Mnemonics Flashcards
Purpose of SAO
OIA
* Opinion: provide the appointed actuary’s opinion on reserve amounts for items in SAO scope
* Inform: inform readers/regulators of significant risk factors regarding reserves
* Advise: advise whether risk factors could lead to MAD in reserves
Exemption from SAO
SLuSH
* Size: insurer is small (less than $1m annual GWP) & (less than $1m gross reserves @ year-end)
* LOB: certain lines are exempt
* u
* Supervision: exempt if insurer is under supervision
* Hardship: if insurer is under financial hardship (cost of SAO is burden)
May qualify for hardship if cost of SAO exceeds the lesser of:
* 1% of CY capital & surplus (from latest quarterly statement)
* 3% of GWP for year (projected from last quarterly statement)
Identification
- Actuary’s name/title + WARD
- Who made appointment
- Affirmation of qualifications
- Relationship to company
- Date of appointment
- Intended purpose/users (ASOP.36)
Relevant Comments - list
MR BICUR
* 1 & 2: MAD (Material Adverse Deviation)
materiality standard; risks that may result in MAD
* 3: Exhibit B
significance of Exhibit B disclosure items including:
anticipated salvage & subrogation
discounting (tabular & non-tabular)
insurer’s share of reserves for (pools & associations)
* 4 & 5: Reinsurance
retroactive reinsurance
uncollectible reinsurance
* 6: IRIS
ratios 11, 12, 13
* 7: Changes
material changes in reserving assumptions/methods since prior opinion
* 8: Unearned Premium
UEP for long-duration contracts
Considerations regarding disclosure of materiality
SIC
* Sophistication of user
* Importance of concept to user
* Complexity of concept (KISS)
Scope section disclosures
- Data sources
- Reserve items in opinion
- Evaluation of the data for reasonableness & consistency
- Accounting basis for reserves
- Review date
- Intercompany pooling (if applicable)
- Reviewed methods & assumptions in determining reserves
- Reconciliation to Schedule P
Items to consider when making use of work of another
E(NPC)
Effect of variations in other person’s estimates on appointed actuary’s opinion
Nature of coverage
Proportion of reserves covered by other person’s work (relative to total reserves)
Credentials of other person
Company-specific Risk Factors list (Relevant Comments)
Company Operations - DONGAS
* Data (thin or unexplained changes)
* Operations (qualitative changes in operations)
* New (new products or new markets)
* Growth (rapid growth in 1 or more business segments)
* Adequacy (changes in adequacy of case reserves)
* Severity (changes in severity or frequency)
General
* A&E losses (Asbestos & Environmental)
* Catastrophic weather events
* Cyber liability
* Mass torts (asbestos)
* Construction defects
* New legislation
Other
* Distributional changes in limits/attachment points/deductibles
* Terms of reinsurance contracts
Branded Risk Classifications
CLL-MOP-RRS
CR - Credit (10)
LG - Legal
LQ - Liquidity (6, 9)
MK - Market (6)
OP - Operational (5, 7, 8)
PR/UW - Pricing/Underwriting (1, 2, 3, 4)
RP - Reputation
RV - Reserving (11, 12, 13)
ST - Strategic (1, 2, 3, 4, 6, 7, 8)
Functions of Schedule P
DT-RAPID (go downtown on rapid transit)
D - Development of reserves over time attributable to specific years & lines - (2,3,4)
T - Trends in frequency & severity (1,2,5)
R - Calculate RBC loss-sensitive discount (7)
A - Evaluate Adequacy of recorded reserves (2,5)
P - Determine Payment patterns for discounting (3)
I - Observe split between actuarial reserves (IBNR) and case reserves (4,5)
D - Disclosures for SAO (1)
Risks not covered by RBC
BM-AIRS
* Business plans & strategy
* Management
* Ability to access capital
* Internal controls
* Reserve adequacy
* Systems
Operational Risk
L-PIPE - It was Alice with the lead pipe in the break room
L - Legal risk
P - Personnel risk (in case you hired a dumb-ass intern)
I - Inadequacy or failure of internal systems
P - Procedural risk (and/or risk of failure of internal controls)
E - External risk (due to external events)
Does NOT include reputation risk
Operational risk charge is reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership (but not to produce a charge that is less than zero).
Off-balance sheet items
1.0% charge
DANCE
D - DTA
A - guarantee for Affiliates
N - Non-controlled assets
C - Contingent liabilities
E - collateral for sEcurities lEnding programs (0.2%)
Areas of difference between GAAP and SAP
BASIC - D3NG + PDR
* Balance sheet presentation of reinsurance
* Anticipated salvage/subrogation
* Structured settlements
* Invested assets
* Ceded reinsurance
* DAC (Deferred Acquisition Expense)
* DTA (Deferred Tax Asset)
* Discounting loss reserves
* Non-admitted assets
* Goodwill
* PDR (Premium Deficiency Reserve)
Advantages of surplus allocation method
R2-DC
* Not distorted by Reinsurance
* Uses 2 years of data to smooth results (reduces distortions)
* easy to obtain Data (from annual statement)
* easy to Calculate & compare across companies & lines of business
Disadvantages of surplus allocation method
FARCe
* does not reflect Future business or growth (it is retrospective)
* does not allow for Actuarial/management input (method is formulaic)
* does not reflect Risk characteristics of line of business (e.g. short vs long-tail)
* does not recognize Catastrophe potential
* e doesn’t stand for anything
Strengths of Schedule F as solvency monitoring tool
- RP is formulaic - easy to compare across years & companies
- RP is formulaic - hard to manipulate because inputs are numbers from financial statements
- RP accounts for reinsurer credit risk with penalties for unauthorized reinsurers (often this means foreign insurers)
- RP accounts for reinsurer credit risk with penalties for slow-paying reinsurers
- Schedule F shows impact to surplus if reinsurance contracts are canceled
Weaknesses of Schedule F as solvency monitoring tool
- RP is formulaic - may mask management’s better informed estimate of collectability risk
- RP is formulaic - but no statistical basis for formula - may not represent true collectability risk
- RP penalizes unauthorized reinsurers regardless of their financial strength
- RP penalizes slow-paying reinsurers regardless of their financial strength and 20% slow-payer threshold is arbitrary
- Schedule F doesn’t directly measure reinsurer’s solvency which is the true source of uncollectability risk
- Schedule F doesn’t measure the quality of an insurer’s reinsurance management
Regulator considerations when evaluating an unauthorized reinsurer’s application for certification
JRR Tolkien & CS Lewis (Frodo for FinPos?)
Jurisdiction of reinsurer
Rating from a rating agency
Regulatory history
FinPos (Financial Position)
C & S (Capital & Surplus)
Functions of reinsurance
F-cat-SWIPLES
* Fronting arrangements
* catastrophe protection
* Surplus relief & capital efficiency
* Withdrawal from market
* Internal reinsurance transactions
* Pools - mandatory & voluntary
* Large line capacity
* Enter market and/or U/W guidance
* Stabilize results