Section A Flashcards
NAIC stands for
National Association of Insurance Commissioners
What is the NAIC
An organization of regulators that coordinates governance, including issuing model laws and regulations
When did NAIC adopt codification of SAP
1/1/1
Who enforces GAAP
FASB (assigned by SEC)
assets
future economic benefit, result of past events
liabilities
sacrifices of benefits due to present obligations as a result of past events
First page of the annual statement (Jurat page) includes
Name NAIC code Address Name & title of preparer Officers
largest asset held by insurers
bonds
9 categories of assets
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
Think of encumbrance as
the outstanding loan amount
Real estate: valuation of properties occupied by the company
depreciated cost - encumbrances
Real estate: valuation of properties held for the production of income
depreciated cost - encumbrances
Real estate: valuation of properties held for sale
Min ( Depreciated cost, Fair value) - Encumbrances - Cost to sell property
impaired meaning
unlikely to be collected
“Amounts Recoverable from Reinsurers” asset includes
just the balances due for the losses that have been paid
Tax laws accelerate
recognition of revenue because they are based on discounted reserves
7 categories of liabilities
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
Reinsurance Payable on Losses and LAE includes
liabilities for amounts owed to reinsureds for losses that they have already paid
Paid amounts are on ____ and unpaid amounts are on _____
income statement, balance sheet
2 main categories of expenses
LAE
Underwriting and investment expenses
4 breakouts of Underwriting and Investment expenses
Commision & brokerage expenses
Taxes licenses and fees
General and administrative expenses
Investment expenses
“Other expenses” in the Balance Sheet is made up of
“General and administrative expenses” and “investment expenses” that have been incurred but not yet paid
In the Underwriting and Investment exhibit, each category of expenses is broken into
LAE
Other underwriting expenses
Investment expenses
U&IE separates UEPR into
amount unearned 1yr or less from effective date
amount unearned 1yr+
Earned but unbilled premiums (EBUB)
Reserves for rate credits & retrospective adjustments
EBUB
arises from policies that are subject to exposure audit. In order to book EBUB, it needs to be reasonably estimable in aggregate
Ceded reinsurance premiums payable needs to be recorded net of
any commission from the reinsurer that covers the ceding company’s expense
unassigned funds results from
the contribution of retained earnings to surplus (earning that the insurer retains, rather than paying out as dividends or some other form)
3 ways that LAE & other underwriting expenses are allocated in the Annual Statement
NAIC operating expense classifications
Expense categories
Line of business
“Expense categories” in the annual statement
LAE
Other Underwriting expenses
Investment expenses
Other Underwriting Expenses are a component of
premium
Net Investment Gain =
Net Investment Income + Net Realized Capital Gains
components of realized capital gains from bonds
realized gain on sale/maturity
other realized adjustments (foreign exchange gain on disposal, other than temporary impairments)
Adjusted Carrying value for a Class 1-2 bond
Amortized Cost
Adjusted carrying value for a class 3-6 bond
Min (Amortized Cost, Fair value)
Insurer has to treat the amount of the impairment on a bond as
a realized capital loss, even if it is still holding the bond
Value of the highest 2 ratings of redeemable preferred stock
original purchase price + acquisition costs
Value of the highest two ratings of perpetual preferred stock
fair value
Value of the lower rated redeemable and perpetual preferred stock
Min (cost, amortized cost, fair value)
When assessing investment performance, these 3 things need to be considered
size of investable assets
risk
taxes
5 examples of aggregate write-ins for Miscellaneous Income
Gain on sale of equipment Retroactive Reinsurance Gain on Foreign Exchange Corporate Expenses Fines and penalties of regulatory authorities
2 components of income that do not fit into underwriting, investment, or other
Dividends to policyholders
Federal and foreign income taxes
8 direct surplus charges
\+ 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
For unrealized capital gains, possibly adjust for DTL unless
pulled straight from income statement
For the change in net deferred income tax,
only admitted
3 things included in capital changes and surplus adjustments
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)
Dividends to stockholders can only be paid from
unassigned surplus
cost of double taxation definition
difference between the indirect amount of tax paid via investing through the insurer and the direct amount
Double taxation: margin paid by policyholders
(investment yield * tc) / (1-tc)
double taxation: margin paid by policyholders converted to premium load and adjusted for TVM
margin / (premium * (1+investment yield) ^t))
Atkinson and Dallas formula
add the cost of the insurer investing in the safer investments to the cost of double taxation
5 notes often requiring direct involvement by actuaries
Reinsurance Changes in incurred losses & LAE Premium deficiency reserves Discounting of liabilities for unpaid losses and LAE Asbestos/environmental reserves
9 notes regarding reinsurance
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
5 notes that are potentially relevant to actuaries
Summary of significant accounting policies Events subsequent Intercompany pooling Structured settlements High deductibles
Ceding commissions are treated as
revenue, and therefore increase the surplus
Uncollectible reinsurance need to be
written off as an expense
Accounting treatment of the transfer of a run-off agreement
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
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
Accounting Changes and Correction of Errors
- The fact that it is changed the treatment
- The impact of the change
Tabular discounts
based on interest rate and mortality assumptions from life tables specified by the state regulator. They apply to annuity claims that pay pension benefits
5 sections of Common Interrogatories
General Board of Directors Financial Investment Other
5 sections of Common Interrogatories
General Board of Directors Financial Investment Other
5 topics addressed in the financial section of the Common Interrogatories
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
6 examples of question topics in P&C Interrogatories
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
finite reinsurance
reinsurance that does not transfer underwriting or timing risk
2 exclusions to finite insurance interrogatory about ceded 50% or at least 25% retroceded
reinsurance ceded to entities under the insurer’s control, other than captives
reinsurance ceded to approved pooling arrangements
If the insurer answers affirmatively to either finite reinsurance interrogatory it needs to file a Reinsurance Summary Supplementary Filing, which includes these 3 things:
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
Five-Year Historical Data Exhibit shows gross and net premiums summarized by these 5 lines:
- liability
- property
- property and liability combined
- all other
- non-proportional reinsurance
Schedule A provides details about
real estate directly owned by the insurer
Schedule B lists the
mortgage loans owned by the insurer
Examples of “other long term assets” owned by the insurer
real estate not directly owned
joint ventures
partnership interests
surplus debentures
2 parts of Schedule T
Part 1: Exhibits of Premiums Written
Part 2: Interstate compact - Exhibit of Premiums Written
Part 2 of Schedule T applies to insurers that
also write life insurance, annuities, disability income and long term care insurance
Contingent commissions are based on
the profit of the ceded business
explanation of funds held or deposited with reinsured companies
a portion of the premium due to the reinsurer is withheld by the insurer to pay claims
funds held or deposited with reinsured companies are booked as
an asset to the reinsurer and liability to ceding companies
3 types of security to protect against credit risk for reinsurance
funds held or deposited with reinsured companies
letters of credit
amounts of assets pledged or collateral held in trust
amounts of assets pledged or collateral held in trust are
under control of the reinsurer
disadvantage of companies entering into portfolio reinsurnace arrangments
the reinsurer will require a risk premium to assume the risk
2 key differences of groupings of part 3 of schedule f versus part 1
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)
3 situations that require a special code be used
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
stressed net recoverable has a floor of
0
when calculating stressed total recoverable, the reinsurance recoverables also need to be reduced by IBNR for reinsurers with
special code 4 (exempt from the provision)
slow paying ratio
recoverable on paid > 90 days overdue not in dispute / (recoverable on paid not in dispute + amounts received in last 90 days)
The rating of a certified reinsurer impacts
the amount of capital they have to post
2 reasons why being certifid is better for both the ceding company and reinsurer
lower provision for insurer
reinsurer does not need to post as much collateral
unsecured total recoverables =
reinsurance recoverables (paid, unpaid, UEPR, commissions) - funds held, payables & collateral
provision for unauthorized is capped at
total amount recoverable (and cannot be negative)
unsecured total recoverables ___ disputed amounts
includes
Provision for Reinsurance with Certified due to Collateral Deficiency =
Net recoverable from reinsurer - amount of credit allowed for net recoverables
net recoverable from reinsurer =
total recoverable - reinsurance payable
credit allowed for net recoverable =
catastrophic deferral + (net recoverable - catastrophic deferral) * % collateral provided/% collateral required
% collateral provided
(funds held + collateral) / (net recoverable - catastrophic deferral)
Provision for Overdue Reinsurance Ceded to Certified (non-slow paying) =
min ( 20%* paid recoverables over 90 days overdue + 20% * dispute over 90 days overdue, credit)
Provision for certified overdue (slow paying)
min ( max( 20%* paid recoverables over 90 days overdue + 20% * dispute over 90 days overdue, 20% *( credit - collateral and funds held) ), credit)
Pooling treatment: schedule P vs schedule F
Schedule P is net of pooling
Schedule F treats the pooling as reinsurance
3 steps for part 6 of schedule F
- look at assets, adjust reinsurance recoverable
- look at liabilities, adjust to 0, adjust loss and UEPR up
- add all adjustments together, back into “net amount recoverable from reinsurers”
Part 1 of Schedule P prior years row includes
paid activity during the year
ending reserves as of the valuation date
DCC meaning
defense, litigation and medical cost containment
selected methodology to allocate A&O needs to be
disclosed in the interrogatories to schedule P
In schedule P part 1, non tabular discounts are displayed in
columns 32 and 33
Schedule P is ____ intercompany pooling
net of
Reserves shown in the Balance Sheet are ______ all discounts
net of
Columns 11 & 12 in Schedule P part 2 show
how the company’s ultimate projection has changed over the past year and past two year
To populate the prior years row for part 3,
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
the prior years row of schedule P part 2 can be derived from:
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
right most column of prior years row of Schedule P part 2
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
2 purposes for claim counts
identify trends
identify changes in the way that claims are settled and reserved
In schedule P part 6, premium is grouped by
exposure year, so could include adjustment after year ends
Schedule P is the only exhibit that does not treat the pooling arrangement as
reinsurance
If there is a change in the intercompany pooling percentage, Schedule P is restated retroactively to
reflect the updated pooling percentage (Schedule F is not)
Surplus relief differences for intercompany reinsurance and intercompany pooling
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
The IEE provides
detailed information about the expenses of an insurer and detail about the insurer’s profitability by line of business
Within other underwriting expenses, part 1 of the IEE allocates commission and brokerage expenses to
acquisition, field supervision and collection expenses
Within other underwriting expenses, part 1 of the IEE allocates taxes, licenses and fees to
taxes, licenses and fees
3 differences between part 1 of IEE and part 3 of U&IE
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
formula for pretax profit
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
IEE uses a retrospective approach:
it allocates the profit that has emerged
to produce the total profit for a given line in the IEE
the pretax profit is added to the 2 types of investment gains
The liability fo Joint and Several Liability arrangements that have a fixed total obligation need to be reported as the sum of
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
if the contingency involves a guarantee, the insurer needs to
disclose the nature and amount of the guarantee
If either of these two things apply, the charges for a fee need to be recorded as WP instead of other income
the insurance policy can be cancelled for non payment of the fee
the fee is refundable in the event that the policy is cancelled
EBUB arises from
policies which have their exposures subject to audit
EBUB is
the amount of adjustments to premium due to changes in the level of exposure
If the insurer uses tabular discounts, these 6 disclosures are necessary
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
2 examples of “Long term contracts”
home warranty and mechanical breakdown
For years prior to the most recent three years, the gross UEPR
is no less than the larger of the aggregate results of test 1, 2 and 3 taken over all those years
6 disclosures of recoverables from high deductibles
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)
accounting standards for premium adjustments for retrospective policies
accrued additional premium recorded as a receivable. either adjust written or earned premium
accrued return premium recorded as part of the change in UEPR
Stressed total recoverable
120% * (Total Resinsurance Recoverable - Provision)
Stressed net recoverable
Stressed total recoverble - funds held - reinsurance payable
Part 1 of schedule F excludes
IBNR because IBNR reserves are not divided by ceding company
