Odomirok 6 to 7

Question 1

Annual Statement

Answer 1

(the “Blank”) the publicly available document in which insurers report their financial results to the state regulators in the US. It is developed/ maintained by the NAIC, and has been adopted by all states.

Question 2

Jurat Page

Answer 2

The first page of the annual statement; contains basic information about the insurer, including its:

• Name
• NAIC code
• Address
• Name & title of preparer
• Officers

Question 3

Actuaries are involved in both the creation and use of the balance sheet. For instance:

Answer 3

• The actuaries play a big role in determining the reserves
• The balance sheet provides some of the data used to assess the adequacy of
  capital. It also contains the surplus balance

Question 4

Cash & invested assets vs Non invested assets

Answer 4

Cash & invested assets are more liquid. This distinction is important given that the statutory accounting is focused on solvency. Cash & invested assets can be found in Rows 1-12 of the Assets page, and Non invested assets in Rows 13-25.

Question 5

Admitted vs nonadmitted assets

Answer 5

displayed in separate columns in the balance sheet. Non admitted assets are not easily convertible to cash to satisfy the insurer’s liabilities (now or in the future), and are therefore not included in the surplus.

Question 6

Bond

Answer 6

an instrument that in return for an initial principal payment, makes interest payments during the term, and returns the principal at maturity.

Question 7

Schedule D

Answer 7

A schedule in the annual statement; contains details of the bonds held by the insurer, including:
- Type of issuer (federal, state, corporate)- Maturity- NAIC Class (rating)

Question 8

Stocks

Answer 8

Instruments that represent an ownership share in a company

Question 9

Common stocks

Answer 9

Provide voting rights, and possible dividends. They are subordinate to bondholders and creditors to receiving money in the event of a liquidation.

Question 10

Preferred stocks

Answer 10

Do not offer voting rights, but do guarantee dividends. The owners of preferred stocks have priority to those of common stocks to receive a return of their investment during a liquidation.

Question 11

Stock concerns

Answer 11

Regulators will typically be concerned if the insurer has a relatively high holding of stocks, since they have volatile values.

Question 12

Schedule A

Answer 12

A schedule in the annual statement; contains details of the real estate transactions & holdings.

Question 13

Valuation rule: Properties occupied by the company

Answer 13

(need to occupy at least 50%) Depreciated cost - Encumbrances (think of encumbrance as the outstanding amount of the loan)

Question 14

Valuation rule: Properties held for the production of income

Answer 14

Depreciated cost - Encumbrances

Question 15

Valuation rule: Properties held for sale

Answer 15

min(Depreciated cost, Fair value) - Encumbrances

Question 16

Cash, cash equivalents and short-term investments

Answer 16

Assets that are immediately convertible to cash

Question 17

Schedule E-1

Answer 17

A schedule in the annual statement; contains details about cash

Question 18

Schedule E-2

Answer 18

A schedule in the annual statement; contains details about cash equivalents (original maturity under 3 months)

Question 19

Schedule DA

Answer 19

A schedule in the annual statement; Contains details about short-term investments (original maturity under one year)

Question 20

Uncollected premiums & agents’ balances

Answer 20

written premium balances not yet received, but due before the financial statement date; also include unpaid installment premiums

Question 21

Deferred premiums

Answer 21

written premium balances not yet received, but due after the financial statement date; also include unpaid installment premiums

Question 22

What type of asset is premium over 90 days overdue?

Answer 22

Nonadmitted

Question 23

Impaired asset

Answer 23

a bad debt; insurer should treat all premium that it believes that it will not collect as impaired.

Question 24

Amounts recoverable from Reinsurers

Answer 24

The balances due from reinsurers for the losses that have been paid. (The ceding company recognizes recoverables on its unpaid losses by holding the loss reserves net of recoveries.)

Question 25

Schedule F

Answer 25

A schedule in the annual statement; Contains details about expecting reinsurance recoveries (on both paid and unpaid losses)

Question 26

Net deferred tax assets (DTA)

Answer 26

Deferred tax asset refers to future tax benefits that arise due to temporary differences in income recognition between tax and statutory accounting. A “Net DTA” is recognized in the Balance Sheet, which nets out any Deferred Tax Liability (DTL) that may exist. (The Balance Sheet will contain EITHER a DTA or DTL. It will not contain both.

Question 27

Two common sources of DTAs include:

Answer 27

• Loss reserves are discounted in tax accounting, but undiscounted in SAP accounting. Under tax accounting, the discounting will reduce over time, generating an incurred loss, and reducing the tax due. The DTA accounts for this future reduction.
• Carryforward net operating losses from prior years: this occurs when the insurer has net operating losses in one year, and expects these to offset future gains, and therefore future taxes.

Question 28

Receivables from Parent, Subsidiary & Affiliates

Answer 28

Often arise when the affiliates share services or resources. Should be concerned about significant amounts in this line item, as they are usually not as liquid or available as other assets. In particular, should look at the source of the receivables and the portion that are paid on time.

Question 29

Other nonadmitted assets

Answer 29

-Investments in bonds, stocks, mortgage loans or real estate that exceed any state limitations.
-Investments in electronic data processing equipment (EDP) & software that exceed the set limits
- Furniture, equipment, and supplies
- Balances due from an agent from sale of a security, overdue by over 15 days from settlement
- Funds held at a reinsured company that exceed the associated liabilities
- 10% of deductibles recoverable in excess of collateral
User should investigate further if insurer has large portion in nonadmitted assets.

Question 30

Loss & Loss Adjustment Expense Reserves

Answer 30

The reserves should be booked at management’s best estimate. In the case where management has a range of estimates, and no point within the range is more likely, the midpoint should be booked.

Question 31

Reinsurance Payable on Losses & LAE

Answer 31

Includes liabilities for amounts owed to reinsureds for losses that they have already paid. liabilities for loss & LAE unpaid by the ceding company are held in the assuming entity’s Loss & LAE reserves)

Question 32

Other expenses (excluding taxes, licenses & fees)

Answer 32

Expenses that have been incurred but not paid.

Question 33

Two main categories of expenses

Answer 33

• LAE

- Underwriting and investment expenses

Question 34

Underwriting & Investment Exhibit (U&IE) Part 3

Answer 34

Exhibit in annual statement that contains details on expenses. Broken into 3 categories: LAE, Other underwriting expenses, and investment expenses.

Question 35

Unearned premiums

Answer 35

The portion of the premium that is yet to be earned.

Question 36

Daily pro rata method

Answer 36

Used for calculating unearned premiums; based on number of days of the policy that have expired.

Question 37

Monthly pro rata method

Answer 37

Assumes that premiums are written evenly through each month. Of the premium written within a certain month: 1/24 is earned that month, 1/12 is earned over the next 11 months, and 1/24 is earned in the following (13th) month. This method uses less data & calculations than the daily method.

Question 38

Additional UEP detail in U&IE

Answer 38

• Amount unearned (1 yr or less from the effective date of the policy)
• Amount unearned (over 1 yr from the effective date of the policy)
• Earned but unbilled premiums (EBUB): arises from polices that are subject to exposure audit (in order to book EBUB, it needs to be reasonably estimable in aggregate)
• Reserves for rate credits & retrospective adjustments based on experience

Question 39

Premium deficiency reserve

Answer 39

A separate liability created if the premium is insufficient to cover losses, expenses & other costs.

Question 40

Ceded Reinsurance Premiums Payable

Answer 40

Need to be recorded net of any commission from the reinsurer that covers the ceding company’s expense.

Question 41

Funds held under Reinsurance Treaties

Answer 41

Arise when the insurer is holding funds from the reinsurer as collateral

Question 42

Provision for Reinsurance

Answer 42

Provision for reinsurance recoverables that may not be collectible

Question 43

Surplus

Answer 43

The difference between assets and liabilities

Question 44

Common Capital Stock

Answer 44

Line item for the par value of the insurer’s stock that is issued and outstanding. Not material for most insurers as the par value is often set low.

Question 45

Par value

Answer 45

The minimum amount set by the insurer at which the stock can trade at its initial offering.

Question 46

Gross Paid in & Contributed Surplus

Answer 46

Line item that is generated when the insurer issues stock. It equals the excess of the sale price of stock over its par value.

Question 47

Unassigned funds

Answer 47

Line item that results from the contribution of retained earnings to surplus. Mutual insurers surplus consists primarily of Unassigned Funds, as they do not issue shares.