Notes to FSs

Question 1

Purpose to Notes to financial statements

Answer 1

Purpose = provide additional qualitative or quantitative info that may provide a more complete picture of the insurer’s financial condition

Question 2

why is it important to elaborate on reinsurance transactions

Answer 2

bc have material impact on financial statements

Liab and income are net of reins

Surplus is impacted by reins

Question 3

disclosures about reinsurance necessary

Answer 3

bc reins generates credit risk so note can be used to assess level of credit risk as it provides details about unsecured recoverables, disputed balances, uncollectible recoverables

Question 4

unsecured reins recoverables (A)

Answer 4

need to disclose info about reinsurers that don’t provide collateral if recoverables from reinsurer exceed 3% of ceding company’s surplus; show potential credit risk of recoverables

Question 5

-reinsurance recoverables in dispute (B)

Answer 5

formal written letter is required to classify a recoverable as being in dispute; note can be used to identify credit risk and insurers that try to over recover

-regulators concerned with reins amnts in dispute: credit risk, insurers may be trying to artificially increase their surplus by overstating reins recoverable, ceding comp may avoid having reinsurer listed as slow-paying by considering some of recoverables to be in dispute

Question 6

reinsurance assumed & ceded (C)

Answer 6

info about ceding commissions related to ceded UEPR, necessary to disclose this as commissions are treated as revenue and therefore increase surplus; help identify situations where insurer is engaging in reins contracts with comm designed to manipulate surplus and derive impact to surplus if policies are cancelled

Question 7

uncollectable reins (D)

Answer 7

describes recoverables that were written off during yr because considered uncollectible, written off as expense; could refer to this when determining whether prov for reins is sufficient

Question 8

commutation of ceded reins (E)

Answer 8

commutation is settlement btw insurer and reinsurer to discharge all remaining obligations; note discloses commutation that took place during yr; commutations distort financial statements because payment is neg paid loss and loss reserve is increased; consideration will increase assets and reserves will increase

Question 9

retroactive reins (F)

Answer 9

covers liab that occurred prior to effective date of policy; ceded reserves are recorded as neg write in contra liab & consideration paid reduces assets in BS and any gain (diff btw ceded reserves and prem paid) is recorded as other income in IS and special surplus in BS; info can be used to verify insurer is approp accting for retroactive reins and better understand its impact

Loss reserves unaffected by transaction

Question 10

reins accounted for as deposit (G)

Answer 10

if accounted for deposit or liab, will not impact UW income; statement should include schedule that shows hist change to deposit/liab balance since inception of contract

Question 11

disclosures for transfer of P&C run-off agreements (H)

Answer 11

transfer to 3rd party of risk from line that is no longer actively marketed by insurer; accounted for differently to trad retro reins contract: consideration paid is recorded as paid loss and reserves transferred recorded as contra liab

Question 12

Change in Incd Loss & LAE

Answer 12

discloses changes in estimates for loss and LAE from prior AY

• lists amount of change, segments that lead to change, and reason for change
• important bc changes can distort curr yr UW income and recurring material changes may indicate that there are issueswith reserving process and user need to refer to SchedP or 5-yr historical data exhibit

Question 13

Premium Deficiency Reserves

Answer 13

insurer has option about whether to give credit for investment income when calc deficiency

• 2 ways to account for deficiency: establish write-in liab or reflect as part of UEPR
• if 2^nd used, only way to know it exists is by referring to Notes
• need to disclose size of deficiency and whether investment income was considered

Question 14

Discounting of Liab for Unpaid Loss & LAE

Answer 14

tabular and non-tabular discounting

• tabular are based on interest rate and mortality assumptions from life tables; apply to annuity claims that pay pension benefits; typically applied to specific claims; note discloses whether tabular used and if so basis and assumptions
• non-tabular mainly used when insurer receives permission from state regulator; often applied to aggregate reserves and are based on projected payment pattern and assumed discount rate; note discloses whether non-tabular used and if so the basis for discount
• note requires disclosure if there has been change since prior yr of key assumptions used to calc discount
• reasons for familiarity with note: diff companies use diff discounting practices, use of non-tabular discounts is sign that regulator possibly may have solvency concerns, and discounting is disclosed and described in SAO

Question 15

Asbestos/Environmental Reserves

Answer 15

need to disclose potential exposure bc reserves from these exposures have developed adversely over past few decades and lot of uncertainty assoc with reserves

• policies designed to cover exposure do not need to be disclosed
• disclose LOB affected, nature of exposures, and reserving methods
• table provided containing beginning&ending reserves, loss incd, and paid during CY separately for asbestos and environmental and separately for direct, assumed and net for past 5 CY years
• valuable because discloses presence of exposure to asbestos and environ loss, magnitude of exposure, and recent devel of exposure

Question 16

Summary of Sign Accounting Policies

Answer 16

describes source of accounting rules used to construct AS, any exceptions that were made to rules and basis for, and add detail on sign accting policies

Question 17

Events Subsequent

Answer 17

includes events that occur btw accting date of statement and date statement issued; recognized=conditions that existed @ accting date and non-recognized=events that did not exist @ accting date

is disclosed and described in SAO

Asbestos/Environmental Reserves: need to disclose potential exposure bc reserves from these exposures have developed adversely over past few decades and lot of uncertainty assoc with reserves

• policies designed to cover exposure do not need to be disclosed
• disclose LOB affected, nature of exposures, and reserving methods
• table provided containing beginning&ending reserves, loss incd, and paid during CY separately for asbestos and environmental and separately for direct, assumed and net for past 5 CY years
• valuable because discloses presence of exposure to asbestos and environ loss, magnitude of exposure, and recent devel of exposure
• Notes that may be relevant*

Summary of Sign Accounting Policies: describes source of accounting rules used to construct AS, any exceptions that were made to rules and basis for, and add detail on sign accting policies

Events Subsequent: includes events that occur btw accting date of statement and date statement issued; recognized=conditions that existed @ accting date and non-recognized=events that did not exist @ accting date

• recognized disclosure only needed if it would prevent the statements from being misleading and non-recognized described only if they may have material effect on financial condition of company
• important for SAO bc need to decide whether events are material to loss reserve estimates

Question 18

Intercompany Pooling

Answer 18

regulators want to understand arrangement so can assess solvency of aggregate group; arrangement can impact AS – UW & Investment Exhibit, Schedule F, Schedule P

Question 19

High Deductibles

Answer 19

loss reserves are held net of portion within deductible so important to disclose this arrangement in notes as credit risk exists; must disclose reserve credit recognized for unpaid claims and amount billed but not yet collected for paid claims

Question 20

pooling treatment in schedules

Answer 20

-schedule F uses pooling % based on CY and schedule P restates data to use current pooling % for intercompany pooling