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Exam 6 > Section A > Flashcards

Section A Flashcards

1
Q

NAIC stands for

A

National Association of Insurance Commissioners

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2
Q

What is the NAIC

A

An organization of regulators that coordinates governance, including issuing model laws and regulations

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3
Q

When did NAIC adopt codification of SAP

A

1/1/1

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4
Q

Who enforces GAAP

A

FASB (assigned by SEC)

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5
Q

assets

A

future economic benefit, result of past events

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6
Q

liabilities

A

sacrifices of benefits due to present obligations as a result of past events

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7
Q

First page of the annual statement (Jurat page) includes

A 
Name
NAIC code
Address
Name & title of preparer
Officers
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8
Q

largest asset held by insurers

A

bonds

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9
Q

9 categories of assets

A 
Bonds
Stocks
Real Estate
Cash, Equiv, Short term
Uncollected & deferred premiums and agents' balances
Amounts recoverable from reinsurers
Net deferred tax assets
Receivables from Parent, Subsidiary & Affiliates
Other Nonadmitted Assets
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10
Q

Think of encumbrance as

A

the outstanding loan amount

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11
Q

Real estate: valuation of properties occupied by the company

A

depreciated cost - encumbrances

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12
Q

Real estate: valuation of properties held for the production of income

A

depreciated cost - encumbrances

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13
Q

Real estate: valuation of properties held for sale

A

Min ( Depreciated cost, Fair value) - Encumbrances - Cost to sell property

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14
Q

impaired meaning

A

unlikely to be collected

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15
Q

“Amounts Recoverable from Reinsurers” asset includes

A

just the balances due for the losses that have been paid

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16
Q

Tax laws accelerate

A

recognition of revenue because they are based on discounted reserves

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17
Q

7 categories of liabilities

A 
Loss and LAE Reserves
Reinsurance Payable on Losses and LAE
Other Expenses
Unearned Premiums
Ceded Reinsurance Premiums Payable
Funds Held under Reinsurance Treaties
Provision for Reinsurance
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18
Q

Reinsurance Payable on Losses and LAE includes

A

liabilities for amounts owed to reinsureds for losses that they have already paid

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19
Q

Paid amounts are on ____ and unpaid amounts are on _____

A

income statement, balance sheet

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20
Q

2 main categories of expenses

A

LAE

Underwriting and investment expenses

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21
Q

4 breakouts of Underwriting and Investment expenses

A

Commision & brokerage expenses
Taxes licenses and fees
General and administrative expenses
Investment expenses

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22
Q

“Other expenses” in the Balance Sheet is made up of

A

“General and administrative expenses” and “investment expenses” that have been incurred but not yet paid

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23
Q

In the Underwriting and Investment exhibit, each category of expenses is broken into

A

LAE
Other underwriting expenses
Investment expenses

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24
Q

U&IE separates UEPR into

A

amount unearned 1yr or less from effective date
amount unearned 1yr+
Earned but unbilled premiums (EBUB)
Reserves for rate credits & retrospective adjustments

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25
Q

EBUB

A

arises from policies that are subject to exposure audit. In order to book EBUB, it needs to be reasonably estimable in aggregate

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26
Q

Ceded reinsurance premiums payable needs to be recorded net of

A

any commission from the reinsurer that covers the ceding company’s expense

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27
Q

unassigned funds results from

A

the contribution of retained earnings to surplus (earning that the insurer retains, rather than paying out as dividends or some other form)

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28
Q

3 ways that LAE & other underwriting expenses are allocated in the Annual Statement

A

NAIC operating expense classifications
Expense categories
Line of business

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29
Q

“Expense categories” in the annual statement

A

LAE
Other Underwriting expenses
Investment expenses

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30
Q

Other Underwriting Expenses are a component of

A

premium

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31
Q

Net Investment Gain =

A

Net Investment Income + Net Realized Capital Gains

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32
Q

components of realized capital gains from bonds

A

realized gain on sale/maturity

other realized adjustments (foreign exchange gain on disposal, other than temporary impairments)

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33
Q

Adjusted Carrying value for a Class 1-2 bond

A

Amortized Cost

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34
Q

Adjusted carrying value for a class 3-6 bond

A

Min (Amortized Cost, Fair value)

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35
Q

Insurer has to treat the amount of the impairment on a bond as

A

a realized capital loss, even if it is still holding the bond

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36
Q

Value of the highest 2 ratings of redeemable preferred stock

A

original purchase price + acquisition costs

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37
Q

Value of the highest two ratings of perpetual preferred stock

A

fair value

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38
Q

Value of the lower rated redeemable and perpetual preferred stock

A

Min (cost, amortized cost, fair value)

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39
Q

When assessing investment performance, these 3 things need to be considered

A

size of investable assets
risk
taxes

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40
Q

5 examples of aggregate write-ins for Miscellaneous Income

A 
Gain on sale of equipment
Retroactive Reinsurance
Gain on Foreign Exchange
Corporate Expenses
Fines and penalties of regulatory authorities
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41
Q

2 components of income that do not fit into underwriting, investment, or other

A

Dividends to policyholders

Federal and foreign income taxes

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42
Q

8 direct surplus charges

A 
\+ Change in Unrealized Capital Gains
\+ Change in Net Unrealized Foreign Exchange Capital Gains
\+ Change in Net Deferred Income tax
- Change in Nonadmitted Assets
- Change in Provision for Reinsurance

Change in Accounting Principles
Capital Changes and Surplus Adjustments
Dividends to stockholders

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43
Q

For unrealized capital gains, possibly adjust for DTL unless

A

pulled straight from income statement

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44
Q

For the change in net deferred income tax,

A

only admitted

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45
Q

3 things included in capital changes and surplus adjustments

A

changes in capital due to issuance of stock
changes due to return of capital
transfers from surplus to capital when stock dividends are issued (total surplus remains constant)

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46
Q

Dividends to stockholders can only be paid from

A

unassigned surplus

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47
Q

cost of double taxation definition

A

difference between the indirect amount of tax paid via investing through the insurer and the direct amount

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48
Q

Double taxation: margin paid by policyholders

A

(investment yield * tc) / (1-tc)

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49
Q

double taxation: margin paid by policyholders converted to premium load and adjusted for TVM

A

margin / (premium * (1+investment yield) ^t))

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50
Q

Atkinson and Dallas formula

A

add the cost of the insurer investing in the safer investments to the cost of double taxation

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51
Q

5 notes often requiring direct involvement by actuaries

A 
Reinsurance
Changes in incurred losses & LAE
Premium deficiency reserves
Discounting of liabilities for unpaid losses and LAE
Asbestos/environmental reserves
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52
Q

9 notes regarding reinsurance

A 
Unsecured recoverables
Recoverables in dispute
Assumed and Ceded
Uncollectible
Commutation of Ceded
Retroactive
Deposit
Transfer of Run-Off
Certified Rating Downgraded or Status subject to revocation
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53
Q

5 notes that are potentially relevant to actuaries

A 
Summary of significant accounting policies
Events subsequent
Intercompany pooling
Structured settlements
High deductibles
54
Q

Ceding commissions are treated as

A

revenue, and therefore increase the surplus

55
Q

Uncollectible reinsurance need to be

A

written off as an expense

56
Q

Accounting treatment of the transfer of a run-off agreement

A

Consideration paid is a paid loss
If the consideration paid is less than reserves transferred, the difference is treated as a decrease in the losses incurred

57
Q

If the insurer changes its premium deficiency reserve calculation to either include or exclude investment income, it would disclose it in this note and mention the following

A

Accounting Changes and Correction of Errors

  • The fact that it is changed the treatment
  • The impact of the change
58
Q

Tabular discounts

A

based on interest rate and mortality assumptions from life tables specified by the state regulator. They apply to annuity claims that pay pension benefits

59
Q

5 sections of Common Interrogatories

A 
General
Board of Directors
Financial
Investment
Other
59
Q

5 sections of Common Interrogatories

A 
General
Board of Directors
Financial
Investment
Other
60
Q

5 topics addressed in the financial section of the Common Interrogatories

A

SAP or other?
Loans made to senior leadership and other stakeholders
Assets that the insurer was obliged to transfer to another party which were not reported as liabilities
Assessments other than guaranty fund assessments
Amounts due from affiliates

61
Q

6 examples of question topics in P&C Interrogatories

A

Exposure to catastrophic events and excessive loss
Process used to calculate Probable Maximum Loss
Level of reinsurance protection
Limiting provisions within reinsurance contracts, guaranteed policies, and retrospectively rated policies
Any releases of liability under reinsured policy
Exposure to warranty business

62
Q

finite reinsurance

A

reinsurance that does not transfer underwriting or timing risk

63
Q

2 exclusions to finite insurance interrogatory about ceded 50% or at least 25% retroceded

A

reinsurance ceded to entities under the insurer’s control, other than captives
reinsurance ceded to approved pooling arrangements

64
Q

If the insurer answers affirmatively to either finite reinsurance interrogatory it needs to file a Reinsurance Summary Supplementary Filing, which includes these 3 things:

A

Impact on the Balance Sheet and Income Statement had the contracts been excluded
A summary of the applicable terms of the contract that generated the affirmative response
Teh reasons that management entered into the contract, including the expected financial gain

65
Q

Five-Year Historical Data Exhibit shows gross and net premiums summarized by these 5 lines:

A
  1. liability
  2. property
  3. property and liability combined
  4. all other
  5. non-proportional reinsurance
66
Q

Schedule A provides details about

A

real estate directly owned by the insurer

67
Q

Schedule B lists the

A

mortgage loans owned by the insurer

68
Q

Examples of “other long term assets” owned by the insurer

A

real estate not directly owned
joint ventures
partnership interests
surplus debentures

69
Q

2 parts of Schedule T

A

Part 1: Exhibits of Premiums Written

Part 2: Interstate compact - Exhibit of Premiums Written

70
Q

Part 2 of Schedule T applies to insurers that

A

also write life insurance, annuities, disability income and long term care insurance

71
Q

Contingent commissions are based on

A

the profit of the ceded business

72
Q

explanation of funds held or deposited with reinsured companies

A

a portion of the premium due to the reinsurer is withheld by the insurer to pay claims

73
Q

funds held or deposited with reinsured companies are booked as

A

an asset to the reinsurer and liability to ceding companies

74
Q

3 types of security to protect against credit risk for reinsurance

A

funds held or deposited with reinsured companies
letters of credit
amounts of assets pledged or collateral held in trust

75
Q

amounts of assets pledged or collateral held in trust are

A

under control of the reinsurer

76
Q

disadvantage of companies entering into portfolio reinsurnace arrangments

A

the reinsurer will require a risk premium to assume the risk

77
Q

2 key differences of groupings of part 3 of schedule f versus part 1

A

part 3 also separately lists authorized, unauthorized, and certified reinsurers
protected cells are listed separately (separate company with its own assets and liabilities, but which also has access to the parent’s capital)

78
Q

3 situations that require a special code be used

A

Code 2: cessions of over 75% of subject premium
Code 3: Counterparty reporting exception for Asbestos and Pollution contracts under SSAP62
Code 4: IBNR on contracts in force prior to 7/1/84 that are exempt from the statutory provision for unauthorized reinsurers

79
Q

stressed net recoverable has a floor of

A

0

80
Q

when calculating stressed total recoverable, the reinsurance recoverables also need to be reduced by IBNR for reinsurers with

A

special code 4 (exempt from the provision)

81
Q

slow paying ratio

A

recoverable on paid > 90 days overdue not in dispute / (recoverable on paid not in dispute + amounts received in last 90 days)

82
Q

The rating of a certified reinsurer impacts

A

the amount of capital they have to post

83
Q

2 reasons why being certifid is better for both the ceding company and reinsurer

A

lower provision for insurer

reinsurer does not need to post as much collateral

84
Q

unsecured total recoverables =

A

reinsurance recoverables (paid, unpaid, UEPR, commissions) - funds held, payables & collateral

85
Q

provision for unauthorized is capped at

A

total amount recoverable (and cannot be negative)

86
Q

unsecured total recoverables ___ disputed amounts

A

includes

87
Q

Provision for Reinsurance with Certified due to Collateral Deficiency =

A

Net recoverable from reinsurer - amount of credit allowed for net recoverables

88
Q

net recoverable from reinsurer =

A

total recoverable - reinsurance payable

89
Q

credit allowed for net recoverable =

A

catastrophic deferral + (net recoverable - catastrophic deferral) * % collateral provided/% collateral required

90
Q

% collateral provided

A

(funds held + collateral) / (net recoverable - catastrophic deferral)

91
Q

Provision for Overdue Reinsurance Ceded to Certified (non-slow paying) =

A

min ( 20%* paid recoverables over 90 days overdue + 20% * dispute over 90 days overdue, credit)

92
Q

Provision for certified overdue (slow paying)

A

min ( max( 20%* paid recoverables over 90 days overdue + 20% * dispute over 90 days overdue, 20% *( credit - collateral and funds held) ), credit)

93
Q

Pooling treatment: schedule P vs schedule F

A

Schedule P is net of pooling

Schedule F treats the pooling as reinsurance

94
Q

3 steps for part 6 of schedule F

A
  1. look at assets, adjust reinsurance recoverable
  2. look at liabilities, adjust to 0, adjust loss and UEPR up
  3. add all adjustments together, back into “net amount recoverable from reinsurers”
95
Q

Part 1 of Schedule P prior years row includes

A

paid activity during the year

ending reserves as of the valuation date

96
Q

DCC meaning

A

defense, litigation and medical cost containment

97
Q

selected methodology to allocate A&O needs to be

A

disclosed in the interrogatories to schedule P

98
Q

In schedule P part 1, non tabular discounts are displayed in

A

columns 32 and 33

99
Q

Schedule P is ____ intercompany pooling

A

net of

100
Q

Reserves shown in the Balance Sheet are ______ all discounts

A

net of

101
Q

Columns 11 & 12 in Schedule P part 2 show

A

how the company’s ultimate projection has changed over the past year and past two year

102
Q

To populate the prior years row for part 3,

A

first derive the incremental payments since the earliest evaluation date for both the prior and first accident year of the Part 3 from the previous year, then sum these

103
Q

the prior years row of schedule P part 2 can be derived from:

A

the ending reserves of each year end (based on the Schedule P from the previous year)

paid losses from the corresponding prior years row in part 3

104
Q

right most column of prior years row of Schedule P part 2

A

cumulative paid losses (right most column of prior years row in Part 3)

+

reserves (part 1 columns 24-(21-22)), likely adjusted for tabular discounts bc part 1 is net

105
Q

2 purposes for claim counts

A

identify trends

identify changes in the way that claims are settled and reserved

106
Q

In schedule P part 6, premium is grouped by

A

exposure year, so could include adjustment after year ends

107
Q

Schedule P is the only exhibit that does not treat the pooling arrangement as

A

reinsurance

108
Q

If there is a change in the intercompany pooling percentage, Schedule P is restated retroactively to

A

reflect the updated pooling percentage (Schedule F is not)

109
Q

Surplus relief differences for intercompany reinsurance and intercompany pooling

A

intercompany reinsurance: the individual reinsurer provides the surplus relief
intercompany pooling: the members of the pool benefit from the surplus of each participant, as opposed to an individual company

110
Q

The IEE provides

A

detailed information about the expenses of an insurer and detail about the insurer’s profitability by line of business

111
Q

Within other underwriting expenses, part 1 of the IEE allocates commission and brokerage expenses to

A

acquisition, field supervision and collection expenses

112
Q

Within other underwriting expenses, part 1 of the IEE allocates taxes, licenses and fees to

A

taxes, licenses and fees

113
Q

3 differences between part 1 of IEE and part 3 of U&IE

A

IEE segments other underwriting expenses
IEE does not include amounts unpaid, amounts relating to uninsured plans, or total expenses paid
IEE dollars are in thousands, not whole

114
Q

formula for pretax profit

A 
premiums earned
- dividends to policyholders
-incurred loss
-dcc and A&) expenses
- commission & brokerage
- taxes, licenses, and fees
- other acq, field supervision, and collection expenses
- general expenses
\+ other income less other expenses
115
Q

IEE uses a retrospective approach:

A

it allocates the profit that has emerged

116
Q

to produce the total profit for a given line in the IEE

A

the pretax profit is added to the 2 types of investment gains

117
Q

The liability fo Joint and Several Liability arrangements that have a fixed total obligation need to be reported as the sum of

A

The amount that the insurer agreed to pay based on its agreements with the co-obligers

Any additional amount that the insurer expects to pay on behalf of its co-obligers

118
Q

if the contingency involves a guarantee, the insurer needs to

A

disclose the nature and amount of the guarantee

119
Q

If either of these two things apply, the charges for a fee need to be recorded as WP instead of other income

A

the insurance policy can be cancelled for non payment of the fee
the fee is refundable in the event that the policy is cancelled

120
Q

EBUB arises from

A

policies which have their exposures subject to audit

121
Q

EBUB is

A

the amount of adjustments to premium due to changes in the level of exposure

122
Q

If the insurer uses tabular discounts, these 6 disclosures are necessary

A

tables used
rates used
the discounted liability from the financial statement
the amount of tabular discount, by line of business and reserve category
amount of interest accretion recognized in the income statement
the line in the income statement in which the interest accretion is classified

123
Q

2 examples of “Long term contracts”

A

home warranty and mechanical breakdown

124
Q

For years prior to the most recent three years, the gross UEPR

A

is no less than the larger of the aggregate results of test 1, 2 and 3 taken over all those years

125
Q

6 disclosures of recoverables from high deductibles

A

loss reserves gross of high deductibles, by line of business
for unpaid claims by the insurer, reserve credit from the high deductible recoveries due to the insurer
for paid claims by the insurer, recoveRables over 90 days overdue and nonadmitted amounts
collateral held
total unsecured high deductible amounts related to both unpaid and paid claims
highest 10 unsecured amounts ranked by counterparty (counterparties under common control should be treated as 1)

126
Q

accounting standards for premium adjustments for retrospective policies

A

accrued additional premium recorded as a receivable. either adjust written or earned premium

accrued return premium recorded as part of the change in UEPR

127
Q

Stressed total recoverable

A

120% * (Total Resinsurance Recoverable - Provision)

128
Q

Stressed net recoverable

A

Stressed total recoverble - funds held - reinsurance payable

129
Q

Part 1 of schedule F excludes

A

IBNR because IBNR reserves are not divided by ceding company

Exam 6 (8 decks)

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