Odomirok Ch 10: Notes to Financial Statements

Question 1

purpose of the Notes to the Financial Statements

Answer 1

provide additional qualitative or quantitative information that may provide a more complete picture of the insurer’s financial condition.

Question 2

What notes require direct involvement from actuaries?

Answer 2

• Reinsurance:
• Changes in incurred losses & LAE
• Premium deficiency reserves
• Discounting of liabilities for unpaid loss & LAE
• Asbestos/ environmental reserves

Question 3

What notes are potentially relevant to actuaries?

Answer 3

• Summary of significant accounting policies
• Events subsequent
• Intercompany pooling
• Structured settlements
• High deductibles

Question 4

What disclosures does the insurer need to make about unsecured reinsurance recoverables:

Answer 4

If the recoverables from the reinsurer exceed 3% of surplus, disclose:

• Name
• Paid losses billed but not yet collected
• Ceded reserves
• Ceded unearned premiums

Question 5

List some questions the actuary may have if the insurer has material credit risk exposure to a reinsurer:

Answer 5

• Why wasn’t security provided?
• Are there concerns about the financial health of either the insurer or reinsurer?
• Was the large amount of recoverables caused by a catastrophe?
• Are all of the unsecured recoverables concentrated with one reinsurer?

Question 6

List 2 uses of the Disputed balances note:

Answer 6

1. Identify credit risk

2. Identify insurers that try to over recover from reinsurers

Question 7

List some questions that the actuary may have about the disputed balances:

Answer 7

• What is the issue causing the disagreement?
• Is the disputed amount material to either the reinsured or reinsurer?
• Are there legal opinions available?

Question 8

Reasons that users would be interested in the Reinsurance Assumed & Ceded note:

Answer 8

• Identify situations where the insurer is engaging in reinsurance contracts with commissions designed to manipulate its surplus
• Helps derive the impact to surplus if the policy(s) are cancelled

Question 9

List some questions that the actuary may have about the Uncollectible Insurance note:

Answer 9

• Why is the reinsurance uncollectible?
• Is there other outstanding recoverable that may also be uncollectible in the future for similar reasons?
• How long has it taken the company historically to write off the uncollectible reinsurance that had been disclosed in the notes?

Question 10

Define a commutation:

Answer 10

Settlement between an insurer and reinsurer to discharge all remaining (present & future) obligations.

Question 11

Describe 2 ways in which commutations will distort the financial statements:

Answer 11

1. The payment from the reinsurer is a negative paid loss
   (income statement)
2. The loss reserve is increased (balance sheet)

Question 12

Describe the accounting treatment of retroactive reinsurance:

Answer 12

• The ceded reserves are recorded as a negative write in item in the balance sheet
• Any gain is recorded as other income in the income statement and special surplus in the balance sheet

Question 13

Required disclosures in the Notes about retroactive reinsurance:

Answer 13

• Reserves transferred
• Consideration paid
• Paid losses reimbursed
• Special surplus generated
• The reinsurers involved

Question 14

Reason it is important to disclose retroactive reinsurance:

Answer 14

Helps verify that the insurer is appropriately accounting for the retroactive reinsurance, and to better understand its impact.

Question 15

What do the Notes need to disclose about reinsurance accounted for as a deposit:

Answer 15

Include a schedule that shows the historical change to the deposit/ liability balance since the inception of each contract.

Question 16

What does the Change in Incurred Loss & LAE note disclose:

Answer 16

• Amount of the change
• Segments/ lines that lead to change
• Reason for the change

Question 17

Reasons the Change in Incurred Loss & LAE note is important:

Answer 17

• Changes can distort the current years underwriting income

- Recurring material changes may indicate that there are issues with the reserving process.

Question 18

2 reasons that Premium deficiencies are rare:

Answer 18

• Most policies charge sufficient premium to cover the expected losses & expenses
• A particular segment within a group that has a deficiency may be offset by the surplus of another segment

Question 19

2 ways to account for premium deficiency:

Answer 19

• Establish a write-in liability

- Reflect as part of the UEPR

Question 20

What does the insurer need to disclose about premium deficiencies in the Notes:

Answer 20

• The size of the deficiency

- Whether investment income was considered

Question 21

What does the insurer disclose about discounting in the notes:

Answer 21

• Whether it uses tabular discounting
• Basis & assumptions supporting tabular discounts
• Whether it uses nontabular discounting
• Basis & assumptions supporting nontabular discounts
• Whether there has been a change since the prior year of any of the key assumptions that were used to calculate the discount.

Question 22

Provide some reasons why the actuaries should become familiar with the Discounting note:

Answer 22

• different companies use different discounting practices, and the actuary will therefore need to know the details in order to make comparisons
• The use of non-tabular discounts is a sign that the regulator possibly may have solvency concerns about the insurer
• The actuary has to disclose & describe discounting in the SAO

Question 23

2 reasons that it is necessary to disclose the potential asbestos/ environmental exposure:

Answer 23

1. The reserves have developed adversely over the last few decades
2. There is a lot of uncertainty associated with the reserves

Question 24

What does the insurer need to disclose about the asbestos/ environmental exposure in the Notes:

Answer 24

• Lines of business affected
• Nature of the exposures
• Reserving methodology
• Table that contains for each of the past 5 years: Beginning loss & LAE reserves/ Incurred loss & LAE/ Calendar year payments for losses & LAE/ Ending loss & LAE reserves
• Pure IBNR.

Question 25

What is described in the Summary of Significant Accounting Policies note:

Answer 25

• The source of the accounting rules used to construct the Annual Statement (typically the NAIC Accounting Practices & Procedures Manual)
• Any exceptions that were made to the above rules, and the basis of the exceptions
• Additional detail on the insurers significant accounting policies

Question 26

Define Type 1 (Recognized Subsequent Events):

Answer 26

Events that provide additional detail on conditions that existed at the accounting date

Question 27

How should Type 1 Events be accounted for:

Answer 27

These events should already be reflected in the financial statements, as the statements are meant to include all known information about the conditions that existed at the accounting date, as of the dates the statements are issued.
Disclosure will only be needed in the event that it would prevent the statements from being misleading.

Question 28

Define Type 2 (Non-recognized Subsequent Events):

Answer 28

Events that did not exist at the accounting date

Question 29

What do the Notes disclose about intercompany pools:

Answer 29

• Members of the pool
• Lead company
• Pooling percentage of each participant

Question 30

What do the Notes disclose about Structured Settlements:

Answer 30

• Total amount of the structured settlement payments for which the insurer could be held liable
• In the event where the remaining payments from a single life insurer exceeds 1% of surplus, the name of the life insurer and associated remaining payments

Question 31

What do the Notes disclose about High Deductible policies:

Answer 31

• The reserve credit that the insurer has recognized for the unpaid claims
• The amount billed but not yet collected for the paid claims