Odomirok 21

Question 1

List 2 reasons measurement tools are very useful:

Answer 1

1. The results of a tool may indicate the need for further
   investigation (either via evaluation of other tools, or inquiry
   of management)
2. When multiple tools are used together over a period of
   several years, they can provide an early warning of “high
   risk” insurers

Question 2

The statutory financial statements provides what 2

views of financial health of the insurer:

Answer 2

• Balance sheet strength: ensure that the insurer can pay its claims
• Earnings potential

Question 3

List some financial statements that can be used to

assess loss reserve adequacy:

Answer 3

-Five year historical data exhibit: shows how losses have
developed over time
-Notes to the financial statements: includes management’s discussion about changes in the incurred losses.
-Schedule P, Parts 2-4: provides data to perform tests of reserve adequacy
-Schedule F, Part 3 (& Notes): loss reserves are net of reinsurance, so the reinsurance collectability does have an
impact on reserve adequacy.

Question 4

How can the accident year loss & LAE ratios help regulators assess the adequacy of unearned premium reserves.

Answer 4

If ratios exceed 100%, it is possible that the unearned premium is insufficient to cover future losses that will emerge.

Question 5

What factors should the regulators consider regarding
the investable assets when considering the balance
sheet strength:

Answer 5

-Changes in investable asset values and yields on invested
assets should be monitored
-If the insurer generally invests in riskier assets than
the industry average, the regulators should assess the
effectiveness of their hedging practices

Question 6

What may large growth in written premium during a
soft market (underwriting cycle), as indicated by the
Five-Year Historical Data exhibit suggest:

Answer 6

The insurer may be making concessions on rate or commission.

Question 7

Where can a user of the financial statements see

deteriorating loss ratios:

Answer 7

Five-Year Historical Data exhibit (calendar year) or Schedule P (accident year).

Question 8

Where can a user of the financial statements see

increased exposure to catastrophic/ large events:

Answer 8

Writings by state in Schedule T; or by line of business in the
Underwriting & Investment Exhibit. General interrogatories,
Part 2 provides details about the probable maximum loss,
and the provisions that had been implemented to protect the company against such a loss

Question 9

Provide some examples of poor decision making that

have lead to insolvencies:

Answer 9

• little or no reinsurance
• insuficient reinsurance for the amount of risk
• very rapid premium growth
• significant adverse development
• inadequate pricing
• serious data problems