Part 15 (Odomirok 21) (***) Flashcards
*** Strengths and limitations of the tools for solvency of insurers
T/F We are able to rely on an individual tool to exclusively make a conclusion about the financial health of the insurer
False, each tool only provides one piece of evidence
T/F We can NOT replace an audit by instead using the Measurement Tools
True
T/F Measurement tools do not guarantee the input data is accurate/complete
True
T/F These tools indicate if management has implemented good internal management, systems, and controls
False
T/F These tools will uncover fraud
False
What are the two views of financial health the statutory financial statement provides of the insurer
- Balance sheet strength
- Earning Potential
Why is Balance sheet Strength one of the views of financial health
Regulators want to ensure that the insurer can pay its claims
What are the two areas that can impair solvency in the Balance Sheet
- Loss & LAE reserve adequacy
- Unearned Premium Reserve Adequacy
What can regulators refer to for Loss & LAE reserve adequacy
- Five Year Historical data exhibit
- Notes to the financial statement
- Schedule P, Parts 2-4
- Schedule F, Part 3
What does the Five Year historical data exhibit show about Loss & LAE reserve adequacy
How losses have developed over time
What does the Notes to Financial Statements include that refer to Loss & LAE reserve adequacy
Includes management’s discussions about changes in the incurred losses
What does Schedule P, Parts 2-4 provide that relates to Loss & LAE reserve adequacy
Provides data to perform tests of reserve adequacy
What does Schedule F, Part 3 show that relates to Loss & LAE reserve adequacy
Lists reinsurers, so regulators can examine the reinsurers used, strength
What 2 things would cause regulators to want to assess the adequacy of unearned premium reserves
- Accident year loss & LAE ratios (From Schedule P, Part 1) > 100%
- Deficiencies in the loss Reserves
When examining the balance sheet strength, what will regulators also look to (other than Reserve adequacy)
Investable Assest
What is looked for/monitored in Investable assets
- Changes in investable asset values and yields on invested assets
- If insurer generally invests in riskier assets than industry average, look at effectiveness of insurer’s hedging
What can be looked at to generate early warnings of future problems in earning
Trends in Financial Ratios
What trends are they looking for in financial ratios to generate early warnings of future problems in earning
- Large growth in written premium during a soft market
- Increases in underwriting or other expense ratios
- Deteriorating loss ratios
- Increased exposure to CAT/large events
- Losses on investments, Change in Mix of Invested assets, Declining yield on investment assets
- Increase in the provision for reinsurance
What does Large growth in written premium during a soft market indicate
Insurer may be paying more commission
What does Increases in underwriting or other expense ratios indicate
Insurer may be paying more commission, and less of premium is available to pay for losses
What does Deteriorating loss ratios indicate
Price increases are not sufficient enough to keep up with the increase in losses
What does Losses on investments, Change in Mix of Invested assets, Declining yield on investment assets indicate
Insurer has changed its investment strategy, or lacks controls of the investment strategy
What does Increase in the provision for reinsurance indicate
Increase credit risk
What do IRIS ratios focus on and what is the
Disadvantage with IRIS ratios
IRIS focuses on balance sheet strength and earnings quality
There is not direct link between the results of the ratios and regulatory intervention
What does RBC focus on and
Disadvantage with RBC
Balance sheet risk and profitability
Most of the factors that enter the calculation are based on industry wide experience instead of the company’s own
What does SOA and AOS stand for,
what do they focus on, and why important
Statement of Actuarial Opinion
Actuarial Opinion Summary
Present Actuary’s opinion of the loss reserve adequacy
Important because, loss reserves are typically the largest single item on the balance sheet
What 2 things do Credit Rating Agencies provide
- Financial strength rating (FSR)
- Debt/ issuer ratings
What are FSRs
Financial strength ratings are ratings of ability to meet obligations to the policyholder
What do Debt/ issuer ratings measure
They measure the ability to meet debt obligations
What type of factors are the FSRs and Debt ratings based on
Quantitative and Qualitative factors
What type of stakeholders can use FSRs
- Policyholders
- Directors of corporate policyholders
- Insurers
- Investors
How can policyholders use FSRs
Use to assess chance that insurer can pay its claims
How can directors of corporate policyholders use FSRs
Require the use of highly rated insurers, and also the use of cancelation endorsements
Can use Finacial strength ratings to see
How can insurers use FSRs
To decide which companies to cede business to
How can Investors use FSRs
Decide whether to invest in the insurer
What did the AAA study of insolvencies find (3 things)
- Insolvency is caused by a combination of factors
- Size/ experience/ diversification had a significant impact
- Good management and governance is essential
- Poor decision making includes insufficient reinsurance, very rapid growth, inadequate pricing
What were the findings of the effectiveness of the SAOs
The Statement of Actuarial Opinions had
- Only one SAO was qualified, the remaining were “reasonable”
- Half concluded there was risk of material adverse deviation, 37% said no risk, and remaining said nothing
Main messages about the study of how tools have faired
- Financial impairment is caused by a VARIETY of factors
- A VARIETY of tools need to be used collectively to help detect companies that are at risk for impairment
