Measurement Tools Flashcards
each tool only provides one piece of evidence, so should
not rely only on 1 to make conclusions about financial health of insurer
results of tool may indicate
need for further investigation and when multiple tools are used together over period of several yrs they can provide early warning of high risks insurers
what tools do not
tools should not replace audit, do not guarantee that input data is accurate/complete, do not indicate if management has implemented good internal management, systems, and controls, and will not uncover fraud
IRIS & disadv
focuses on BS strength and earnings quality
- no direct link btw results of ratios and regulatory intervention
- NAIC analyst system team will review IRIS results together with other tools to prioritize companies that require attention
RBC & disadv
considers BS risk via asset and reserve risk charges and profitability via WP risk charge
-dis=most of factors are based on industry wide experience rather than company’s
SAO & AOS
actuary’s opinion of reserve adequacy which is important since largest single item on BS typically
-regulators may give add scrutiny if actuary opines reserves are anything but reasonable or id additional comments mention sign risks that could result in material adverse deviation
Credit Rating Agencies & ratings
provide financial strength ratings (rating of ability to meet obligations) and debt/issuer ratings (ability to meet debt obligations)
- ratings are based on both qual (corporate gov, product development, capital structure, asset quality, investment strategy, reserve adeq, claims management, contingent assets and liab, level of reins dependency) and quant (capital adequacy models) analysis of insurer’s financials
- ratings established annually but monitoring throughout year to evaluate whether rating needs to change in light of certain developments (statutory financial statement filings, interim management reports, significant public announcements)
FSRs can be used by
PH for change insurer will be able to pay claims, directors of corporate PH may require use of highly rate insurers, insurers to look at reinsurers to decide which companies to use, investors to assist in decision about whether to invest
Annual & Qtrly financial statements and schedules provide 2 views of financial health
balance sheet strength (focus on areas that can impair solvency ie reserve & UEPR adequacy) and earnings potential
for reserve adeq regulators can refer to
5yr historical data exhibit (shows how losses have developed over time), notes (includes management’s discussion about changes in incd loss), schedule P (provide data to perform tests of reserve adeq so you don’t need to rely on estimates provided), schedule F (reinsurance collectability/credit risk)
for UEPR adeq regulators can refer to
regulators can look at AY LRs
if ratio > 100% possible UEPR is insufficient to cover future losses
when examining BS strength, also look at
investable assets ie changes in values and yields and effectiveness of hedging practices for riskier assets
future earnings can be impaired by
UW, pricing, & investment strategy
regulators can examine what to generate early warnings of future problems in earnings
trends in financial ratios and other annual changes in income statement
Large growth in WP during soft market, increases in UW or expense ratios, deteriorating LRs, increased exposure to CAT/large events, losses on investments/changes in mix of invested assets/declining yield on investment assets, increase in prov for reins
hard to perform detailed exam of filings of each insurer so need to rely
on other tools in conjunction with statements to prioritize which insurers to target
