Part B ACTEX Qs

Question 1

Special facilities were established for crime insurance in certain areas. Discuss briefly the nature of the facilities established or suggested.

Answer 1

The Federal Crime Insurance Program (1968) was intended to provide coverage for homeowners and small businesses located in neighbourhoods with high crime rates because private insurance for burglary or robbery was not available at affordable rates. With proper loss prevention methods, this insurance was available from the private market at rates less than the government rates and the Federal Crime Insurance Program expired in 1995.

Question 2

List four of the five basic reasons that Caulder et al state are generally used to justify government participation in insurance.

Answer 2

1. Filling insurance needs unmet by private insurance
2. Compulsory purchase of insurance
3. Convenience
4. Greater Efficiency
5. Social Purposes

Question 3

According to Caulder et al. the presence of a needs test to determine eligibility is a characteristic of what type of program?

Answer 3

social welfare program

Question 4

According to Caulder et al. financing from general tax revenues rather than from earmarked sources is a characteristic of what type of program?

Answer 4

social welfare program

Question 5

Describe three important questions considered by Greene when evaluating a government program. What are these questions?

Answer 5

1. Is the provision of the insurance by the government necessary or does it achieve a social purpose that cannot be provided by private insurance
2. Is it insurance or a social welfare program?
3. Is the program efficient, is it accepted by the public?

Question 6

Using Caulder et al. as a source, give two examples of social objectives currently addressed by government insurance. (include examples of an alternative for accomplishing the social objective without government insurance)

Answer 6

1. Rehabilitation and vocational training are objectives of state workers compensation funds (other gov programs could achieve these objectives)
2. Social Security provides benefits to the truly needy elderly and disabled (entitlement programs could be expanded to make payments to these groups)
3. The federal flood insurance program encourages the purchase of flood insurance (building codes could prevent construction in flood zones)

Question 7

Discuss differences between insurance programs and social welfare programs. Discuss the distinction between insurance and social welfare programs with respect to eligibility for benefits.

Answer 7

Insurance benefits are paid to all insured parties who suffer a loss, regardless of need. Social welfare benefits, on the other hand, are paid to those who demonstrate need, regardless of their contributions.

Question 8

Identify and describe the two types of risk that can lead an insurance company to wind up.

Answer 8

1. Insolvency risk - risk that occurs when assets become insufficient for an insurance company to meet is contractual and other financial obligations.
2. Liquidity risk - risk that occurs when an insurer has sufficient assets to cover its obligations but there is a high level of risk that those could disappear.

Question 9

Identify the two leading causes of failure for Canadian insurance companies, and briefly describe how they are linked.

Answer 9

inadequate pricing and deficient loss reserves. They are related since insurance pricing is based on recent historical loss data developed to ultimate via loss reserves.

Question 10

Identify and briefly describe four company characteristics that have been identified in most insolvencies.

Answer 10

1. Governance and internal controls - solvency risk is increased when they break down or are purposely circumvented
2. New entrants - likelihood of firm survival tends to increase with the age of the firm
3. Growth - Rapid growth in the last few years of business is a contributing factor to insolvencies
4. Firm size - insolvent insurers are usually small insurers writing less than one percent of total industry premium.

Question 11

According to the Facility Association Plan of Operation, what 5 classes of business are defined for the purpose of determining participation in Association business.

Answer 11

1. PP nonfleet nonpool auto business
2. All automobile business other than (1) or RSP
3. Business transferred to a pool other than a risk sharing pool in AB, NB, or NS or a ON catastrophic claim fund
4. Business transferred to a risk sharing pool in AB, NB, or NS
5. Uninsured or unidentified motors claims and amounts expended in connection with the pool or catastrophic claim fund in ON covering statutory benefit claims due from an insolvent insurer.

Question 12

What is the main objective of the Facility Association?

Answer 12

To ensure that automobile insurance is available for every owner and licensed driver of motor vehicles who require it to legally operate their vehicles

Question 13

Contrast the OSFI’s role in dealing with insurer insolvency versus the PACICC’s role.

Answer 13

OSFI seeks to minimize the risk of insolvency, whereas PACICC manages a compensation plan to provide policyholders with a reasonable level of recovery for unpaid claims in the event that an insurance company became insolvent and could not meet its financial obligations.

Question 14

Identify four funding mechanisms PACICC uses in the event of the insolvency of an insurer.

Answer 14

1. Assessments of participating insurers
2. A compensation fund
3. Liquidated assets of the insolvency insurer
4. Recoveries from third parties

Question 15

What does AAFC stand for and what are its responsibilities?

Answer 15

Agriculture and Agri-Food Canada. It is the department of the Government of Canada responsible for the growth and development of the Canadian agricultural and agri-food sector. The AAFC is responsible for developing national standards for agricultural risk management programs, including standards for the actuarial certifications required for insurance programs.

Question 16

Give the formula for the Indemnity Rate.

Agricultural Programs

Answer 16

Indemnity Rate = Indemnities/Liabilities

Question 17

Define Indemnity

Agricultural Programs

Answer 17

An Indemnity is the claim amount; for yield-based plans, an indemnity is payable when the actual production is less than the production guarantee

Question 18

Define Liability

Agricultural Programs

Answer 18

A Liability is also known as the limit or the maximum exposure. With respect to production program insurance it is total insured value of an agricultural product, determined as the product of the expected production value and coverage level.

Question 19

What are the National Certification Guidelines? They are akin to what from the CIA and what from the OSFI?
(Agricultural Programs)

Answer 19

National Certification Guidelines are a set of guidelines issued by AAFC to provide guidance on the considerations for performing production insurance actuarial certifications. They are akin to educational notes issued by the CIA and guidelines issued by OSFI

Question 20

Two loads, a self-sustainability load and an uncertainty load are included in the premium for production program insurance. Define Self Sustainability Load.
(Agricultural Programs)

Answer 20

Self Sustainability load: Load applicable to premiums to recover past deficits and maintain a surplus level appropriate to sustain volatility in loss experience.

Question 21

List two items that are not included in the premium rate.

Agricultural Programs

Answer 21

Excluded: profit - not needed because these are governmental programs, and expenses - paid for by the provincial and federal governments.

Question 22

Two loads, a self-sustainability load and an uncertainty load are included in the premium for production program insurance. Define Uncertainty Load.
(Agricultural Programs)

Answer 22

Uncertainty Load: load in the projected premium rates to account for the limitations with data, assumptions or the selected methodologies in estimating future indemnity rates.

Question 23

A producer’s program margin for the year, after reflecting AgriInsurance recoveries, is $150,000, What is the AgriStability payment when the historical reference margin is $200,000?

Answer 23

A AgriStability payment is made when the program margin for the year falls below 70% of the historical reference margin.
$200,000 x 70% = $140,000, which is

Question 24

A producer’s program margin for the year, after reflecting AgriInsurance recoveries, is $150,000, What is the AgriStability payment when the historical reference margin is $300,000?

Answer 24

A AgriStability payment is made when the program margin for the year falls below 70% of the historical reference margin.
$300,000 x 70% = $210,000.
Payment is ($210,000 - $150,000) x 70%

Question 25

Give the names of the following production insurance programs:
A deposit-matching program designed to allow producers to accumulate funds that can be used to manage income shortfalls or to make investments to manage farm risks.

Answer 25

AgriInvest

Question 26

Give the names of the following production insurance programs:
A disaster relief framework under which federal and provincial governments collaborate on a case-by-case basis, to determine when and how to help producers who incur extraordinary expenses necessary to recover from natural disasters such as disease, pest and weather-related events.

Answer 26

AgriRecovery

Question 27

Give the names of the following production insurance programs:
This program essentially provides producers with an access to short-term low-interest loans in order to improve cash flow management.

Answer 27

Advance Payment Program

Question 28

Give the names of the following production insurance programs:
A program designed to help producers manage large production margin declines

Answer 28

AgriStability

Question 29

Give the names of the following production insurance programs:
A pilot program launched in April 2014 to help livestock producers protect themselves against unexpected price declines.

Answer 29

Western Life Price Insurance Program

Question 30

Give the names of the following production insurance programs:
A program designed to allow individual producers to obtain production insurance coverage guaranteeing a predetermined level of production.

Answer 30

AgriInsurance

Question 31

The 3 actuarial certifications are required by AAFC in order to fund the federal portion of premiums. What three topics must these actuarial certifications cover?

Answer 31

1. Probable yield methodologies used to derive the insured exposure for yield-based plans
2. Premium rate methodologies used to fund the insurance program
3. Self-sustainability of the insurance program.

Question 32

Most agricultural products are insured under yield-based plans. There are two types. What are they?

Answer 32

Individual Yield Program: an indemnity is paid out when the individual producer’s production falls below the producer’s production guarantee for a specified agricultural product.
Collective Yield Program: an indemnity is paid out to a producer when the collective production for a given group of producers or area falls below the collective production guarantee for a specified agricultural product. The indemnity is determined regardless of the individual producer’s actual production.

Question 33

Give three examples of non-yield based plans

Answer 33

Weather derivative plans
acre based compensation horticulture
coverage for perennial plans
mortality insurance for livestock and poultry

Question 34

When calculating the probable yield, the actuary generally starts with historical data and historical probable yields. Give four possible adjustments that should be made to reflect the current production capability of an agricultural product.

Answer 34

1. Adjustments for changes in farming or management practices
2. Adjustments for changes in insurance program design
3. Trend in technology or genetic improvement, based on observed historical data and usually confirmed by agronomical specialists
4. Adjustments for maturity of perennial plants
5. Adjustments for quality, which are required tin situations where an insured peril would affect the quality of the production and as such decrease the market value of the agricultural product
6. Changes in data sources and in data collection methodologies
7. Variations in the mix of insureds over time and across geographical regions.

Question 35

Insurance program design may include optional benefits. Describe the following optional benefits:
a. Quality loss protection

Answer 35

Protects against decreases in quality in addition to decreases in quantity of the agricultural production

Question 36

Insurance program design may include optional benefits. Describe the following optional benefits:
a. Establishment benefits

Answer 36

provide coverage for crops that fail to establish due to insurable causes

Question 37

Insurance program design may include optional benefits. Describe the following optional benefits:
a. Emergency Works Benefits

Answer 37

compensate for the cost to mitigate further damages when there is partial damage to a crop

Question 38

Explain the following option in designing a production insurance program:
Whole Farm options

Answer 38

indemnities may be based on the combined actual yield for a specified group of crops

Question 39

Explain the following option in designing a production insurance program:
Risk-splitting benefits

Answer 39

indemnities may be based on a subset of the total farm production for a given agricultural product

Question 40

Explain the following option in designing a production insurance program:
Floating price options

Answer 40

the insured price may vary with market prices at harvest

Question 41

A producer insures 300 maple trees subject to a deductible of 10% of insured trees. If a producer loses 30 trees out of 300 trees each insured at $1000, what is the indemnity payable? What is the indemnity payable if the deductible is 5%

Answer 41

10%: $0

5%: $15,000

Question 42

Credibility-weighting may be used in the context of premium rate methodologies in production program insurance. The standard of credibility is typically based on the number of years of data available for the agricultural product. List three possibilities that could be used for the complement of credibility.

Answer 42

1. a larger group of data
2. a proxy agricultural product
3. a theoretical model
4. a simulation
5. a prior selection based on judgement

Question 43

Premium rate methodologies for production program insurance need to balance premium responsiveness and premium stability. Briefly describe three stabilizing or mitigating techniques.

Answer 43

1. LT averaging methods, which may attribute higher weights to more recent years
2. splitting of indemnity rates into basic and excess components based on a selected threshold
3. transition rules after introducing new methodologies
4. capping in year over year changes in indicated indemnity rates

Question 44

The production insurance program would considered self-sustainable under federal legislation if which following two criteria are met?

Answer 44

Recovery from the 95th percentile deficit would occur, on average, within 15 years
Recovery from the 95th percentile deficit would occur, with 80% probability within 25 years.

Question 45

Actuarial certification is required with respect to the sustainability of the overall insurance program. Describe the assessment procedure with respect to self-sustainability.

Answer 45

The assessment of self-sustainability resembles a DCAT analysis as it consists of an analysis of the financial condition under base and adverse scenarios, but it involves a fully stochastic analysis over a longer time horizon.

The actuary would design or confirm the self sustainability load methodology based on the simulations. Generally, the self-sustainability load is established based on a selected target surplus level recommended by the actuary.

Question 46

Provinces may buy reinsurance for their production program insurance from the government. How is government reinsurance different from traditional reinsurance?

Answer 46

Government reinsurance functions as a deficit-financing mechanism rather than as traditional reinsurance.

Question 47

Briefly describe the roles of the federal government for the Terrorism Risk Insurance Program

Answer 47

Provide funds for losses in excess of set amounts of loss resulting from terror attack; Acts as reinsurer; Partnership with private market

Question 48

Briefly describe the roles of the state government for the Terrorism Risk Insurance Program

Answer 48

Does not have a role other than regulating the insurer as normal

Question 49

Briefly describe the roles of the private insurers for the Terrorism Risk Insurance Program

Answer 49

Offer an handle claims for terrorism coverage and pay losses up to attachment point.

Question 50

Briefly describe two reasons for government involvement in the Terrorism Risk Insurance Program.

Answer 50

1. Fill unmet needs: after 911 terrorist attacks, insurance companies were unwilling to provide the terrorism coverage without the financial backing of the federal government.
2. Achieve Collateral Social Purpose: Terrorism coverage encourages business continuation after terrorist attack

Question 51

Evaluate the Terrorism Risk Insurance Program’s effectiveness

Answer 51

Arguments that it is ineffective:
- the program has not been very effective. There has been less demand for terrorism coverage than originally thought. It is filling an unmet need, but can do little social good if most businesses don’t purchase it.
- program was supposed to be temporary yet it is still federally run as insurers do not want to entirely own this risk.
- Also there isn’t fully adequate funds
Arguments that it is effective:
- it has been effective in providing coverage for those insurers that want it.
- program effective in increasing availability of coverage, but it has not been tested by an actual terrorist attack so it may be that this coverage is unnecessary.
- it has been effective at providing coverage while allowing time for insurers to build models, understand the risk and build capital for events.
-been effective so far, as high risk concentrations areas continue to be insured.

Question 52

According to the TRIA, what needs to be true before government helps defray damages from terrorist acts?

Answer 52

1. The terrorist act must cause $5 Million in insured losses to be certified for TRIA coverage
2. The aggregate insured losses from a certified act of terrorism must be $100 Million in a year for the gov coverage to begin
3. An individual insurer must meet a deductible of 20% of its annual premiums for the government coverage to begin.
4. The acts must be certified as an act of terror certification by the Secretary of Treasury in conjunction with the Attorney General and the Secretary of State

Question 53

What were the 3 stated goals of the original TRIA legislation?

Answer 53

1. Create a temporary federal program of shared public and private compensation for insured terrorism losses to allow the private market to stabilize
2. protect consumers by ensuring the availability and affordability of insurance for terrorism risk
3. preserve state regulation of insurance

Question 54

The TRIA program creates a mechanism through which the federal government could share insured commercial property/casualty losses with the private insurance market. The role of federal loss sharing depends on the size of the insured loss. Describe the mechanism for sharing with respect to small, medium and large losses.

Answer 54

For a small loss, there is no federal sharing. For a medium-sized loss, the federal role spreads the loss over time and over the entire insurance industry, providing assistance up front but then recouping the payments through a levy on insurance policies afterwards. For a large loss, the federal government pays most of the losses, although recoupment is possible in these circumstances as well.

Question 55

How does the federal gov. recoup monies paid out for terrorist acts?

Answer 55

The general result of the recoupment provisions is that, for attacks that result in under $27.5 billion in insured losses, the Treasury Secretary is required to recoup 133% of the government outlays through surcharges on property/casualty insurance policies. For events with insured losses over $27.5 billion, the Secretary has discretionary authority to recoup all the government outlays and may be required to partially recoup the government outlays depending on the size of the attacks and the amount of uncompensated losses paid by the insurance industry.

Question 56

Which department administers the TRIA program?

Answer 56

it was originally administered by the Treasury. However, the Dodd-Frank bill of 2010 created a Federal Insurance Office and the responsibility has been moved to that department, which is still in the Treasury.

Question 57

Is there a mandate that requires policyholders to purchase terrorism coverage?

Answer 57

No

Question 58

The TRIA requires those insurers that offer the lines of insurance covered by TRIA to make terrorism insurance available prospectively to their commercial policyholders. True/False

Answer 58

True

Question 59

The Webel paper on terrorism identifies four ideal elements of an insurable risk. What are these elements and how well does the risk of terrorism meet these criteria?

Answer 59

1. a sufficiently large number of insureds to make losses reasonably predictable - losses due to terrorism are not expected to meet this criterion
2. losses must be definite and measurable - this is not a problem
3. losses must be fortuitous or accidental - by their nature, terrorist attacks are NOT accidental
4. losses must not be catastrophic - this depends on the size of the loss and the nature.

Question 60

Out of the following countries, which have and which have not dealt with terrorism risk?
Spain, UK, Germany, Canada

Answer 60

Canada hasn’t