Ins. Acct. Ch. 1

Question 1

McCarran-Ferguson Act

Answer 1

1945, exempts insurers from Sherman Act; interstate commerce but state controlled.

Question 2

Insurance Expense Exhibit (IEE)

Answer 2

specific to p&c statement, primary regulatory report showing pre-tax statutory net income and its components by line of business. Source of NAIC profitability reports.

Question 3

IEE- Part I

Answer 3

Allocation to Expense Group reports expenses by insurance function: loss adjustment; acquisition, field supervision, and collection; general; taxes, licenses, and fees; and investment expenses.

Question 4

IEE- Part II

Answer 4

Reports by line of business (net of reinsurance), detailed information regarding premiums, losses, expenses, net investment gains or losses and other income, and dividends to policyholders to arrive at net income before federal and foreign income taxes.

Question 5

IEE - Part III

Answer 5

Similar info by line of business but on direct basis rather than net of reinsurance.

Question 6

Asset

Answer 6

property, right or claim with future measurable value that is owned or effectively controlled.

Question 7

admitted assets

Answer 7

assets acceptable for solvency purposes. 3 essential characteristics: a) it embodies a probable future benefit which contributes to cash flow, b) a particular entity can obtain this benefit, and c) the transaction giving rise to entity’s right to control the benefit has already occurred.

Question 8

Bonds

Answer 8

SSAP No. 26- Bonds, Excluding Loan-backed and Structured Securities, bonds are defined as “any securities representing a creditor relationship, whereby there is a fixed schedule for one or more future payments.”

Question 9

Short-term investements

Answer 9

SSAP No. 2 “All investments with remaining maturities of one year or less at the time of acquisition.

Question 10

Uninsured Plans

Answer 10

SSAP No. 47 , “the plan … bears all of the insurance risk, and there is no possibility of loss or liability to the administrator caused by claims incurred related to the plan. The administrator, however, may be subject to credit risk with regard to the risk-bearing entity.”

Question 11

Electronic data processing (EDP) equipment and software

Answer 11

must be capitalized and depreciated (over the lesser of its useful life or three years). May be admitted subject to limitations, The aggregate amount admitted as an asset is limited to three percent of insurer’s C&S, reduced by: EDP equipment and software, net deferred tax assets, and net positive good will.

Question 12

Non-operating software

Answer 12

must be established as a nonadmitted asset and written off over a period not to exceed the lesser of the useful life of the software or five years.

Question 13

Leased EDP

Answer 13

considered operating leases and are expensed.

Question 14

Furniture, equipment, and supplies

Answer 14

material amounts must be capitalized and depreciated, and the undepreciated amount must be reported as a nonadmitted asset.

Question 15

Bonds

Answer 15

considered to be senior securities because creditor claims are settled before the claims of stockholders. Those that are not loan-backed or structured are generally valued at amortized cost, i.e., the amount paid plus or minus any premium or discount amortized to date.

Question 16

Mandatory convertible bonds

Answer 16

valued at the lower of amortized cost or fair value prior to conversion.

Question 17

Unaffiliated common stock

Answer 17

valued at fair value

Question 18

Acquisition, Development, and Construction (ADC)

Answer 18

SSAP No. 38 - when properties are being constructed; a lending agreement which are made to property owners to finance real estate projects in which the lender participates in the residual profits. If insurer is the lender and expected to receive more than 50% of profits, should be classified as an investment in real estate in Sch. A. If <50%, then loan or real estate joint venture.

Question 19

accounting date

Answer 19

date used to separate paid versus unpaid claim amounts.

Question 20

valuation date

Answer 20

date through which transactions are included in the data used in the unpaid claim estimate analysis

Question 21

review date

Answer 21

the cutoff date for including information known to the actuary in the unpaid claim analysis

Question 22

accident date

Answer 22

date a covered incident occurs. If the claim does not occur at a single point in time, then the adjuster assigns a date.

Question 23

report date

Answer 23

the date an insurer or its agent is informed of a claim or “notice date.”

Question 24

record date

Answer 24

the date the insurer enters the loss in its statistical records.

Question 25

transaction date

Answer 25

the date of a financial transaction

Question 26

settlement date

Answer 26

the date a claim is settled

Question 27

closing date

Answer 27

the date on which the insurer closes its files on a claim because no further activity is expected.

Question 28

case reserve

Answer 28

the total of the individual estimates of outstanding liability for recorded claims. Are established for reported claims and identified by claim numbers.

Question 29

Incurred but not reported (IBNR) reserve

Answer 29

the estimated liability for claims incurred but not reported as of the accounting date.

Question 30

supplemental reserve

Answer 30

additional amount for recorded claims, estimated on an aggregate basis, aka bulk reserves. Used when statistical analysis indicates that the ultimate development of the original reserves will be deficient.

Question 31

reopened claim reserve

Answer 31

estimated liability for a claim that can reopen after closed. eg. workers comp claims.

Question 32

claims-in-transit reserve

Answer 32

estimated liability for claims reported but not yet recorded or “pipeline reserve.”

Question 33

frequency

Answer 33

the number of claims divided by the number of exposures

Question 34

written premium

Answer 34

earned plus unearned premium

Question 35

net written premiums

Answer 35

direct written premiums + assumed reinsurance premiums - ceded reinsurance premiums

Question 36

unearned premiums

Answer 36

(policy premium x unexpired days)/total number of days in policy

Question 37

in-force premium method

Answer 37

requires that the full-term premium for each policy that has not expired at the annual statement date be determined. All of the individual policy premiums are then aggregated to arrive at a total.

Question 38

direct method

Answer 38

the amortization procedure uses the written premiums for the full term of the policy, or for any additional premium paid.

Question 39

audit premium

Answer 39

based on future activities that reflect the level of exposure to insurance risk. Per SSAP No. 53, insurers must estimate the premium, which is generally know as earned but unbilled (EBUB), which is either an adjustment to written premium or an adjustment to earned premium.

Question 40

straight profit

Answer 40

call for reinsurer to return to the ceding company a stipulated percentage of the profits produced by the ceding company’s business.

Question 41

sliding scale

Answer 41

most frequently used. Commission depends largely on the loss ratio or experience of the particular ceding company’s business.

Question 42

guaranteed profit

Answer 42

includes a fixed commission rate and a fixed reinsurer’s fee or profit factor.

Question 43

treasury stock

Answer 43

Stock of a company that has been issued, fully paid for and subsequently reacquired by the company.

Question 44

Surplus notes

Answer 44

treated as surplus udner SAP, but generally considered debt for GAAP and federal income tax purposes.

Question 45

statement billing

Answer 45

occurs when the insurance company send the agent a statement listing policies written, and premium and coverage adjustments processed.

Question 46

account current billing

Answer 46

occurs when the agent renders a statement to the insurer reflecting premiums which are owed to the insurer, less the agent’s commission, and subsequently remits payment tot he insurer in accordance with the agreed credit terms.

Question 47

item billing

Answer 47

occurs when each transaction is accounted for separately, with payment on individual basis.

Question 48

SSAP No. 63

Answer 48

Underwriting Pools and Associations Including Intercompany Pools, provides that participants in pools and associations are required to accrue their participation on a “gross” basis. Further, cash basis (“pay-as-you-go”) methods are not acceptable under the codification.

Question 49

losses incurred

Answer 49

an insured event or occurrence that may or may not have been reported to the insurer. = losses paid to date - loss reserve prior period + loss reserve current period

Question 50

paid losses

Answer 50

an actual payment of cash or service has been rendered to the claimant of the insured event.

Question 51

losses reserved for future payment

Answer 51

an amount estimated by the insurer to be sufficient to pay the loss at some time in the future, instead of within the current accounting period.

Question 52

loss offsets

Answer 52

a reduction in the cost of a claim from salvage of damaged property, from subrogation against other parties involved in a loss, or from loss credits from others owing the insurer (i.e. reinsurance or claim refund).

Question 53

five components of load and loss adjustment liabilities

Answer 53

Case reserves, IBNR reserves, supplemental and bulk reserves, reopened claim reserves, and claims-in-transit reserves.

Question 54

bulk reserves

Answer 54

are loss reserves that not established on a claim number basis. Are considered IBNR losses and are provided for in the IBNR statistical base.

Question 55

loss adjustment expenses

Answer 55

are expected payments for costs to be incurred in connection with the adjustment and recording of losses and can be classified into two broad catagories: DCC and AO

Question 56

Defense and Cost Containment (DCC)

Answer 56

include defense litigation, and cost containment expenses, whether internal or external.

Question 57

Adjusting and Other (AO)

Answer 57

other than DCC, which include fees and expenses of adjusters and settling agents, lae for participation and involuntary market pools if reported by calendar year, attorney fee incurred in the determination of coverage, including litigation between the reporting entity and the policyholder, and fees and salaries for appraisers, P.I., hearing representatives, re-inspectors and fraud investigators, adjusters expenses.

Question 58

positive pay

Answer 58

provides the insurance company with the ability to electronically send the bank daily listings of issued checks. The bank in turn matches key components on these listings to checks presented to the bank for payment. Guards against fraudulent or altered checks.