Part 9 (Odomirok 10) (***) Flashcards
*** How notes paired with other financial information is used to assess insurer's financial condition
Unsecured Reinsurance Recoverables (Section A)
Collateral is required to protect against Credit Risk
If recoverables from a reinsurer that doesn’t provide collateral exceeds 3% of the ceding company’s surplus disclose:
- Name
- Paid losses billed but not yet collected
- Ceded Reserves
- Ceded Unearned Premiums
Reinsurance Notes
- Unsecured Reinsurance Recoverables
- Credit Risk
- Reinsurance Recoverable in Dispute
- Credit Risk
- Reinsurance Assumed & Ceded
- Reinsurance that is subject to specific accounting treatment
- Uncollectible Reinsurance
- Credit Risk
- Commutation of Ceded Reinsurance
- Reinsurance that is subject to specific accounting treatment
- Retroactive Reinsurance
- Reinsurance that is subject to specific accounting treatment
- Reinsurance Accounted for as a Deposit
- Reinsurance that is subject to specific accounting treatment
- Disclosures for the Transfer of P&C Run-off Agreements
- Reinsurance that is subject to specific accounting treatment
- Certified Reinsurer Rating Downgraded or Status Subject to Revocation
- Reinsurance that is subject to specific accounting treatment
Unsecured Reinsurance Recoverables questions
- Why wasn’t security provided? (collateral)
- Are there concerns about the financial health of either the insurer or reinsurer
- Was the large amount of recoverable caused by a catastrophe
- Are all the unsecured recoverable concentrated with one reinsurer.
Reinsurance Recoverables in Dispute (Section B)
Used to identify credit risk and insurers that try to over recover from reinsurers
Reinsurer may dispute because:
- Unwilling to pay because disagreement about if a loss is covered
- Unable to pay
- Must have formal letter that the loss is in dispute
Reinsurance Recoverables in Dispute questions
- What is the issue causing the disagreement
- Is the disputed amount material to either the reinsured reinsurer
- Are there legal options available
Reinsurance Assumed & Ceded (Section C)
Provides information on Commission Equity: Ceding commissions related to the unearned premium reserve
- Identifies when insurer uses reinsurance contracts with commissions to manipulate surplus. (Commissions increase surplus since treated as revenue).
- And helps see impact to surplus if policies are cancelled
Uncollectible Reinsurance (Section D)
Recoverables that were written off during the year because they were considered to be uncollectable. Must be written off as an expense
Uncollectible Reinsurance questions
- Why is the reinsurance uncollectable
- Is there other outstanding recoverable that may be also uncollectible in the future for similar reasons
- How long has it taken the company historically to write off the uncollectible reinsurance that has been disclosed
Commutation of Ceded Reinsurance (Section E)
Commutation: Settlement between an insurer and reinsurer to discharge all remaining (present and future) obligations
Distorts Financial Statements
- Payment from reinsurer is negative paid loss (income statement)
- Loss reserve is increased (balance sheet)
Retroactive Reinsurance (Section F)
Covers liabilities that occurred prior to the effective date of the policy. Make sure the insurer is appropriately accounting for the retroactive reinsurance.
Accounting treatment
- Ceded Reserves are recorded as a negative write in item in the balance sheet
- Any gain (ceded reserve - premium paid) is recorded as
- Other income in the income statement
- Special Surplus in the balance sheet
Retroactive Reinsurance (Section F) Required Disclosures
- Reserves Transferred
- Consideration Paid
- Paid Losses reimbursed
- Special surplus generated
- Reinsurers involved
Reinsurance Accounted for as a Deposit (Section G)
Contract needs to meet specific risk transfer criteria to be accounted for as reinsurance
- If not, needs to be accounted for as a deposit or liability, and will not impact underwriting income.
Includes Schedule that shows the historical change to the deposit/liability balance since inception of each contract
Disclosures for the Transfer of P&C Run-Off Agreements (Section H)
Transfer to a third party of a risk from a line or market segment that is no longer actively marketed by the insurer.
- Consideration paid is recorded as a paid loss
- Consideration paid is less than reserves transferred, the difference is treated as a decrease in losses incurred
Certified Reinsurer Rating Downgraded or Status Subject to Revocation (Section I)
Certified Reinsurers that has rating reduced or certified status revoked needs to provide additional capital. Note discloses the impact if the additional collateral has not been received by the filing date.
Change in Incurred Loss & LAE Note
Discloses changes in estimates for loss & LAE from prior accident years
- Amount of Change
- Segments/lines that lead to change
- Reason for change
- Changes can distort current year’s underwriting income
- Recurring material changes may indicate that there are issues with the reserving process, and user needs to refer to Schedule P or 5yr historical data exhibit
Premium Deficiency Reserves
Arises when the unearned premium is insufficient to cover the sum of future losses, LAE, and maintenance expenses
- Insurer has option whether to give credit for the investment income when calculating the deficiency
- Calculation should group the policies consistent with the way in which they are marketed, serviced & measured
Why should Premium deficiencies be rare
Most policies charge sufficient premium to cover the expected losses & expenses
If a particular segment within a group has a deficiency, this may be offset by the surplus of another segment within the group
Two ways to account for the premium deficiency in the balance sheet
Establish a write-in liability
Reflect as part of the UEPR
- Won’t be obvious that prem deficiency exits. So, insurer needs to disclose things
Does not having a premium deficiency reserve mean rates are adequate
No, because investment income and grouping of segments so deficiency in one segment will be offset by a surplus of another can cover the inadequate premium
What needs to be disclosed in the notes for a Premium Deficiency
The size of the deficiency
Whether investment income was considered
2 types of Discounting of Liabilities for Unpaid Loss & LAE
Tabular Discounting
- Based on an interest rate and mortality assumptions from life tables specified by the state regulator
- Usually used in workers compensation insurance
Non-Tabular discounting
- Less common, used when insurer receives permission from the state regulator
- Used in Workers’ compensation and medical professional liability
Why is it important to be familiar with Discounting of Liabilities note
- Different Companies use different discounting practices
- Use of non-tabular discounts is a sign that the regulator may have concerns about insurer’s solvency
- Actuary has to disclose and describe discounting in the SAO
Asbestos / Environmental Reserves, why is this note important
- Reserves from these exposures have developed adversely over the last few decades
- High uncertainty associated with the reserves
What to disclose for Asbestos / Environmental Reserves
- Lines of business affected
- Nature of the exposures
- Reserving Methodology
As well as a table
- Beginning loss & LAE reserves
- Incurred loss & LAE
- Calendar Year payments for losses & LAE
- Ending Loss & LAE reserves
- Pure IBNR
Subsequent Events
Events that occur between the accounting date of the statement (12/31) and the date at which the statement is issued
Subsequent Events Type 1 (Recognized Subsequent Events)
Events that provide additional detail on conditions that existed at the accounting date
- These events should really already be reflected in the financial statements
- Disclosure will only be needed if it would prevent the statements from being misleading
Subsequent Events Type 2 (Non recognized Subsequent Events)
Events that did not exit at the accounting date
- These events should not be included, but should be described in the note if they may have a material effect on the financial condition of the company
Intercompany Pooling
The note discloses if a pool exits
- Members of the pool
- Lead Company
- Pooling % if each participant
Why is Intercompany Pooling Notes useful
Regulators can understand the pooling arrangement in order to assess the solvency of the group
Users should be aware of the pooling arrangement since it impacts the Annual Statement:
- Schedule F shows cessions to the lead company as ceded reinsurance
- Schedule P reflects only the members’ portion of the aggregate results
Structured Settlements
When the insurer purchases an annuity (usually from a life insurer) on behalf of the claimant to settle a claim (typically workers’ comp or general liability claim)
What should the Structured Settlements Note show
Total amount of the nominal 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 must also be disclosed
Why is it a credit risk for Structured Settlements
The insurer could still be held liable for the remaining payments if the life insurer making the annuity payments becomes insolvent, and since it is not reflected on the balance sheet, it is necessary to disclose.
Why are High Deductibles a credit risk
The insurer pays the entire loss ground-up and then seeks reimbursement. If insured does not reimburse, then there is credit risk.
Why is credit risk not immediately obvious with High Deductibles under SAP accounting
Insurer book the loss reserves net of the insured’s share
What to disclose for High Deductibles
- Reserve credit that the insurer has recognized for the unpaid claims
- Amount billed but not yet collected for the paid claims
