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
Motivations for commutations
SEDR
* Solvency: primary & reinsurer may have concerns about each other’s solvency
* Exit: commutation provides a way for the reinsurer (& primary insurer) to exit a particular market
* Disputes: primary & reinsurer may want to end their relationship because of disputes (e.g. over contract provisions)
* Reserves: primary & reinsurer may disagree over the value of the ceded/assumed reserves (both may think they’re getting a good deal under the commutation)
Steps in pricing a commutation
EDTU
1. Estimate the claim payments that would be made in the absence of a commutation
For the insurer, these payments are reinsurance recoverables
For the reinsurer, these payments are loss reserves
2. Discount the estimates (losses are booked on nominal basis, but commutation price uses discounted values)
Need a payment pattern and discount factor – probably different for two sides
3. Tax effects: would try to agree on a price that is mutually beneficial
4. Unique considerations: for example, reinsurer may be desperate to exit the market and may accept a higher selling price
Pitfalls in a risk transfer test
PRICE-P
* Profit commission: do NOT include
* Reinsurer expenses: do NOT include
* Interest rate: do NOT vary by scenario; should only consider insurance risk
* Commutation timing: do NOT use prescribed payment patterns; INCLUDE commutation fees
* Evaluation date: test should be based on circumstances at evaluation date
* -
* Premiums: use PV of GROSS premiums; apply adjustments to UNDISCOUNTED premiums
Practical considerations in a risk transfer test
parameter(selection, risk).Pr(ass).Comm
* Parameter selection (interest rate, payment pattern, loss distribution)
* Parameter risk
* Pricing assumptions
* Commutation clause
Reasons for governmental participation in insurance
FCC(ES)
* Filling needs unmet by private insurance
May occur when private insurance is not economically viable (after 9/11, private market withrdrew coverage)
* When insurance is Compulsory
if insurance is compulsory but not offered by the private market then government must be the provider
* for Convenience
government may already have necessary structures in place
* for Efficiency
agent commissions eliminated > lower expense ratio > lower premiums for consumer
* for Social purposes
private market is motivated by profit, sometimes at the expense of social purposes like universal medical coverage for seniors
Criteria for evaluating government insurance programs
W/I - SEAN
* is the program one of Welfare or Insurance
* does it achieve Social purposes
* is it Efficient
* is it Accepted by the public
* is it Necessary
Policy Goals of NFIP
AM&R
* Access: provide access to primary insurance (transfers some of the financial risk to the federal government)
* Mitigate & Reduce: mitigate & reduce flood risk through floodplain management standards
Objectives of NFIP
RASH
* Risk-based premiums
* Affordability
* Sustainability (premiums should cover claims costs & expenses)
* High participation rates
Issues & barriers to private flood insurance
SNAP RBC
* Subsidization by NFIP: private insurer can’t compete with taxpayer-subsidized rates
* Non-compete clause
* Accurate assessment of flood risk: don’t have credible data, but FEMA can’t release NFIP data due to 1974 Privacy Act
* Participation rates: necessary to manage & diversify portfolio; even where flood insurance is mandatory participation can be low
* Regulatory uncertainty: private coverage increases state involvement which increases compliance costs since each state may have different regulations
* Broad coverage (at least as): hard to determine since policy forms can be written differently
* Continuous coverage requirement: coverage must be continuous to retain NFIP premium subsidies; switching to private may constitute a lapse in coverage
How to address issues & barriers to private flood insurance
- replace “at least as broad” with “comply with state regulations” (easier to determine)
- pass a federal law stating that private flood insurance counts when assessing whether coverage has been continuous
- eliminate the non-compete clause (essentially done)
- reform NFIP rate structure so that prices match what a private insurer would charge (FEMA redesigned risk-rating system: Risk Rating 2.0)
- don’t change anything: state level authority may be better in the long-term because it encourages state-specific solutions
- remove personally identifiable information from NFIP data then make data public (or release only aggregate data)
- expand mandatory purchase requirement (require all SFHA properties to buy flood insurance, not just those with federally-backed mortgage)
Clayton Antitrust Act (1914)
Prohibits activities that encourage monopoly power specifically [TEMPO]
* Tying - requiring purchase of 1 product to purchase another
* Exclusive dealings - sale of insurance conditional on buyer not doing other business with competitors
* Mergers & acquisitions that lessen competition
* Price discrimination - pricing differences between similar risks
* One person cannot be a director of 2 competing corporations
Checks & Balances in US insurance regulatory system for limiting failures
D2P2M
* Duplication
* Diversity of perspective
* Peer review
* Peer pressure
* Market discipline
Elements in building an effective global insurance regulatory system
TSAR
1 Trust
* regulators must trust each other
* US: accomplished through NAIC accreditation
* global proposal: IMF Financial Sector Assessment Program and G20 peer review
2 Share
* regulators in different countries must share information (this is the greatest challenge because domestic regulators want to protect domestic industries)
3 Action
* other countries must be able to take action against an insurer (if dissatisfied with actions by other regulators)
4 Resolution
* mechanism of resolution for bankrupticies (must be fair to all countries involved)
NAIC’s 5 principles that any national regulatory structure should possess
STarCH
Standards
* uniform where appropriate but local where necessary
* set & enforce at state level
Taxes & fees
* states should still be able to collect taxes & fees
Collaboration
* encourage: collaboration with international bodies
Holding companies
* state regulators should have equal standing with other regulators regarding holding companies
Judging regulatory effectiveness
RIICH
* were Rehabilitation actions effective
* did regulations help Identify & correct problems before policyholders were harmed
* how frequent were Insolvencies and how effective were the guaranty funds in reimbursing policyholders
* is there a positive Cost-benefit analysis of the regulations
* is the insurance marketplace Healthy
7 core principles of US insurance financial solvency
POORER-C
Prevention & correction
* timely action to address potential risks (may include regulatory enforcement powers)
Off-site exams
* regulators maintain an insurer profile using NAIC tools such as FAST (Financial Analysis Solvency Tools)
On-site exams
* risk-focused exams covering governance, management, financial strength
Reporting (includes disclosure & transparency)
* public financial statements
Exiting market
* framework for orderly exit (includes receivership scheme for policyholder obligations)
Regulatory control of risky transactions
* require regulatory approval for transactions that could affect insurer’s ability to fulfill policyholder obligations
Capital adequacy
* RBC and other tools
Causes/warning signs for insolvencies
GoNGS
* Gov: poor Governance (CEO sucks)
* N: New entrant to market (inexperienced management, lower capital)
* G: Growth too rapid (get premiums up front, but the trouble starts when the losses start rolling in)
* S: Size too small (can’t absorb unexpected losses)
Dodd-Frank requirements
UMAD
* Undergo stress-testing (to assess whether an insurer can absorb the financial impact of adverse events)
* Meet liquidity requirements (for short-term obligations)
* Adhere to capital requirements (for all obligations)
* Develop a living will (a resolution plan in the event of insolvency)
Areas of responsibility of the FIO
CRITI
* Collect data on the insurance industry
* Report annually to Congress on the state of the insurance industry
* Improvements (suggest improvements to insurance regulation in conjunction with state insurance departments)
* TRIA (help administer TRIA)
* International (help with negotiation of international agreements)
Actuarial concerns regarding FIO
BCDS
Banking regulation spillover
* increases compliance costs for insurers that have banks within their structure
Capital requirements
* inappropriate increases in capital requirements (stricter capital requirements should apply more to banks than insurers)
Dual regulation
* inconsistent regulation between state & federal (accounting/solvency standards)
* excessive regulation (federal regulation on top of state regulation may be expensive and restrictive)
Standardization
* forced standardization of forms & rates decreases innovation and competition
International concerns regarding FIO
FCS
Federal approach:
* better for international coordination of standards (versus many different state-based approaches)
* worse for transparency (FIO is not as transparent as NAIC)
Conflict between NAIC & FIO:
* NAIC and states have traditionally been at the forefront of international insurance issues
* FIO is now participating at the federal level and may have different approaches
Standardization of insurance:
* this was listed as an actuarial concern but also applies internationally
* may decrease innovation, reduce consumer options, increase costs
Arguments for credit scores
SMORe
* * Statistical significance (in predicting expected loss costs)
* Manipulation (credit scores are difficult to manipulate because they are calculated by 3rd part companies, not self-reported)
* Objective (credit scores are based on numerical data)
* Removal (removing credit scores won’t change aggregate premium, provided an off-balance is applied)
* e - nothing
Arguments against use of credit-scoring
FEED
* * Frequency (credit score is correlated only with frequency, not with severity of claims)
* Errors (50% of credit reports have errors, sometimes due to identity theft)
* Economic downturns (downturns in economy may have a disparate credit impact on vulnerable populations)
* Discriminatory (credit scoring may lead to rates that are unfairly discriminatory)
Examples where credit scoring can be unfairly discriminatory
RAMP
* * recent immigrants: may not have access to credit
* age: young people don’t have a long credit history, elderly people use credit less often
* moral/religious beliefs: certain belief systems may discourage use of credit
* poor families: may use cash versus credit (need to use credit to get good score)
Concerns related to UBI
D-TOPIC
Data credibility & manipulation
* will data be credible, especially at early stages of adoption
* digital devices are subject to manipulation by hacking
Transparency
* will consumers understand how their data is used (device is a black box)
Oversight
* is there sufficient regulatory oversight for UBI (device is a black box)
Privacy
* will personal data that’s collected be secure (used only for loss mitigation/pricing, not sold to 3rd parties)
Income level
* lower-income drivers may be disproportionately affected by cost of device
Cost
* cost of device may be significant for middle-income drivers also
5 steps of interactive rating process
RM-PDP
* * Research: by rating 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
3 drawbacks to interactive ratings
TIE
* Time-consuming: requires extensive meetings with senior management
* Intrusive: insurer must provide detailed operational info
* Expensive: insurer must pay for rating agencies to do the interactive ratings
Why do insurers bother with interactive ratings?
USE
* * Unrated insurers: agents are wary of unrated insurers
* Solvency assessment: 3rd parties such as regulators or investors may rely on a rating agency’s assessment
* Efficiency: agents, underwriters, regulators don’t have the expertise to evaluate the financial strength of an insurer
Notes requiring direct involvement by actuaries
CARD+PDR
* Change (incurred loss & LAE)
* Asbestos & environmental reserves
* Reinsurance
* Discounting (unpaid loss & LAE)
* PDR (Premium Deficiency Reserves)
Notes relevant to actuaries
SHIES
* Summary of significant accounting principles
* High deductibles
* Intercompany pooling
* Events subsequent
* Structured settlements
