Notes to Financial Statements

Question 1

notes to financial statements requiring direct actuary involvement (5)

Answer 1

• reinsurance
• changes in incurred loss and LAE (prior AYs)
• premium deficiency reserves
• discounting of unpaid loss and LAE
• asbestos/environmental reserves

Question 2

sections of reinsurance note (9)

Answer 2

• A: unsecured reinsurance recoverables (if > 3% of surplus)
• B: reinsurance recoverables in dispute
• C: reinsurance assumed and ceded (including info on ceding commissions)
• D: uncollectible reinsurance
• E: commutation of ceded reinsurance
• F: retroactive reinsurance
• G: reinsurance accounted for as a deposit
• H: transfer of runoff agreements
• I: certified reinsurer rating downgraded or status subject to revocation

Question 3

accounting for retroactive reinsurance

Answer 3

• net loss reserves not reduced; separate write-in on balance sheet
• any gain recorded as other income and as restricted special surplus

Question 4

accounting for transfer of runoff agreements

Answer 4

• amount paid by the transferring insurer is recorded as a paid loss
• if less than the loss reserves transferred, the difference is recorded as a decrease in losses incurred

Question 5

sections of reinsurance note that identify potential credit risk, and follow-up questions (4)

Answer 5

• A: unsecured reinsurance recoverables (if > 3% of surplus); why wasn’t security provided? are there concerns with financial health of reinsurer? did a catastrophe lead to a large amount of recoverables?
• B: reinsurance recoverables in dispute; what is point of disagreement? is disputed amount material? are there legal opinions available?
• D: uncollectible reinsurance; why uncollectible? could other recoverables become uncollectible? how long did it take to write off?
• I: certified reinsurer rating downgraded; why downgraded? why wasn’t additional collateral provided?

Question 6

disclosures for changes in incurred loss and LAE (3)

Answer 6

• amount of change
• segments or LOBs leading to change
• reason for change

Question 7

disclosures for premium deficiency reserve (2)

Answer 7

• amount of deficiency

* whether investment income was considered

Question 8

disclosures for discounting of unpaid loss and LAE (2)

Answer 8

• whether discounting is used

* if so, basis and assumptions

Question 9

disclosures for asbestos/environmental reserves (3)

Answer 9

• whether there is potential exposure to asbestos or environmental liabilities
• portion of reserves related to unreported claims
• beginning reserves, incurred losses and LAE, calendar year payments, and ending reserves on direct, assumed, net bases for past 5 years

Question 10

why note about changes in incurred loss and LAE is crucial to assessing financial health (2)

Answer 10

• material changes in prior AYs could mask true loss experience of current year
• recurring material changes in prior AYs could indicate a problem with the reserving process