Questions I didn't know

Question 1

Identify and explain the 4 main categories of reserves

Answer 1

Premium reserves
-amounts set aside in financial statements to reflect premiums that have either 1) been received by the valuation date but provide coverage after the valuation date or 2) not been received by the valuation date but which relate to coverage that was provided prior to the valuation date

Claim reserves
-amounts set aside to cover future payments for claims which have been incurred under the contract but which have not yet been paid

Policy reserves (aka contract reserves, active life reserves, additional reserves)
-amounts set aside to account for the current funding of costs over the future lifetime of the contract.
-Account for any long-term differences between the slope of revenue and benefit streams.

Gross Premium Reserves/Premium Deficiency Reserves
-used when future revenue streams plus current reserves and liabilities for a given block are not sufficient to cover future costs -> company needs to set aside money to cover the shortfall

Question 2

Cash Flow testing - definition and 6 assumptions

Answer 2

Evaluates future assets and liabilities over a period of time to evaluate the risk associated with the timing of or the amount of cash flows.

Mortality
Morbidity
Lapse
Asset Credit Quality
Reinvestment
Disintermediation

Question 3

Deterministic model definition and use

Answer 3

Deterministic models show the interrelationship of variables but each piece of output is a single value, the expected value of that variable under the assumptions chosen.

Helpful when we want to test the impact of specific alternative situations (scenario testing).

Question 4

Stochastic model definition and use

Answer 4

Stochastic models test one or more variables with the variable’s whole distribution of possible results.

Give information about the distribution of results, not just the average or expected value. This is helpful when the impact of results isn’t linear.

Question 5

Types of stochastic models and definitions; considerations

Answer 5

Monte Carlo simulator
-used to develop stochastic results when the underlying distribution is unknown or possibly does not exist (financial ruin)
-significant practical value when trying to combine results from any other stochastic models

Parametric Distribution
-works best when the process being modeled is stationary over time

Ordinary Least Squares
-GLM with normal distribution
-used when we want to investigate the effects of specific explanatory variables, such as time or seasonality

Generalized Linear Models
-best to use when a dependent variable is either bounded or not normally distributed

Stochastic Time Series
-useful for handling situations when values are correlated across time

Considerations
-availability of data
-appropriateness of data
-access to statistical software
-validation of results
-covariance between model inputs
-advantages and disadvantages

Question 6

Statutory assets

Answer 6

Statutory surplus is equal to admitted assets less liabilities.
-Only admitted assets impact statutory surplus.
-Statutory income may be impacted by both admitted and non-admitted assets

Prepaid expenses are non-admitted
Claims overpayment receivables are admitted for amounts that have been invoiced. Amounts over the invoiced amount are non-admitted

Question 7

NAIC public documents and private documents

Answer 7

Public
-Annual financial statement Blank: pre-formatted template for core financial information as well as supplemental exhibits
-Quarterly financial statement Blank: pre-formatted template that is less voluminous than the annual statement
-Annual audited financial statement: condensed report on core financials with an opinion statement from the audit firm
-Annual Actuarial Statement of Opinion: statement signed by a qualified actuary attesting to the adequacy of the actuarial liabilities and assets recorded by the company

Private
-Annual RBC report: pre-formatted template that computes the company’s minimum capital requirement under formulas adopted by the NAIC
-Annual Actuarial Memorandum: documents the appointed actuary’s work supporting conclusions expressed in the annual Actuarial Statement of Opinion

Question 8

IBNR reserving methods - notes on options

Answer 8

Development method
-common in health industry
-can use data from other blocks with adjustments
-relies on historical patterns
-assumes consistent payment patterns

Loss ratio method
-does not rely on historical data (exposure or claims)
-utilizes pricing or projected loss ratios
-pricing loss ratios wouldn’t react to emerging experience

Case reserves
-most common for individual, large catastrophic claims
-not for large blocks of business -> extremely labor intensive

Projection method
-similar to LR method; can be used when historical data unavailable
-projected PMPM can be used based on pricing assumptions
-typically requires a historical claim rate as a function of membership
-typically uses historical data to trend forward to future periods

Question 9

Situations which require a PDR

Answer 9

A block of business will experience losses over the near term
-due to overall premium inadequacy OR
-losses on a particular subset within the block will exceed profits on the other subsets

A block of business will be profitable in the near term but will experience losses in the future (over the projection period)
-can be due to long-term guarantees

Question 10

Asset Adequacy testing methods

Answer 10

Gross Premium reserve test
-Actuary can demonstrate that the degree of conservatism in the reserves and other liabilities is so great that moderately adverse deviations in the actuarial assumptions are covered
-Actuary can demonstrate that the product designs and/or investment strategies limit moderately adverse experience from happening
-loss ratio method

Question 11

Describe regulatory concerns regarding conservatism in reserve estimates

Answer 11

Conservatism in estimates can be held on an explicit or implicit basis. Historically, explicit margins were often added as percentage loads to reserves developed under assumptions presumably held near the mean value of the estimated outcomes. Employing conservative assumptions in the process of determining the liability is the most common approach to developing implicit margins.
Recently, pressure has been placed on health actuaries to balance the need for sufficiency against concerns that overly conservative estimates can distort reported earnings and tax liabilities.
It is difficult for regulators to provide guidance relating to conservatism due to the wide variance in environmental conditions across companies. Therefore, it is up to the actuary to produce estimates that are appropriately conservative without specific requirements on how that should be obtained.