Excess Articles Flashcards
What is the Codification Project?
- The project produced a comprehensive guide to SAP that provided a consistent and comprehensive basis of accounting and reporting
- This guide is called the NAIC Accounting Practices and Procedures Manual and consists of the various Statments of Statutory Accounting Principles (SSAPs)
- The reasons for the codification of SAP are related to uniformity of reporting
NAIC Accounting Practices and Procedures Manual
What are the reasons for the codification of SAP?
Uniformity of reporting makes:
- cross-company comparison easier
- financial statement preparation easier for multi-state insurers
- regulator detection of warning signs more obvious for weak insurers
NAIC Accounting Practices and Procedures Manual
What are the concepts underlying Statements of SAP?
These principles constitute an accounting basis for the preparation of SAP statements where state regulations don’t exist
- conservatism (estimates should be conservative to protect policyholders
- consistency (regulators need financial information that is comparable across companies
- recognition (solvency assessments are based on the balance sheet, the income statement is secondary)
NAIC Accounting Practices and Procedures Manual
What is the hierarchy of accounting rules?
Higher Levels take precedence over lower levels
1. SSAPs (which comprise the NAIC APPM)
2. Emerging Accounting Issues Working Group
3. NAIC Annual Statement Instructions
4. SAP Statement Concepts
5. Sources of nonauthoritative GAAP accounting guidance and literature
NAIC Accounting Practices and Procedures Manual
What needs to happen if an insurer wants to deviate from APPM or state prescribed accounting practices?
The regulator must provide notice 5 days in advance of approval to all states where the insurer is licensed. The notice must disclose the description of the request, and the quantitative impact
NAIC Accounting Practices and Procedures Manual
Briefly describe what the SSAPs are
An accounting basis for the preparation of SAP statements where state regulations don’t exist
What are the types of Subsequent Events?
It’s a cold January day and Alice the Actuary is working on year-end reserves. On Jan 15, there were 2 major events:
an insolvency pertaining to one of their reinsurers (reinsurer accounts for material portion of their reinsurance arrangements)
an ice-storm that will have a material effect on future reserves
These are subsequent events because they occurred after the balance sheet date but before issuance and audit of the financial reports.
Type I: (Recognized Subsequent Event) provides additional evidence with respect to conditions that existed at the balance sheet date. Must be recognized in financial statements
Type II: (Nonrecognized Subsequent Event) provides evidence with respect to conditions that did not exist at the date of the balance sheet. Does not need to be recorded, but it must be disclosed in financial statements (nature of event, and financial impact if it can be estimated)
SSAP 9
Given an undiscounted reserve estimate, what components are required to calculate the corresponding discounted reserve?
payment pattern (recoverables should be considered when developing a payment pattern)
discount rate
ASOP 20
Briefly describe 3 possible methods for selecting a discount rate
risk-free rate:
- this is the rate of return from a hypothetical investment with no risk
- in practice it would be the rate of return for a very low risk investment with a timing pattern similar to the payment pattern for the given reserve liabilities
portfolio yield:
- this is the average yield on investments within a selected asset portfolio
- this method provides better matching of liabilities & assets (assuming the timing & value of asset earnings matches the payment pattern of the reserve liabilities)
selection by another party:
- the actuary uses a rate selected by someone else
- the actuary must disclose this (or be held responsible for the selection)
ASOP 20
Identify required disclosures related to an actuary’s work involving discounting
dates: accounting date, valuation date, review date
DAM: Data, Assumptions, Methods for the discount rate selection
uncertainties around the payment pattern
difference between discounted & undiscounted reserves
range: if a range of estimates is provided, actuary should describe the basis for the range
ASOP 20
Identify specific items the AA must IDENTIFY regarding the unpaid claim estimate
clms-RED
clms (obvious!)
- claims covered (line, state,..)
Reinsurance:
- net/gross basis, uncollectability risk
Expenses
- types of unpaid adjustment expenses included in loss estimate
Discounting:
- does estimate include discounting
ASOP 43
Identify specific factors the AA should CONSIDER when selecting a reserving method
PaNDA (the first “a” doesn’t stand for anything)
Purpose of anlaysis
- internal or external use
Nature of claims
Data availability
Assumptions underlying methods - approrpiate?
ASOP 43
Identify specific items the AA should DISCLOSE regarding the unpaid claim estimate
PAR
Purpose & scope of analysis
Accounting date, valuation date, review date (shout-out to BP!)
RMAD: sources of risks, significant events
ASOP 43
Describe the concept of materiality
An omission, understatement or overstatement in a work product is material if it is likely to affect either the intended principal user’s decision-making or the intended principal user’s reasonable expectations.
AAA Materiality
Considerations in setting a materiality level
F FINANCIAL strength
–
S SIZE (of entity)
T TYPE of business
A ACCESS (to capital)
R net RETENTION
S STAGE (of organization’s life cycle)
AAA Materiality
Identify considerations regarding the disclosure of materiality in actuarial communications
Sophistication of user
Importance of concept to user
Complexity of concept
AAA Materiality
Identify possible actions of a report-writer based on materiality
Include item?
- ask yourself whether the item should be considered
Refine item?
- ask yourself whether the item is sufficiently accurate
Disclose item?
- ask yourself whether the item should be reported
AAA Materiality
Identify the components of a liability
responsibility to transfer assets upon occurrence of a specified event
responsibility cannot be avoided
event has occurred
SSAP5R
Define loss contingency or asset impairment and identify the 3 levels
a condition involving uncertainty regarding amount of loss
resolved when future event occurs or fails to occur
levels:
- probable (likely to occur)
- reasonably possible (between probably and remote)
- remote (slight chance of occurring)
SSAP5R
If a financial instrument has characteristics of both liabilities and equity then how should it be reported in financial statements
as a liability, to the extent the instrument embodies an unconditional obligation of the issuer
SSAP5R
What is Earned But Unbilled Premium?
Earned But Unbilled Premium (EBUB) is an estimate of audit premium for WC:
- written/earned premium is adjusted by the EBUB amount
- after policy expiration, an audit is performed and EBUB is adjusted by the appropriate amount
- EBUB is then immediately recognized in the financial statements
SSAP53
What is A Premium Deficiency Reserve
A Premium Deficiency Reserve (PDR) is a liability equal to the amount by which future outflows exceed future inflows
- outflows include: losses, loss adjustment expenses, commissions and other acquisition costs, maintenance costs (4 items)
- inflows include: recorded unearned premium reserve, future installment premiums on existing policies (2 items)
SSAP 53
What are the 2 categories of LAE?
DCC (Defense & Cost Containment): covers defense, litigation, and medical cost containment expenses, whether internal or external
Examples:
- litigation management
- rehab nurses
A&O (Adjusting & Other): expenses other than DCC
Examples:
- adjuster fees
- attorney fees
SSAP55
What are the three types of underwriting pools and association?
(a) involuntary pool
- stated-mandated (participation is manadatory)
- provides coverage to high-risk customers who can’t otherwise find coverage (Ex: young drivers or those with poor driving records)
- premiums & losses are shared according to participants’ share of the voluntary market
- also called residual market plans (see Cook.Personal)
(b) voluntary pool
- not state-mandated (participation is voluntary)
- provides greater capacity for risks with very high insurable values (Ex: aircraft, nuclear)
- premium & loss-sharing mechanism not specified
(c) intercompany pool
- relates to business pooled among affiliated entities (see Inter-Company Pooling on Schedule P)
- premiums & losses are shared according to a quota-share reinsurance agreement
(pooled business is ceded to the lead entity, then retroceded back to the pool participants in accordance with their quota-share)
SSAP63
How are U/W results for voluntary & involuntary pools accounted for: gross or net?
gross
→ this means that premiums, losses, expenses are recorded separately in financial statements not netted against each other
→ business ceded to a pool is treated as “normal” reinsurance
SSAP63
Are equity interests in a pool treated as admitted or non-admitted assets?
admitted
(this is a “cash advance” to provide funding for the pool and is separate from receivables and payables related to a pool’s underwriting results)
If a reporting entity is part of a pooling arrangement where participants cede substantially all of their business to the pool, the financial statements shall include:
- description of the terms of the arrangement including lines of business covered
- identification of the lead entity and all participants including pooling percentages
- amounts due to/from lead entity and all participants
- other arrangements that fall outside of the normalpooling agreement including reinsurance with non-affiliated reinsurers
SSAP63
Given table of “Tests” for UEP, how to calculate?
For current and prior 2 years, take max across tests
For any prior, combine all prior, and take max
SSAP65
Briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
Test 1:
management’s best estimate of the amounts refundable to the contract-holders at the reporting date
→ the term ‘amounts refundable’ seems strange to me – isn’t that just the liability payments?
Test 2:
(gross premium) x [ (projected future loss) / (projected total loss) ]
→ projected future loss relates to the unexpired term of the contract
Test 3:
(projected future loss) – (investment income) – (PV of premiums)
→ the full explanation is much more detailed but it’s extremely unlikely you’d need to know it
SSAP65
What are the potential benefits of using predictive analytics in insurance?
Reveals insights into insurance costs
Encourages better risk management.
Lowers many consumer costs
CAS Pred Models
What challenges do state insurance regulators face with predictive models?
many lack the necessary tools to effectively review rapidly evolving predictive models
CAS Pred Models
What are the 2 main responsibilities given to the Casualty Actuarial and Statistical (C) Task Force?
draft and propose changes to the Product Filing Review Handbook
provide state guidance for rate filings based on predictive models
CAS Pred Models
What is the purpose of the guidance provided in the white paper?
enhance uniformity in regulatory processes while considering state-specific insurance needs
CAS Pred Models
What is the purpose of regulatory best practices for predictive models?
Support parameter valuation.
Improve model understanding
Provide a baseline for state regulators
CAS Pred Models
How do regulatory best practices help state insurance regulators and the industry?
regulatory best practices guide regulators
regulatory best practices identify key model elements
regulatory best practices facilitate resource sharing
regulatory best practices improve review quality
regulatory best practices aid in training
to understand if a predictive model is cost-based
to understand if the predictive model is compliant with state law
to understand how the model improves a company’s rating plan
CAS Pred Models
How do regulatory best practices benefit state insurance marketplaces?
regulatory best practices enhance market speed and competitiveness by improving review processes
CAS Pred Models
How do regulatory best practices assist new insurance regulators?
regulatory best practices provide training and help identify needed resources for model reviews
CAS Pred Models
How does best practices enhance market speed?
Best practices can also improve consistency among the regulatory review processes across the states and improve the efficiency of each regulator’s review, thereby helping companies get their products to market faster.
CAS Pred Models
What should regulator’s review of a predictive model include?
Regulatory Review Items to Include #1: Check that the rating factors have these characteristics.
produce fair rates
not cause excessive premium disruptions
comply with state practices
Regulatory Review Items to Include #2: Check the following items regarding the data and the model.
how the model was built
accuracy of input data
adjustments to raw data
update frequency of risk characteristics
Regulatory Review Items to Include #3: Check interaction of the model with the rating plan.
must understand input characteristics of model
must understand integration of model with rating plan
must understand interaction of model with non-modeled variables
Regulatory Review Items to Include #4: Check for desired characteristics regarding the insurance marketplace.
enable competition and innovation
protect model confidentiality
allow timely reviews for speed to market
CAS Pred Models
What is the Federal Insurance Office?
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Federal Insurance Office (FIO) to submit an annual report on the insurance industry to:
* the President
* the Senate Committee on Financial Services of the House of Representative
* the Senate Committee on Banking, Housing, and Urban Affairs
Note that the FIO was created by the Dodd-Frank Act.
Context:
U.S. insurance regulation involves both state and federal entities, with the Federal Insurance Office (FIO) providing federal oversight.
Federal Insurance Office (FIO):
Established by the Dodd-Frank Act, the FIO fills in gaps not covered by state regulation.
Monitoring and Risk Assessment:
FIO monitors the insurance industry for systemic risks and coordinates with the Federal Reserve on stress testing.
Accessibility and Fairness:
FIO ensures that underserved communities have access to affordable insurance products.
International Coordination:
FIO represents the U.S. in international insurance forums such as the IAIS.
Data Collection and Reporting:
FIO collects, analyzes, and reports insurance sector data to inform federal insurance policies.
Advisory and Recommendations:
FIO advises the Secretary of the Treasury and recommends designations of insurers for Federal Reserve regulation.
FIO Dodd Frank
Briefly describe the main responsibilities of the Federal Insurance Office in the U.S. insurance regulatory framework.
Analyze and report industry data
Monitor systemic risks in the insurance industry
Ensure insurance accessibility for underserved communities
Represent the U.S. in international insurance matters
FIO Dodd Frank
Briefly describe how the FIO contributes to risk assessment in the insurance sector.
identifies potential systemic risks
coordinates stress-testing with the Federal Reserve
FIO Dodd Frank
Briefly describe the role of the FIO in promoting accessibility and fairness in the insurance industry.
monitors the accessibility of affordable insurance for underserved communities.
FIO Dodd Frank
Describe how the FIO functions in an advisory capacity and how it influences the regulation of certain insurers?
advises the Secretary of the Treasury on insurance matters
recommends designations of insurers for Federal Reserve regulation
FIO Dodd Frank
Classifications of insurers licensed in State A
domestic - if incorporated in state A, licensed in state A, writes policies in state A
foreign - if incorporated in state B, licensed in state A, writes policies in state A
alien - if incorporated outside of the U.S., licensed in state A, writes policies in state A
Porter 6 Formation
requirements surrounding capital (obvious) as part of something called an organizational exam
capital requirements are met
management team is in place
records are in good order
rates have been approved
Porter 6 Formation
Market conduct regulation of an insurer includes conduct surrounding:
sales & advertising
underwriting
rates
claims settlement
BM RMAD
What are the 2 quantitative tests for RMAD?
Bright Line Indicator Test
10% of Net Reserves > TAC - CAL
Comparison of Reserves + materiality standard and the high end of actuary’s reserve range
Even if conclusion is no from both tests, should still apply qualitative tests regarding the existance of RMAD, considerations including:
* long-tail or volatile lines (WC, liability lines)
* catastrophes from late in the year that may not be reflected in the reserves
* excess claims that are not reported to the (re)insurer until the retention is breached
BM RMAD
