Odomirok 1-5

Question 1

purpose of financial reporting

Answer 1

to communicate its financial results to the stakeholders (eg policyholders, claimants, investors, directors, management, etc)

Question 2

financial reports help stakeholders & regulators

Answer 2

 Track the company’s financial performance 

Compare the company’s performance 

Make informed financial decisions

Question 3

Insurers in the US are regulated by

Answer 3

state governments

Question 4

National Association of Insurance Commissioners

Answer 4

organization of regulators that coordinates governance (including issuing model laws & regulations)

Each state government has an insurance division, headed by an insurance commissioner. The divisions are assisted by NAIC

Question 5

NAIC adopted

Answer 5

Codification of Statutory Accounting (SAP) in 1/1/01

Question 6

purpose of Codification of SAP

Answer 6

to provide a common set of principles that each state can follow, in order to ease the regulatory burden on companies, and promote consistency

Question 7

SAP rules

Answer 7

state regulators prescribe a set of accounting principles, the Statutory Accounting Principles (SAP)

Since the main focus of the regulators is to ensure that the policyholders will be protected, the SAP rules are usually conservative

Combined with associated monitoring tools, it can provide an early warning of impending financial problems.

Question 8

GAAP

Answer 8

Generally Accepted Accounting Principles

primarily used by investors

The main objective is to present results that closely measure the financial performance during a period. It accomplishes this by matching revenues and expenses

SEC (Securities & Exchange Commission) has assigned FASB (Financial Accounting Standards Board) to develop GAAP rules

Question 9

Because actuaries estimate the financial impact of insurable events, they need to understand certain accounting rules

Answer 9

Issuing a SAO (Statement of Actuarial Opinion): actuaries need to state that the reserves satisfy the insurance laws of the state. They therefore need to be familiar with the accounting rules prescribed by state regulations 

Pricing/ Designing insurance products 

Determining capital requirements 

Evaluating risk transfer of reinsurance contracts 

Assessing the reserve adequacy of non-insurers 

Assisting in the calculation of taxable income 

Valuing insurers in M&A (mergers & acquisitions) transactions

Question 10

Primary Financial Statements

Answer 10

Balance Sheet

Income Statement

Capital & Surplus

Cash Flow

Notes to the Financial Statements

Question 11

balance sheet

Answer 11

this shows the assets and liabilities valued as of a certain point in time (typically 12/31)

Question 12

assets, liabilities, equity

Answer 12

Assets: resources controlled as a result of past events; that have a probable future economic benefit

Liabilities: probable sacrifices of economic benefits due to present obligations as a result of past events

equity: difference between assets and liabilities

Question 13

Income Statement

Answer 13

shows the financial results (income) earned during a period

Question 14

Income, Revenues, Expenses

Answer 14

-Income: difference between revenues and expenses -Revenues: inflows/ enhancements of assets/ settlements of liabilities -Expenses: outflow of assets/ incurrence of liabilities

Question 15

role of the actuary in the preparation of the balance sheet is

Answer 15

value the reserves (which are a significant component of the liabilities)

Question 16

role of the actuary in the preparation of income statement is

Answer 16

estimate the amount & timing of payments

Question 17

Capital & Surplus

Answer 17

provides those transactions that impact surplus, but which are not included in the income statement

Question 18

Cash Flow

Answer 18

shows the cash flows into and out of the firm. This exhibit is not as important in the insurance industry, as insurers rarely face liquidity issues (as the premium is collected before most payments are made).

Question 19

Actuaries are not usually involved in the preparation of this statement.

Answer 19

Cash Flow

Question 20

Notes to the Financial Statements

Answer 20

quantitative & qualitative disclosures elaborating on elements from the statements

Question 21

Key concepts of many of the accounting frameworks include:

Answer 21

Liquidation vs going concern

Fair value vs historical cost

Principle based vs rule based

Question 22

Liquidation vs going concern:

Answer 22

the statements can view the firm as ongoing business (going concern) or as a run-off (liquidation).

Different users will have different perspectives: investors will generally view the firm as a going concern, whereas regulators will be more focused on a liquidation scenario.

Question 23

Fair value vs historical cost:

Answer 23

assets and liabilities are often valued at:

• fair value: value it can be traded at in the open market
• historical cost: purchase price less depreciation

Historical cost is more reliable (objectively verifiable), but fair value is often more accurate (consistent with actual market value).

Question 24

Principle based vs rule based

Answer 24

• principle: a general accounting approach that the users need to interpret
• rule: specific guidance that users need to follow

The rules are easier to interpret, but the principles are more adaptable to changes.