final Flashcards
materiality definition
an omission overstatement or understatement is material if the actuary expects it to materially affect the user’s decision making or reasonable expectation
policies excluded by PACICC
aircraft
credit
crop
mortgage
surety
Relationship Manager responsibility
responsible for maintaining an up to date risk assessment for FRFI, main point of contact for FRFI
how might insurance revenue for reinsurance contracts issued differ from earned premium?
o For entities applying PAA, revenue recognition requirements
o Treatment of reinsurance cf that are contingent on claims of the underlying contracts
o Treatment of amounts paid to the purchaser of reinsurance contracts, not contingent on claims of underlying contracts.
reasons for having an internal capital target
- gives management time to address issues
- captures insurer specific risks not addressed by industry wide capital guildelines
management action if capital available falls below internal capital target
if this happens or expected within 2 years, notify osfi and submit plan to restore capital internal target level reasonably quickly
Board responsibility on risk management
oversee risk management on an enterprise wide basis
CRO responsibility on risk management
oversight of all risks across the firm
provide regular reports to the Board, risk committee and SM
OSFI supervision of FRFI
AMCIN assess/monitor/communication/input notified
assess their financial condition and monitor compliance with applicable federal legislation
OSFI reports and findings can provide useful input to the Board’s own oversight of FRFI
Open communication between Board and regulators help promote mutual trust and confidence essential to the efficiency of OSFI’s principles based approach to supervision
OFSI expects to be promptly notified of substantive issues affecting FRFI
integrated scenario
a scenario created by combining two or more risk factors to produce a new plausible adverse scenario
scenario testing
significant changes to risk factors
observe future state over longer time horizon
more complex
sensitivity testing
incremental changes
shock is more immediate and shorter time horizon
fewer resources needed
BoD v management responsibilities in stress testing
BoD:
ultimate responsibility for integrity of stress testing
ensure implementation of program by management
be aware of key findings
Management:
implement and manage stress testing program
identify plausible adverse scenario
develop and implement risk mitigation strategies
describe how stress testing is a key risk management tool for coverage of overland flooding
company won’t have historical data
- identify flood risks using stress testing models
- estimate capital required to support flood risk in different scenarios
- stress testing could complement publicly available flood data
reverse stress testing
determine how far risk factors need to change in order to drive the insurer below scenario thresholds and evaluate if the degree of change is plausible.
it helps insurers to better understand the impact of business vulnerabilities
how can you apply reverse stress testing for climate change?
start with insurer failure
identify sequence of events that could lead to this
work through possible responses that could help us avoid that state
benefits of reverse stress testing
- provide management with a different lens through risk assessments and to enhance to robustness
- reveal hidden vulnerabilities
considerations when setting a materiality level
specify use of work
intended users
characteristics that may impact materiality
fstars
financial strength
size of entity
type of business
access to capital
net retention
stage of organization cycle
materiality disclosure considerations
sophistication of user
important concept of user
complexity of report
possible ripple effects
loss of reinsurance
higher LR
post event inflation
mix shift
possible management actions
tighten UW
review mix
review reinsurance
sell assets
raise rates
enquiring professional
a professional who relies n the work of another in the course of their own work
notify responder work is being used/notify regarding needs/ confirm resp’s appointment, professional standing and observance to standards
responding professional
a professional whose work is being used by another
confirm work will be done
confirm appointment and professional standing
notify any issues in meeting enquiring’s needs
insurance reference case implication
- licensing provisions are ultra vires
- regulation of commerce doesnot cover licensing of a particular trade
insurance reference case
provincial and federal insurer
rights and capacity
provincial insurer has the capacity but not the right to operate in another province
federal insurer has the capacity and right to operate in another province
federal government can require a federal license for a foreign insurer
areas under provincial insurance regulation
contract matters: policy contents/terms/premium payment/reinstatement
transaction matters: agent licensing/unfair practices/claims handling
federal insurance regulation
carprice
calculation and assets and reserves
protection of PHs
reporting
investments restriction
conditions for entering business
Canadian regulation to promote insurance solvency
CIRCAF
- oversee creation of domestic and licensing of foreign insurers
- investment restrictions on types of investments that are permitted to reduce risk
- rating bureaus authorization for info sharing
- compliance: enforce compliance by giving government departments authority
- adequacy: create boards to oversee and ensure adequacy of rates
file financial statement regularly
relationship manager reponsibility
for maintaining an up to date risk assessment of FRFI
main point of contact
looks to board and sm to be proactive in providing OSFI with timely notification of important issues affecting FRFI
OSFI requires BoD involvement during interventions to determine best corrective action plans
BOD and SM responsibility in managing FRFI
accountable for its safety and soundness and compliance with governing legislation
items of RAF
RAS risk appetite statement
RL risk limits
RR roles and rep of RAF implementation
RAS description
reflects level and type of risk FRFI is willing to accept to meet business objectives
key features of RAS
linked to FRFI short and long term strategic, capital and financial plans
includes qualitative and quantitative measures of risk
forward looking
consider normal and stressed scenarios
RL description
refers to allocations of FRFI’s RAS to
- specific risk categories
- business unit
- lob or product
how is compliance with RAF ensured?
CRO: ensures aggregate risk limits are consistent with RAF/ provide regular reports to BoD and SM assessing ras and rl
internal auditor: ensure compliance with raf
orsa key elements
risk identification and assessment
relate risk to capital
oversight
monitoring and reporting of risks
internal controls and objective review
differences between orsa and fct
orsa uses osfi guidelines, fct csop
orsa quan and qual, fct quan
orsa management responsibility, fct AA
similarity between orsa and fct
both consider risk identification and control
concerned with capital available and required
base and adverse scenarios
challenges of orsa and fct integration
oversight: AA/ board and SM
methodology: FCT follows prescribed regulatory basis/ ORSA reflects own models and assumptions
different staff responsible
territorial changes
- magnitude proposed < magnitude indicated
- direction proposed = direction indicated
- magnitude proposed within +-10% (-10%, 10%)
prohibited risk classification elements
ccones
claims where fault <=25%
credit history
occupation
net worth
employment
salary
filing items actuary needs to certify
effective dates for new and renewal business/ vehicle classification system/ data is relsuf/ AAP used
parallelogram v ee
on level adjustments:
if parallelogram, calculations should be disclosed
if ee, description of the process should be provided with a comparison of results to results obtained using parallelogram. any sig difference should be explained.
minimum requirements to RSP
PPA only
insured can’t be eligible for FARM
policy must satisfy statutory minimum coverage requirements
insurer must follow proper classification, rating and provide documentation
insurer must use approved rates
AB and ON RSP diff
ON has 1 RSP/ AB has 2
ON has a 5% limit on risks that can be ceded/ AB grid has no limit, non grid has 5% limit
items required in the consent of credit score use
authorization from customer to assess credit info
what/how/how long
notify customers they have the right to withdraw but note they might not receive the best quote
argument for cs use
statistically significant
good rating variable
argument against cs use
unfairly discriminatory: poor families, recent immigrants
privacy concerns: too invasive
accuracy: credit bureau errors may cause inaccurate credit data
regulator’s concern on cs use during economic crisis
- on agg prem: a new rating variable along should not increase aggregate premium
- on ind prem: a distributional shift when economic crisis causes every insured’s cs to worsen, that doesnot reflect the true cost differences
actuary’s response to regulator concern regarding cs
- agg prem: insurer uses insurance scores to determine appropriate rate relationships between risk classes, not overall premium needed
- ind prem: can stop using cs at least temporarily/ redo classification analysis after economy has stabilized
RA comparison
- longer duration
- high sev low freq
quantile method to determine RA adv and disadv
adv: satisfy disclosure requirements regarding CI corresponding RA
dis: if misrepresented, may introduce spurious accuracy
Coc adv and disadv
adv: allocation of RA at a more granular level
disadv: requires projection of capital requirement as an input to liability calculation
when is bootstrap appropriate?
if it appropriately corrects for data volume in each lob
if suitable proxy data was used to derive historical LDFs and are re sampled in the bootstrap method
key drivers of flood
population growth and urbanization: urban centers are more prone to flood risks due to their location near coastlines
climate change
differences between FRM and current framework
- alternative approach to conventional flood control measures
- promotes the use of non structural mitigation measures to complement and enhance other types of mitigation
- stakeholders include gov/industry/communities/non govt organizations/individuals
- an iterative process of AMRA acting/monitoring/reviewing/adapting
roles and resp of gov in FRM
support provincial and local efforts to mitigate flood emergencies
monitor emergencies, financial assistance
roles and reps of prov/terr govt
regulate insurers
implement land use and flood risk management policies
goals/themes to help guide the development of policy options for Canada
minimize uncertainty
maximize market penetration, minimize adverse selection and mutuality
design for affordability
minimize moral hazards
3 rating agencies
best/moodys/sp
identify best, moody, sp rating models
best: EPD expected policyholder deficit
moody: stochastic cf to model economic capital
sp: principle based models and erm practices
describe best rating model
EPD = p/v = pure premium of treaty/ market value of reserves
choose required capital so that EPD = 1%
describe Moody’s rating model
model is based on repeated simulations of loss distribution of separate risks, project cfs until liabilities are settled
describe sp rating model
principle based, weighted avergae of sp and insurer capital assessment
why do insurers maintain credit ratings with rating agencies
agents are wary of unrated insurers
solvency assessment: 3rd party rely on rating agency’s assessment
efficiency: agents dont have the expertise to do their own rating
PML considerations other than non modelled exposures
data quality
model uncertainty
multi region exposure
2 financial and 2 non financial considerations regarding cfs in a reinsurance commutation
f: amount and timing of cf/discount rate applied to cf/pp of cf
nf: court decisions/life expectancy of claimant/quality of reinsurer
adv of commutation primary insurer and reinsurer
p: removes reinsurance credit risk, decrease expense cost, receive cash flow right away
r: give stability in the report for LT claims, savings in claims adjusting and admin costs, required after wind up
fletcher v mpic
customer relied on MPIC, there was no mention of Under insured motorist coverage on application or insurance certificate
MPIC owes duty of care if customers rely on the information/ their reliance is reasonable/ MPIC knew or should have known the customer rely on this information
fletcher v mpic rulings and implications
insured wins
both private agents and government institutions owe a duty or care
but private agents owe a higher duty of care because of their promised expertise
whiten v pilot insurance co
did Pilot use the power imbalance to force insured into smaller settlement?
whiten v pilot insurance co rulings
supreme court restores 1m
punitive damage would be higher if defendant abuse of a position of power, defendant shouldnt see the award simply as a fee
Belanger v Sudbury
city was liable for plaintiff’s injury, salting occurred but were not sufficient given the storm conditions
Belanger v Sudbury rulings
appeal court rejected defendant’s statutory defense and upheld trial judges decision
city is expected to adapt to conditions, not just blindly follow procedures
appeal judge implied that standard of care was breached, a qualified city worker should reasonably have foreseen the icy conditions and taken steps to mitigate them
subsequent event definition
an event where the actuary first becomes aware of after calculation but before report date
subsequent right branch
would event have been reflected in the work if it were subsequent?
no -> no action
yes -> does event invalidate report?
yes-> withdraw or amend
no -> inform dont reflect
material? error?
OSFI expectation of AA
Canadian professional with Canadian experience: at least 3 years of Canadian experience in the past 6 years, 1 in valuation
experience with canadian sop
maintain professional designation requirements
no adverse findings with CIA disciplinary tribunal
peer review contents
description of work, timing , materiality level
compliance with AAP and changes in AM
recommendations of further work
relationship with AA
risk limiting features
terms set in advance
- adjustability of reinsurance premiums or commissions
- pre set limits on timing of loss payments from reinsurer to insurer
- counterparties ceding back to original cedant
exp based:
- future terms based on past experience
- forced renewals if the contract is in deficit
when can actuary report that the insurer is in satisfactory financial condition
throughout forecast period,
base mct > 180
going concern mct > 100
solvency assets> liabilities
commutation of reinsurance
an agreement between a ceding insurer and reinsurer that provides for the valuation, payment and complete discharge of all obligations between the parties under a particular reinsurance contract
commutation of claims
a process in which one party is relieved of its obligations in respect of the claim in exchange for a cash payment
Under a non-proportional reinsurance treaty, particularly some catastrophe covers (such as those covering aggregate losses), the pattern of risk amortisation may differ significantly from the pattern of expected incurred claim costs and therefore may not qualify for the PAA if the contracts have coverage periods in excess of one year.
oversight management of FRFI
- board should establish a board risk committee to oversee risk management on an enterprise wide basis
- FRFI should have a senior officer CRO or equivalent who is responsible for the oversight of all risks across the firm
- board oversight of management
- sm oversight of operations
coverage period
the period during which the entity provides insurance contract services. This period includes insurance contract services that relate to all premiums within the boundary of the insurance contract
grouping considerations
similar risks (underlying risk is same/diff)
managed together
how to select adverse scenarios
percentile if a loss distribution is available
reverse stress testing
reinsurance arrangement thats not uniform
- Risk-attaching proportional treaties;
- Catastrophe treaties with material seasonality (e.g., hurricane);
- Retrospective reinsurance (e.g., stop-loss or reserve protection coverage )
