Part 9 (Odomirok 10) (***)

Question 1

Unsecured Reinsurance Recoverables (Section A)

Answer 1

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

Question 1

Reinsurance Notes

Answer 1

• 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

Question 2

Unsecured Reinsurance Recoverables questions

Answer 2

• 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.

Question 3

Reinsurance Recoverables in Dispute (Section B)

Answer 3

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

Question 4

Reinsurance Recoverables in Dispute questions

Answer 4

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

Question 5

Reinsurance Assumed & Ceded (Section C)

Answer 5

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

Question 6

Uncollectible Reinsurance (Section D)

Answer 6

Recoverables that were written off during the year because they were considered to be uncollectable. Must be written off as an expense

Question 7

Uncollectible Reinsurance questions

Answer 7

• 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

Question 8

Commutation of Ceded Reinsurance (Section E)

Answer 8

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)

Question 9

Retroactive Reinsurance (Section F)

Answer 9

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

Question 10

Retroactive Reinsurance (Section F) Required Disclosures

Answer 10

• Reserves Transferred
• Consideration Paid
• Paid Losses reimbursed
• Special surplus generated
• Reinsurers involved

Question 11

Reinsurance Accounted for as a Deposit (Section G)

Answer 11

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

Question 12

Disclosures for the Transfer of P&C Run-Off Agreements (Section H)

Answer 12

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

Question 13

Certified Reinsurer Rating Downgraded or Status Subject to Revocation (Section I)

Answer 13

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.

Question 14

Change in Incurred Loss & LAE Note

Answer 14

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

Question 15

Premium Deficiency Reserves

Answer 15

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

Question 16

Why should Premium deficiencies be rare

Answer 16

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

Question 17

Two ways to account for the premium deficiency in the balance sheet

Answer 17

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

Question 18

Does not having a premium deficiency reserve mean rates are adequate

Answer 18

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

Question 19

What needs to be disclosed in the notes for a Premium Deficiency

Answer 19

The size of the deficiency

Whether investment income was considered

Question 20

2 types of Discounting of Liabilities for Unpaid Loss & LAE

Answer 20

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

Question 21

Why is it important to be familiar with Discounting of Liabilities note

Answer 21

• 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

Question 22

Asbestos / Environmental Reserves, why is this note important

Answer 22

• Reserves from these exposures have developed adversely over the last few decades
• High uncertainty associated with the reserves

Question 23

What to disclose for Asbestos / Environmental Reserves

Answer 23

• 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

Question 24

Subsequent Events

Answer 24

Events that occur between the accounting date of the statement (12/31) and the date at which the statement is issued

Question 25

Subsequent Events Type 1 (Recognized Subsequent Events)

Answer 25

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

Question 26

Subsequent Events Type 2 (Non recognized Subsequent Events)

Answer 26

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

Question 27

Intercompany Pooling

Answer 27

The note discloses if a pool exits
- Members of the pool
- Lead Company
- Pooling % if each participant

Question 28

Why is Intercompany Pooling Notes useful

Answer 28

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

Question 29

Structured Settlements

Answer 29

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)

Question 30

What should the Structured Settlements Note show

Answer 30

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

Question 31

Why is it a credit risk for Structured Settlements

Answer 31

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.

Question 32

Why are High Deductibles a credit risk

Answer 32

The insurer pays the entire loss ground-up and then seeks reimbursement. If insured does not reimburse, then there is credit risk.

Question 33

Why is credit risk not immediately obvious with High Deductibles under SAP accounting

Answer 33

Insurer book the loss reserves net of the insured’s share

Question 34

What to disclose for High Deductibles

Answer 34

• Reserve credit that the insurer has recognized for the unpaid claims
• Amount billed but not yet collected for the paid claims