or net) unearned premium - Premium Deficiency Reserves - DPAE - Unearned Commissions - other net liability

CAS FINANCIAL REPORTING - CANADIAN REPORTING 3 sources of CF in the STATEMENT OF CF examples for each sources.

1) From OPERATIONS - -net income in the year - -change in receivables - -change in unearned premium - -change in unpaid claim liabilities - -recognized gains in investment 2) From INVESTMENTS - -purchase of new investments 3) From FINANCIAL OPERATIONS - -borrowing + shares - dividends

CAS FINANCIAL REPORTING - CANADIAN REPORTING Discuss the GENERAL EXPENSES in the Income Statement. Give examples.

``` Expenses not directly related to acquisition of business ex: -salaries -management fees -professional fees -occupancy costs -IT Costs ```

CAS FINANCIAL REPORTING - CANADIAN REPORTING Define : OCI (other comprehensive income)? AOCI (accumulated other comprehensive income)?

``` OCI : CHANGE IN unrealized gains on (1) AfS assets (2) derivatives used as CF hedges (3) foreign currency translation (4) share of OCI of subsidiaries, associates and joint ventures ``` AOCI CUMULATIVE OCI (TOTAL unrealized gains) --included in the equity section of the balance sheet

CAS FINANCIAL REPORTING - CANADIAN REPORTING What must a registered insurer do if it cedes business to a non-registered insurer Why?

must secure collateral from non-registered insurer. to provide a provision in case of default of the other party

CAS FINANCIAL REPORTING - CANADIAN REPORTING Define COMMUTATION OF CLAIMS Define COMMUTATION CLAUSE and its purpose Commutation clause are more common for which type of contract

--commutation-- When one party (insurer) relieves the other party (reinsurer) from its obligations in exchange for cash. the relieved party (reinsurer) pays cash to the other --commutation clause-- clause in reinsurance contract REQUIRING the insurer to relieve the reinsurer of obligation in exchange for cash. Purpose : TO ALLOW THE REINSURER TO SETTLE ITS OBLIGATIONS WITHIN A FINITE PERIOD for longer-tailed liability contracts.

CAS FINANCIAL REPORTING - CANADIAN REPORTING In which situation a commutation of claims is likely to happen?

1) between insurers and individual claimants 2) between insurers under financial stress 3) between insurers and reinsurers

CAS FINANCIAL REPORTING - CANADIAN REPORTING 2 advantages for INSURER to commute 1 disadvantage for INSURER to commute

A - insurer doubt creditworthiness of reinsurer (the cash received eliminates the risk) - decrease expense costs - insurer gets a CF immediately for assuming the liabilities D the insurer becomes responsible for the risk so needs to hold capital for it

CAS FINANCIAL REPORTING - CANADIAN REPORTING 3 advantages for REINSURER to commute 2 Financial and 2 Non-Financial considerations with future CF of a reinsurance COMMUTATIONS

1) to bring certainty to its results 2) for capital relief 3) to save claim adjustment and admin costs - -Financial-- - amount and timing of CF - discount rate - cost inflation - potential for volatility of CF - income tax - -Non-Financial-- - morbidity and mortality of claimant - current and future entitlements of claimant - unfavorable court decisions

CAS FINANCIAL REPORTING - CANADIAN REPORTING 5 considerations of the actuaries from insurer and reinsurer in their estimation of PV(obligations) during COMMUTATION OF A BLOCK OF CLAIMS

1) Undiscounted value of future liabilities 2) Timing of payout of undiscounted liabilities 3) Investment income on assets supporting these CF 4) Income Tax 5) Risk Load to provide for volatility

CAS FINANCIAL REPORTING - CANADIAN REPORTING Define: Premium Liabilities Claims Liabilities

--premium liabilities-- liabilities associated with the unexpired portion of an insurance contract --claim liabilities-- liabilities for events that have happened prior to the valuation date, whether reported or not

CAS FINANCIAL REPORTING - CANADIAN REPORTING Purpose of Test of Adequacy of Premium Liabilities?

to compare -- estimate of ultimate costs associated with unexpired portion of policies against -- premium liabilities recorded by the company

CAS FINANCIAL REPORTING - CANADIAN REPORTING Premium deficiency reserve

Additional liability to ensure that all future costs are provided for (when Max Net DPAE is negative)