Lists Flashcards
Methods for selecting discount rate (3)
Risk-free rate
Portfolio yield
Selection by another party (must disclose)
Discounting disclosures (5)
Dates (accounting, valuation, review)
Data, Assumptions, Methods
Uncertainties around payment pattern
Difference between discounted & undiscounted reserves
Range (& basis)
ASOP 41 Communications (8) (CRISIS-LQ)
Conflicts of interest
Risks
Intended user
Scope
Information used the actuary cannot take credit for
Subsequent events
Limitations on applicable findings
Qualifications of actuary
ASOP 43 Unpaid Claim Estimate Identifications (5)
Claims covered (LOB, state, etc)
Reinsurance (net/gross, uncollectability risk)
Expenses (types of LAE, unpaid)
Discounting (if done and relevant disclosures)
RMAD: sources of risk, significant events
ASOP 43 Unpaid Claim Estimate Method Selection (4) (PaNDA)
Purpose of analysis (internal/external)
Nature of claims
Data availability
Assumptions
Considerations for setting materiality level (6) (F-STARS)
Financial strength
Size of entity
Type of business
Access to capital
Retention (net)
Stage of org’s life cycle
General considerations around disclosures (3)
Sophistication of user
Importance of concept to user
Complexity of concept
Tests for RMAD (6)
Bright Line Indicator
10% of net L+LAE > TAC - CAL
If materiality standard falls within range
Long-tailed or volatile lines
Cats late in the year
Excess claims not reported to reinsurer until retention is breached
Reasons for nuclear verdicts (6)
Plaintiff profile (young, seriously injured, high income)
“Reptile tactics” used by plaintiff counsel to appeal to highest possible safety standards
Stealth jurors (hide bias)
State court
Defendant’s actions are egregious
Defense attorneys prioritize perfect record for appeal over convincing jury
Impacts of nuclear verdicts (5)
Bankruptcy
Increased cost of insurance
Decreased availability of insurance
Decreased innovation and product development
Shadow effect: larger pre-trial settlements
Defense against nuclear verdicts (5)
Pre-Trial:
Defense uses supplemental questionnaire to identify stealth jurors
Defendant offers to confess
During Trial:
Comparative fault defense (pro-rated compensation)
Limit “reptile tactic” questions
After trial:
Appeal verdict
State and federal legislative activity around nuclear verdicts (5)
State Tort Reform
Caps on punitive damages
Unique state limits (KS, MS, MT base punitive caps on income or net worth of defendant)
Specialized rules (CT about product liability, RI about wrongful death)
Federal legislation: Stop Underrides Act (reduce accidents involving cars under trucks)
Self-supporting FHCF characteristics
Premiums calculated by actuarial methods
Assessment-backed bonds if cash balance insufficient
Engage in finance and risk-transfer activities to improve liquidity and minimize assessments
Operational responsibilities of FHCF (5)
Maintain Staff: admin, finance, audit prep, claims examiners, debt financing, legal
Manage in-house operations
Oversee outside service providers
Rely on State Board Admin for investment and IT
FHCF Advisory Council provides advice on implementation
Strengths of Schedule F for Solvency Monitoring (3)
Reinsurance Provision (RP) is formulaic and easy to compare across companies and years while being hard to manipulate
RP accounts for reinsurer credit risk by penalizing unauthorized/foreign reinsurers or slow-paying reinsurers
SchF shows impact to surplus of reins
Weaknesses of Schedule F for Solvency Monitoring (5)
Reinsurance Provision (RP) is formulaic and masks actuarial insight with no statistical basis for its formula
Penalized unauthorized reinsurers and slow payers regardless of financial strength
Slow payment threshold is arbitrary
SchF only measures collectability, not overall solvency
Doesn’t measure quality of insurer’s reinsurance management
What does a regulator consider for unauthorized reinsurers applying for certification? (5)
Jurisdiction
Rating (from agency)
Regulatory history
Financial position
Capital and surplus
Motivations for reins commutation
Solvency (both sides)
Exit a market or LOB
Disputes over contract provisions
Reserves - disagree over valuation
Methods for assessing existence of risk transfer (4)
Self-evident (qualitative)
If significant loss is not reasonably possible BUT a reinsurer assumes “Substantially All” of the risk then risk transfer may still exist (quota share, risky individual risk contracts) (qualitative)
Expected Reinsurer Deficit = prob(NPV reins loss)*(NPV reins loss)/(reins prem) if ERD > 1% then yes to risk transfer
10-10 rule: if reinsurer has >=10% chance of >=10% UW loss then yes to risk transfer
Balance sheet & income statement users (8)
Regulators
Actuary
Company management
Shareholders/investors
Auditors
Policyholder/insured
Board of Directors
Rating Agency
Competitors
Non-admitted assets (4)
Illiquid assets like furniture, electronics, etc.
Agent’s balances >90 days overdue
Deferred tax asset
Real estate
Components of Other Surplus Changes (6)
ADD
Change in unrealized capital gains
Change in unrealized foreign exchange
Change in deferred income tax
Cumulative effect of changes in accounting principles
SUBTRACT
Change in non-admitted assets
Change in provision for reinsurance
Causes of reinsurance uncollectibility
credit risk (inability to pay due to insolvency or impairment)
dispute risk (unwilling to pay)
differing interpretations of contract
unique exposures
rare events
provisions untested in courts
contract disputes
latent liabilities like asbestos or environmental pollution
missing policies
late notice of claim
settlements made without first consulting reinsurer
definition of “occurrence”
Functions of Reinsurance
Fronting arrangement
Catastrophe protection
Surplus relief & capital efficiency
Withdrawal from market
Internal reins transactions
Pools (mandatory and voluntary)
Large line capacity
Enter market and/or get UW guidance from more experienced reinsurer
Stabilize results
Structure of Insurance Regulation (D2P2M)
Duplication
Diversity of perspective
Peer review (NAIC FAD & FAWG)
Peer pressure
Market discipline
Business areas impacted by federal taxation
Pricing
Valuation/reserving
Constructing capital models
Tax return preparation
Risk Retention Groups formation & Operation
Formation: must submit plan of operation to commissioner of domiciliary state
Operation: may write business directly in registered states without obtaining a license
Can do business in non-domiciled state if a registration process is completed and the state’s ins commissioner is designated as agent for service of process
Treated as multi-state insurers and subject to NAIC accreditation standards for RRGs
File quarterly & annual yellow book financial statements, RBC, SAO, MD&A, and audited statements
Ineligibility for residual (auto) market
No valid drivers license
Felony conviction within 36 months
Habitual violation of the law
Benefits of predictive analytics
Reveal insight into insurance costs
Encourage better risk management
Lower many consumer costs
Casualty Actuarial and Statistical (C) task force responsibilities & purpose
Draft & propose changes to Product Filing Review Handbook
Provide state guidance for rate filings based on predictive models
Enhance uniformity in regulatory processes
Consider state-specific insurance needs
Regulatory best practices - purpose & benefits
Support parameter valuation
Improve model understanding
Provide a baseline for state regulators
Guide regulators
Identify key model elements
Facilitate resource sharing
Improve review quality
Aid in training
Enhance market speed and competitiveness
Regulator review of predictive models
Model is cost-based, compliant with state law, and improves company’s rating plan
Data & model check:
How it was built
Accuracy of data input
Adjustments to raw data
Update frequency of risk characteristics
Interaction of model with rating plan:
Understand input characteristics of model
Integration of model with rating plan
Interaction with non-modeled variables
Desired marketplace effects:
Enable competition and innovation
Protect model confidentiality
Allow timely reviews for speed to market
Predictive model desirable characteristics
Produce fair rates
Not cause excessive premium disruptions
Comply with state practices
Components of Solvency Modernization Initiative
Capital requirements
Governance and risk management
Group supervision
Statutory accounting
Financial accounting
Reinsurance
Judging regulatory effectiveness (RIICH)
Rehabilitation effects
Identification of problems before policyholders harmed
Insolvency frequency & guaranty fund effectiveness
Cost-benefit analysis positive for regulation
Healthy insurance market
Core principles of US insurance financial solvency (POORER-C)
Reporting
Off-site exams
On-site exams
Capital adequacy
Regulatory control of risky transactions
Prevention & correction
Exiting market
Reasons for Reins Regulatory Modernization Framework to be federal rather than state
Propose & improve state-based reins regulation
Uniform implementation in all states
Comprehensive alternative to related federal legislation that may be focused on other issues
Priorities for Solvency Modernization Initiative
Create a document explaining the US ins regulatory system
Examine international developments
Comply with ICPs promulgated by the IAIS (Int’l Ass of Ins Supervisors)
Learn from global financial crisis
Surplus line regulation
Product must be unavailable in traditional insurance marketplace
Producers must be licensed to sell surplus lines insurance
Producers must place business with insurers that meet managerial and financial requirements
Causes of insurer insolvency
Governance - poor governance
New entrant - management may be inexperienced or balance sheet may be low on capital
Growth - too rapid to support future loss development
Size - too small to absorb unexpected losses
ALSO:
- deficient reserves
- under-pricing of risks
DOI regulatory intervention for trouble insurers
fact-finding: examine insurer using resources such as financial statements, RBC, IRIS, etc.
select appropriate regulatory action:
- mandatory corrective action
- administrative supervision
- receivership → rehabilitation
- receivership → liquidation
Levels of scrutiny in regulation - by LOB
Low scrutiny: IM, Ocean Marine, Surety, Title, CGL
- sophisticated buyers
- individualized risks
- thin data
High scrutiny: WC and Private Passenger Auto
- unsophisticated buyers
- uniform rates
- credible data
- mandatory coverage
- complex classification system
- public interest & political awareness
Services provided by insurance advisory organizations
- education of the public, industry, & regulators
- actuarial services
- filing support
- development of policy forms
Causes/warning signs of insolvencies
Poor governance
New entrance to market
Growing too rapidly
Company too small to absorb unexpected losses
Deficient reserves
Underpricing
Other:
Catastrophe
Reinsurer insolvency
Asbestos
Poor investment results
Lines of business excluded from state guaranty funds
Credit
Surplus lines
Title
Ocean marine
Reinsurance
Mortgage
Pension
Guaranty fund limitations
limited to certain lines of business
claims payouts and UEP refund:
- have stated limits
deductibles:
- claim deductible
- policy deductible
- large net worth deductible (a percentage of an insured’s net worth)
trigger is required:
- court must verify insolvency and have placed insurer in receivership
Characteristics of “the business of insurance”
Specific to insurance
Spreads risk (risk transfer)
Contracts between insurer and insured
None were satisfied in Royal Drug case
NAIC goals
fundamental goals:
- promote public interest (fair & equitable treatment of consumers)
- promote insurer solvency
- promote state insurance regulation
types of regulatory assistance:
- Develop uniform financial reporting standards
- Assist states with pricing/coverage
- Maintain databases to track solvency
Features of state insurance regulatory system
requirements for insurers regarding:
- licensing
- reporting & filing
authority to:
- conduct periodic exams
- impose sanctions
NAIC Accreditation Program for states
Goal: maintain standards for solvency regulation
Interview personnel from state insurance department
Review:
- state laws
- prior examination reports
- files on selected state insurers
- operations of state insurance department
Understand communications within state insurance department
Discuss & Report findings
State DOI functions
Licensing & regulation
- licensing of insurers (for insurers doing business in their state)
- licensing of producers (sellers may have to pass exams, pay licensing fees, perform continuing education)
- regulation of rates & coverages (see below for 4 types of rate filings)
- regulation of claims adjusters (market conduct exams may include claims adjusting & settlement practices)
Insurer solvency
- financial exams (includes financial statements, IRIS,..
- monitor sale of insurance securities (stocks, bonds, real estate, loans)
- determine need for receivership (either rehabilitation or liquidation of an impaired insurer)
Other services
- fraud prevention (NAIC has an online fraud reporting system)
- consumer services (education, complaint resolution)
Credit Scores: for & against
For:
Statistical significance (correlated with frequency)
Manipulation is difficult
Objective - based on numerical data
Removal of credit score rating won’t impact aggregate premium if off-balance is applied
Against:
Frequency is the only correlation - not severity
Errors are common (identity theft)
Economic downturns have disparate effect on credit scores of vulnerable populations (recession hits credit score, not driving habits)
Discriminatory - may violate actuarial rating goals
Rating Agencies
AM Best - most experience, comprehensive financial strength rating
Moody’s - debt rating
S&P - debt rating
All agencies use interactive rating but their exact methods and models differ
How to ensure consistency of financial strength rating across insurers
- Standard information-gathering and assessment guidelines
- ratings are related to economic capital
- analysis and final rating should be issued by separate bodies
Interactive Rating methods
Research: by ratings analysts (insurer submits proprietary info)
Meeting: between rating analysts & insurer’s senior management for presentations
Proposal: the rating analyst leader proposes a rating (insurer may submit further info)
Decision: by ratings committee
Publication: to public & fee-paying subscribers
If an insurer’s financial strength has changed, what reporting options are available?
reporting options:
[1] downgrade or upgrade insurer’s rating
[2] change the outlook (do not upgrade or downgrade)
Note that rating agencies hesitate to change ratings too quickly:
- to avoid angering paying clients (if their rating is downgraded)
- to maintain consistency & reputation among users of financial ratings
NRRA provision
1-state compliance: insured’s home state has exclusive authority to regulate nonadmitted insurance
uniform eligibility standards: US-dom must have more than 15M capital & surplus and if alien insurer is listed in Quarterly Listing of Alien Insurers then states cannot prohibit their business
ECPs or Exempt Commercial Purchasers: states cannot force a broker to do a diligent search if:
- employs a NRRA-qualified risk manager
- has paid aggregate commercial premiums ≥ $100,000 (in past 12 months)
the person’s company is “large” (high net worth ≥ ~20m or high revenues or lots of employees,..)
- the broker has disclosed to the purchaser that coverage may be available in the admitted market
- national producer database of licensure & renewal of surplus lines brokers: if a state doesn’t participate in such a database then they can’t collect licensing fees
Disclosures around price optimization rate filings
- rate adjustments that are not cost-based (may include judgmental adjustments)
- whether price optimization was used (Ex: demand models)
- which rating factors are affected by price optimization and their quantitative impact
- whether customers with the same risk profile have different rates
- data sources and models that affected the rate charged in any way
