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Exam 6 > Part 11 (SSAPs) (*) > Flashcards

Part 11 (SSAPs) (*) Flashcards

Statement of Statutory Accounting Principles

1
Q

SSAP 5 Purpose

A

Establish Accounting Principles for:
Liabilities
Contingencies
Impairment of Assets

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2
Q

Liabilities 3 essential components

A
  1. Present Responsibility to transfer assets at a specified date based on the occurrence of a specified event
  2. Entity cannot avoid the responsibility
  3. Event that obligates the entity has already occurred
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3
Q

Where are liabilities recorded when incurred

A

The Balance Sheet

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4
Q

The 3 types of contingencies

A

Probable: Likely to occur
Reasonable Possible: Change is more than remote, but less probable
Remote: The chance is low

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5
Q

To recognize a loss from a contingency what conditions need to be met?

A
  1. Information prior to the issuance of the financial statements indicate the assets have been impaired at the date of the financial statements.
  2. Amount of loss can be reasonably estimated
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6
Q

Amount of loss from contingency, how to estimate if:
- established range where a particular amount is a better estimate than the others in the range
- no amount in the range appears to be better than the others
- Several point estimates that have equal probabilities and do not form a range
- No range, or no high end of range

A
  • Choose the best estimate
  • Choose the midpoint
  • Have management determine the best estimate
  • Best estimate should be booked
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7
Q

Joint & Several Liabilities reported as

A

Sum of
- The amount the insurer agreed to pay based on its agreements with the co-obligators
- Any additional amount the insurer expects to pay on behalf of its co-obligors

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8
Q

What should the estimate be for additional amount the insurer expects to pay on behalf of co-obligors if there is a range

A

Choose the better estimate, otherwise if none, choose the midpoint

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9
Q

Disclosures for SAP 5 are required if what things happen

A

Joint & Several Liability arrangement applies
Contingency/Asset Impairment was not recognized to the fuller extent
Contingency involving an unasserted claim applies
Guarantee has been made

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10
Q

Joint & Several Liability arrangement disclosures

A
  • Nature of Agreement
    • How the liability arose
    • Relationship with co-obligors
    • term and conditions of arrangement
  • Total outstanding amount under the arrangement
  • Carrying amount of the liability of the insurer, and of any receivable recognized
  • Any recourse provisions that would enable recovery from other entities
  • Period where liability was initially recognized and measured
    • Corresponding entry
    • Where entry was recorded in financials
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11
Q

Contingency Impairment disclosures

A
  • Nature of the contingency
  • Estimate of the possible loss or a statement that such an estimate can not be made
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12
Q

Guarantee disclosures

A

nature and amount of guarantee, even if remote chance

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13
Q

When can a statement be considered “issued”

A

When they are widely distributed to shareholders and other users for general use, in a form and format that complies with SAP

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14
Q

Recognized Subsequent Events

A

Conditions that existed at the date of the balance sheet

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15
Q

What needs to be adjusted for Recognized Subsequent Events
(do we need to disclose the nature and amount of adjustment?)

A

Financial statements need to be adjusted to reflect the impact of material Type 1 (Recognized Subsequent) events

(only disclose the nature and amount of the adjustment if this will keep the financial statements from being misleading)

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16
Q

Nonrecognized Subsequent Events

A

conditions that did not exist at the date of the balance sheet

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17
Q

What needs to be adjusted for Nonrecognized Subsequent Events

A

The impact of material Type 2 events is not included in the financial statements.

But in the Notes it should be disclosed
- Nature of event
- Estimate of its financial impact, or a statement that the estimate cannot be made

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18
Q

What is the purpose of SSAP 9

A

elaborates on “Subsequent Events” and non recognized subsequent events

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19
Q

What is the purpose of SSAP 53

A

elaborates on Premiums

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20
Q

For a majority of contracts, when should written premium be recorded.

What is the exception?

A

WP should be recorded on the effective date of the policy

Exception is Worker’s Compensation contracts that can be billed in Installments. Recorded on installment basis

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21
Q

When premium is recorded what else should be created

A

an Unearned Premium Reserve liability (UEPR)
this accounts for the portion of the coverage which has not yet expired

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22
Q

How is premium recognized in most cases and why.

A

Recognized evenly throughout the duration of the policy.
Because exposure to risk in P&C contracts are fairly constant over the policy period.

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23
Q

2 ways UEPR can be calculated

A

Daily pro rata methods
Monthly Pro rata methods

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24
Q

Daily pro rata methods

A

The unexpired portion of premium is determined by comparing the number of days which have elapsed to the number remaining

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25
Q

Monthly pro rata methods

A

assumes the same amount of business is written on any day of the month. The mean will be written in the middle of the month. 1/24 earned in month written, 3/24 in next, and so on, until 1/24 to finish off payment.

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26
Q

How are flat fees reported

A

Not as premium but instead in “Other Income”

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27
Q

When can flat fees be reported as premium

A
  • If the insurance policy can be cancelled for non payment of the fee
  • The fee is refundable in the event that the policy is cancelled

Otherwise recorded in Other Income

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28
Q

Earned but Unbilled Premium (EBUB)

A

Amount of the adjustments to premium due to changes in the level of exposure

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29
Q

When does EBUB show up

A

When policies have their exposures subject to audit

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30
Q

How to show EBUB before and after audit

A

Before: Estimate EBEB, prem revenue is modified by the level of this estimate

After: EBUB adjusted to reflect the actual exposures. Adjustment recognized as revenue immediately.

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31
Q

What is recorded as nonadmitted for EBUB

A

10% of EBUB in excess of the collateral held

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32
Q

What to do if EBUB in excess of collateral is not anticipated to be collected

A

Write it off

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33
Q

Earned but Uncollected Premiums, what to establish as right away

A

Direct and assumed written premium

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34
Q

If later Earned but Uncollected Premiums is determined to be uncollectible, how to establish

A

Charged to expenses “net gain or (loss) from agents or premium balances charged off”

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35
Q

What are Advance Premiums

A

Premiums paid prior to the effective date of the policy

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36
Q

How are advance premiums recorded

A

As a liability, since not considered income until due

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37
Q

Prepaid Legal Expense PLans

A

(An insurance plan that will cover certain legal expenses that may arise in future) Recognize as income when due from the policyholder but not prior to the effective date of the policy

38
Q

Prepaid Deficiency Reserve, when does it exist

A

When anticipated losses, LAE, commissions & other acquisition costs and maintenance costs
associated with the unearned portion of the premium exceed the UEPR

39
Q

What to disclose for PDR

A

Disclose the amount of the Prem Deficiency Reserve

40
Q

What can be considered in the calculation of the deficiency for PDR

A

Investment Income (this is optional)

41
Q

What does it need to disclose if investment income is considered in calc of PDR

A

Disclose that investment income was considered (doesn’t have to disclose the dollar amount)

Disclose this even if deficiency is eliminated after the consideration of

42
Q

What is the purpose of SSAP 55

A

establish statutory accounting principles for creating liabilities for unpaid claims and claim adjustment expenses (LAE)

43
Q

Whan an insured event occurs what are losses and LAE recognized as

A

An Expense

44
Q

When an insured event occurs, what needs to be liabilities need to be established, and what corresponding charge needs to be recognized

A

Unpaid Losses (loss reserves) and unpaid LAE (LAE reserves).

Recognize a corresponding charge to income

45
Q

When establishing liabilities what needs to be considered

A
  • Reported losses
  • IBNR (incurred but not reported, reported but not recorded, and bulk reserves)
  • LAE (DCC and A&O)
46
Q

Liability for unpaid LAE should be gross of what, and why?

A

any payments to third party administrators or management companies

Results in more meaningful financial statements

47
Q

Estimating Loss Reserves and Salvage and Subrogation

A

Range, pick best estimate or midpoint

48
Q

Disclosures for SSAP 55

A
  • Liabilities at beginning and end of each year
  • Incurred Losses and LAE (current year balances and changes from prior accident years)
  • Loss & LAE payments (current and prior accident years)
49
Q

What is the purpose of SSAP 63

A

Establishing SAP accounting principles for underwriting pools and associations

50
Q

3 categories of underwriting pools and associaitions

A

Involuntary
Voluntary
Intercompany

51
Q

Involuntary pools

A

For parties who would otherwise be unable to obtain coverage

52
Q

Voluntary

A

Similar to Involuntary but not state mandated

  • Typically for providing greater capacity for risks with exceptionally high levels of insurable values
53
Q

Intercompany

A

pooling among affiliated entities that are subject to a pooling arrangement

  • Typically involves a quota share where all pooled business is ceded to lead entity, and then is retroceded to the other participants
54
Q

Participation in pools may be on a joint & several basis

A

Basically if a company can’t pay, it gets allocated to the other companies

There may be ways for the other companies to get their money back from the company who didn’t

55
Q

2 general structures for Pools

A

One or more participants acts as servicing carriers, taking care of admin duties

A pool manager performs the admin services in return for payment

56
Q

How should the participant’s share of items be recoreded

A

Premiums, Losses, and expenses

should be recorded separately

57
Q

Equity interests in & Deposit receivables from a pool are what, and need to be recorded how related to pool’s underwriting results

A

admitted assets

reported separately from receivables & payables that are related to the pool’s underwriting results

58
Q

Occurrence Policies cover losses which…

A

occur during the policy period

59
Q

Claims made covers losses which…

A

reported during the policy period

60
Q

What is used to prevent duplicate coverage and reduce premium costs when an occurrence policy and claims made policy overlap

A

A retroactive date for the claims made policy

61
Q

What endorsement for CM policy covers events occured during policy period but reported after termination of policy

A

Tail Coverage

62
Q

Accounting treatment for Tail coverage if Indefinite period

A

Premiums should be fully earned at inception of the tail contract
Liabilities for unreported claims should be recognized immediately

63
Q

Accounting treatment for Tail coverage if Fixed Period

A

Premium should be earned over the length of the policy term
UEPR needs to be established to account for the unexpired portion
Losses should be recorded when reported

64
Q

When are tabular discounts used for reserves

A

When there are fixed and reasonably determinable payment patterns for reserves

65
Q

What disclosures need to be made when using tabular discounts

A
  • Tables used
  • Rates used
  • Discounted liability
  • amount of tabular discount (by line and reserve category)
  • amount of interest accretion (recognized in income statement)
  • the line in income statement in which the interest accretion is classified
66
Q

Accounting for structured settlements if the insurer is owner and payee

A
  • No reduction to loss reserves
  • Annuity is recorded as an “other than invested asset” at its present value
  • Income from the annuity is recorded as miscellaneous income
67
Q

Accounting for structured settlements if the claimant is the payee

A
  • loss reserves can be reduced
  • cost of the annuity is recorded as a paid loss
68
Q

What needs to be disclosed when entering into a structured settlement

A
  • amt of reserves which the company no longer needs to carry (bc it has purchased annuities with the claimant as payee)
  • extent to which it is contingently liable for the liabilities
  • If aggregate value of annuities exceeds 1% of the surplus
    • Name and location of the insurer
    • aggregate value of annuities
    • if the life insurer is licensed in the insurer’s state of domicile
69
Q

Long duration policy requirments

A
  • policy term >= 13 months
  • reporting entity can neither cancel the contract nor increase the premium
70
Q

UEPR for long duration policy 3 tests for the 3 most recent years (must be what than the 3?)

A

Larger than largest of the following 3 tests

  1. Management’s best estimate of the amounts refundable to the contract holders at the reporting date
  2. Gross premium * projected future gross loss & expense from unexpired term / projected total gross loss & expense
  3. Projected future gross loss & expense from unexpired term - PV of future guaranteed gross prem
71
Q

UEPR for long duration policy for years prior to the most recent 3 years

A

no less than the large of the aggregate results of tests 1,2,3 taken over all those years (tests are done on the prior years in aggregate)

72
Q

If the insurer does not hold collateral what is the nonadmitted value of recoverables

A

Deductible recoveries that are over 90 days overdue are nonadmitted

73
Q

If the insurer does hold collateral what is the nonadmitted value of recoverables

A

10% of the deductible recoverable in excess of collateral is nonadmitted

If amounts in excess of the 10% are deemed uncollectible, they should be nonadmitted as well

74
Q

Disclosures of recoverables for high deductibles

A
  • Loss reserves gross of high deductible, by line of business
  • reserve credit from the high deductible recoveries due to the insurer for unpaid claims by the insurer
  • for Paid claims by the insurer
    • paid recoverable over 90 days overdue
    • nonadmitted amounts
  • Collateral held
  • Total unsecured high deductible amounts, including the percentage that is unsecured
  • Highest 10 unsecured amounts ranked by counterparty
75
Q

Disclosures for Asbestos and Environmental Exposures

A
  • Reserving methodology
  • Amount paid and reserved for loss & LAE
  • Description of the line where there is potential exposure, and the nature of the exposure
  • For the 5 most current CYs on a net and gross basis, separately for asbestos and environmental exposures
    • Beginning reserves
    • incurred losses & LAE
    • calendar year payments for loss & LAE
    • Ending reserves
76
Q

Purpose of SSAP 66

A

establish SAP rules for retrospectively rated contracts

77
Q

Retrospectively rated contract

A

A contract which the final premium is based on the loss experience and additional premium is returned/collected

78
Q

Future Premium adjustments for Retrospectively rated contracts methods

A
  1. Actuarially accepted methods
    - ie. historical ratios of retrospective developments to EP. Then apply ratios to current EP to estimate retrospective development
  2. Review each retrospectively rated contract individually
    - For each risk, determine the ultimate loss, as well as the correspond premium adjustment
79
Q

How is accrued additional premium treated in retrospective contracts

A

Immediate adjustment to premium, recorded as a receivable, also recorded as WP or EP

80
Q

How is accrued return premium treated in retrospective contracts

A

Immediate adjustment to premium, recorded as part of the change in UEPR, also recorded as WP or EP

81
Q

Derivation of the nonadmitted asset for retrospective contracts

A

a. 100% of recoverable from any person for whom any AB have been classified as nonadmitted

b. Accrued retrospective premium adjustments that are not determined & billed in accordance with the policy provisions

c. 10% of accrued retrospective premium that is not offset by retrospective return

d. Factor * Accrued retrospective premium (post offset)

82
Q

Factors for part d of the derivation of the nonadmitted asset for retrospective contracts

A
  1. AAA,AA,A/Aaa,Aa,A 1%
  2. BBB/Baa 2%
  3. BB/Ba 5%
  4. B/B 10%
  5. CCC, CC, C / Caa, Ca 20%
  6. CI, D / C, Default 100%
83
Q

SAP/Moody’s rating factor for non admitted assets retro
AAA,AA,A/Aaa,Aa,A

A

1%

84
Q

SAP/Moody’s rating factor for non admitted assets retro
BBB/Baa

A

2%

85
Q

SAP/Moody’s rating factor for non admitted assets retro
BB/Ba

A

5%

86
Q

SAP/Moody’s rating factor for non admitted assets retro
B/B

A

10%

87
Q

SAP/Moody’s rating factor for non admitted assets retro
CCC, CC, C / Caa, Ca

A

20%

88
Q

SAP/Moody’s rating factor for non admitted assets retro
CI, D / C, Default

A

100%

89
Q

What to rate an insured if it does not have a debt rating from a publicly recognized rating agency or SVO

A

Consider a 5 (unless reason to think a 6)

90
Q

What rating to pick for insured if there are multiple ratings over the years

A

the current quality rating

91
Q

Nonadmitted balance calculation for retrospective rated contract

A
  1. Decide between using c or d
  2. balance = a + b + c or d
  3. If changing from c to d, must receive approval and disclose change in financials.

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