Part C Actex Qs Flashcards
Only Short Answer in section C. Majority of this section is Long Answer
In the Canadian Annual Return (P&C1) a company’s share of the Facility Association premium and claims is reported as
a) direct business
b) reinsurance assumed
Direct business
According to the instruction for P&C 1, any commission not exclusively attributable to premium volume is a contingent commission and would be considered non-referable.
True
According to the Canadian Council of Regulators in Annual Statement Instructions P&C 1, policy acquisition expenses are those incurred only for the acquisition of new business.
False, they include renewal business as well as new
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, is the following true or false?
The P&C1 Annual Return must be prepared on an unconsolidated basis
True
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, is the following true or false?
Premiums, commissions, and losses relating to automobile insurance policies transferred to the Facility or the PRR are to be treated as ceded reinsurance.
False. They are negative direct business
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, is the following true or false?
Contingent commissions are nondeferable
True
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, is the following true or false?
The ratio of claims incurred included adjustment expenses.
True
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1 a P&C insurer would not be required to show the claim liability for structured settlements in its Annual Return, subject to compliance with GAAP, if certain conditions applied. List the four conditions that must be satisfied.
- The insurer owns an annuity whose payments are irrevocably directed to the claimant
- It provides no current or future benefit to the insurer
- The insurer is released by the claimant from its obligations
- The insurer remains liable if required payments are not made
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, what is a premium deficiency?
A premium deficiency exists where the unearned premiums will not be sufficient to discharge all the expected liabilities that will accrue to the policies, including all expenses associated with the servicing of the policies
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, does GAAP requirements ever supersede statutory requirements for the preparation of P&C1?
Statutory requirements always supersede GAAP
According to the Canadian Council of Insurance Regulators in Annual Statement Instructions P&C1, a complete list of all officers is not required. T/F
True
Which of the following items would be found in the P&C1 Summary of Selected Financial Data for Five Years? (more than 1)
- Gross claims incurred
- Net investment income
- GAAP equity
- Net risk ratio
- Claims ratios by year of accident
1, 2, 4, 5 (GAAP equity not found in the exhibit)
Under what condition is an SIR receivable admissible for statutory test purposes?
How can the regulator ensure that the condition is met?
For an SIR receivable to be admissible, regulators need to be satisfied with its collectibility. (i.e. the policyholder is solvent and has proven ability to pay the retention)
He can request acceptable collateral
Indicate whether calendar year ceded loss incurred by type of reinsurance (quota share, excess of loss, etc) can be found in the Canadian Annual Return?
IT can be found in the exhibit Premiums and Claims - Reinsurance Ceded. Page 70.10
In the 1997 Canadian Annual Return, incurred losses ceded to quota share reinsurer’s are provided for each line of business.
True
Identify four ways in which Schedule P of the US Annual Statement provides more information to an actuary than Page 60.40 of the P&C1 with regard to accident year claims information.
Schedule P provides data:
a) on earned premium,
b) separately for direct and assumed, for ceded, and for net losses
c) for two different categories of LAE
d) on anticipated salvage
e) on incurred losses
f) on loss ratios
g) on non tabular discounts
h) on intercompany pooling
i) for ten accident years
j) on individual lines
k) separately for occurrence and claims-made policies
l) on claim counts
m) on premium development
n) separate data on primary loss-sensitive contracts.
The provision for premium liability is represented by one line on the balance sheet of an insurer’s Annual Statement. T/F
False. The provision for premium liability is not shown explicitly on the balance sheet
According to Cantin and Trahan, equity in the unearned premiums is defined as what?
The expected profits on the unexpired policies.
According to Cantin and Trahan, premiums should be earned on a pro-rata basis over the policy period.
False, premiums should be earned on a basis consistent with the occurrence of losses.
Before finalizing the AA’s Report’s calculation of the equity in the gross UPR, a very unusual and large loss occurs on January 25, 2003 on a policy in force as of December 31, 2002. Should the calculation be revised to account for this event in the actuarial report? List the considerations (3)
The calculation should be revised to account for the loss if any of the following criteria are met by the event producing the loss.
1. it provides info about the entity as it was at the calculation date
2. it retroactively makes the entity a different entity at the calculation date
3. it makes the entity a different entity after calculation date and a purpose of the work is to report on the entity as it will be as a result of the event.
None of these criteria apply therefore the calculation should not be revised
Explain why it is impossible for an insurer to have nonzero values for both the deferred policy acquisition expenses entry and the premium deficiency entry in the statutory financial statements for a Canadian P&C insurer.
If a premium deficiency exists, DPAE must be reduced. If EQUP DPAE, reduce DPAE to zero and set up a liability for the remaining deficiency.
According to MSA, surplus is defined as total assets
False. Liabilities and OSFI required reserves must be subtracted from total assets.
Briefly describe each of the following ratios and identify at what level the results of the ratios may indicate weaknesses in a company’s financial health.
- Net leverage ratio
- Net loss reserves to equity
- Return on equity
- Net leverage ratio = net premiums written as a percentage of adjusted equity. (max = 300%)
- Net loss reserves to equity = discounted loss reserves as a percentage of adjusted equity (max = 200%)
- Return on equity equals net income as a percentage of GAAP equity. (min = 8% prior to 2007)
(Adjusted equity = GAAP equity less capital required for CATs and reinsurance ceded to unregistered reinsurers)
According to OSFI in Guideline - MCT for P&C insurers, the risk of default for recoverables from reinsurers arises from both credit and actuarial risk.
Define actuarial and credit risk.
Credit risk is the risk that the reinsurers will fail to pay the insurer what it is owed.
Actuarial risk is the risk associated with assessing the amount of the required provision.
Capital Available includes which of the following amounts?
- an adjustment to market value for investments
- subordinated indebtedness
- off-balance sheet derivative instruments
Not 3
An actuary’s valuation of claim liabilities includes a MFAD. In the MCT, a margin is applied to the actuary’s valuation of claim liabilities.
Explain the rationale for including these two separate margins on claim liabilities.
The margins calculated by actuaries are primarily intended to cover expected variations, whereas the margins in the MCT are included to take into account possible abnormal negative variations in the amounts calculated by actuaries.
An actuary’s valuation of claim liabilities includes a MFAD. In the MCT, a margin is applied to the actuary’s valuation of claim liabilities.
Explain how the accounting treatment for these two margins differs in the P&C1.
The margins calculated by actuaries are include in the liability unpaid claims and adjustment expenses (page 20.20), whereas the margins in the MCT are used solely to determine whether a company has excess capital available over capital required (Page 30.70)
Briefly describe how Canadian regulators control the level of investment risk assumed by insurance companies through the capital required portion of the MCT.
The capital factors applied to different investments in the MCT formula vary with the level of risk of the investment. Investments are categorized into government grade, investment grade, and not-investment grade.
Identify the minimum MCT target level
100%
Identify the supervisory MCT target level
150%
Federally regulated P&C insurance companies are required, at a minimum, to maintain an MCT ratio of 100%. Fully explain why OSFI believes that each institution should establish a target capital level above minimum requirements.
OSFI believes that each institution should establish a target capital level that provides a cushion above minimum requirements, both to cope with volatility in markets and economic conditions, innovations in the industry, consolidation trends and international developments, and to provide for risks not explicitly addressed in the calculation of policy liabilities or the MCT. Such risks include systems, data, strategic, management, fraud, legal and other operational and business risks. An adequate target capital level provides additional capacity to absorb unexpected losses beyond those covered by the minimum MCT and to address capital needs through enjoying market access.
Identify 3 PFAD’s that are mentioned by the author
- Discount rate PfAD
- Claims development PfAD
- Reinsurance collectibility PfAD
What are the limits composed by the CIA on each PfAD?
- 25bp to 200bp
- 2.5% to 20% of unpaid claims
- 0 to 15% of recoverables
Given Average yield, Duration, and Timing Risk, how would you calculate the PfAD applied to the average yield related to timing risk?
PfAD = Average Yield * Timing Risk
Briefly describe 3 pillars of the Solvency II framework.
Start with Pillar 1…
Pillar 1: describes quantitative requirements: balance sheet evaluation, the Solvency Capital Requirement, and the Minimum Capital Requirement
Briefly describe 3 pillars of the Solvency II framework.
Pillar 2..
Pillar 2: describes qualitative requirements: the system of governance, a company’s Own Risk & Solvency Assessment, and the supervisory review process.
Briefly describe 3 pillars of the Solvency II framework.
Pillar 3…
Pillar 3: describes disclosure requirements: the annual published solvency and financial condition report, information provided to the supervisors, and the link with IFRS 2
Discuss the benefits of Sovency II
- it will level the playing filed by ensuring consistent regulation in all territories
- it should also improve the solvency of the industry and that means better protection for consumers
- It promises benefits of better capital management by aligning solvency with the risk profile of each firm
Identify and briefly describe three key elements of the ORSA.
- Relating to risk capital: need to consider the adequacy of capital to support the risk that is tailored specifically to company.
- Monitoring and reporting: need to include risk appetite statement and risk management; consider risk level tolerance of the company and risk level willing to undertake
- Responsibilities of Board Management: Board needs to have the ultimate responsibility and senior mgmt helps the board to implement decisions
According to OSFI paper “key principles for the future direction of the Canadian regulatory capital framework for P&C insurance.
Identify and discuss the two approaches described in the framework for determining regulatory capital requirements. Which approach is more suitable for a small regional insurer.
- Standard approach
- Internal models approach
Standard approach is better for smaller co with limited risk management approach
The P&C MCT advisory committee has outlined the key principles for a new capital framework for CDN P&C insurers.
Briefly discuss how risk should be measured across risk categories and products.
A capital framework should use measures that are comparable across risk and products
Should consider all risks
Identify three quartile approaches for determining the MFADs based on stochastic techniques.
- Multiple of standard deviation
- Percentile level/Confidence level/VAR
- CTE/TVAR
Describe when stochastic modelling may be more appropriate for modelling premium liabilities.
LOBs for which coverage can extend for many years
Lines whose financial results are highly dependent on economic forces
When there are significant correlations between LOBs
Skewed loss distributions
High variance loss distributions
Long tailed
Cat events
The IFRS 4 provides guidance on accounting for insurance contracts. Identify the two primary requirements of this standard.
Classification of insurance contract
Enhanced disclosures in financial statements
Limited improvements to accounting by insurers for insurance contracts
Identified and explains the amounts in an insurers financial statements arising from insurance contracts
Helps users of those financial statements understand the amount, timing and uncertainty of future cash flows from insurance contracts
Define the term insurance contract as used in the IFRS standard.
A contract under which one party accepts significant insurance risk by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder
In the US, insurance companies are required to present their financial statements under two bases: SAP & GAAP
Compare these two in terms of Objective:
GAAP stresses measurement of emerging earnings of a business from period to period (ie. Matching revenue to expense), while SAP stresses measurement of ability to pay claims in the future
In the US, insurance companies are required to present their financial statements under two bases: SAP & GAAP
Compare these two in terms of Intended Users:
GAAP is designed to meet the varying needs of the different users of financial statements. SAP is designed to address the concerns of regulators, who are the primary users of statutory financial statements.
In the US, insurance companies are required to present their financial statements under two bases: SAP & GAAP
Compare these two in terms of Asset recognition:
GAAP has recognized certain assets such as deferred policy acquisition costs while SAP treats it as expense when incurred.
In the US, insurance companies are required to present their financial statements under two bases: SAP & GAAP
Compare these two in terms of Deferred Income Taxes:
Deferred income taxes have been recognized by GAAP but not SAP.
What are maintenance expenses with respect to premium liabilities?
Future cost of servicing the policies in force. Include
- expenses associated with endorsements
- mid term cancellations
- changes in reinsurance contracts etc
Generally expressed as a percentage of gross UPR
