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Exam 6 > Section B > Flashcards

Section B Flashcards

1
Q

RBC formula definition

A

calculates the minimum level of capital that the insurer should hold based on the risks to which it is exposed

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2
Q

RBC Model act for insurers

A

provides the state regulator the authority to take action if the RBC ratio falls below a threshold level

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3
Q

parent

A

entity that directly/indirectly controls the reporting entity

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4
Q

subsidiary

A

the controlled entity

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5
Q

affiliate

A

an entity that is within the same holding company system, or controls/is controlled by the reporting entity

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6
Q

control

A

the power to direct, via ownership of voting securities/contract/ common management. Control is assumed to exist if the entity owns at least 10% of the voting interests

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7
Q

Market valuation approach: Additional R2 component that arises from the common stock investments in the affiliates equal to

A
  • if the total RBC of the affiliate multiplied by the % ownership exceeds the book/carrying value, the excess of the book carrying value over the R0 calculated in the marketing value approach
  • Otherwise max(22.5% * excess of carrying value over the pro rata SAP surplus, excess of RBC * % ownership over the R0 value)
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8
Q

example of an alien insurance affiliate

A

captive

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9
Q

For an indirectly owned affiliate RBC charge

A

use the alien insurance affiliate formula, but adjust the 0.5 to reflect the insurer’s ownership of the holding company

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10
Q

3 examples of non-controlled assets

A
  • collateral loaned to others from securities lending programs
  • assets that are reported on the company’s balance sheet, but for which it does not have exclusive control
  • assets sold that are subject to a put option
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11
Q

2 types of RBC charges associated with securities lending program

A

Schedule DL part 1
Off-balance sheet

NOT included in RBC: investment schedules that correspond to the collateral

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12
Q

RBC charges for Working Capital finance investments

A

NAIC 1: .0038

NAIC 2: .0125

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13
Q

In order to qualify as a federal guaranteed Low Income Housing Tax Credit (LIHTC),

A

the LIHTC needs to have a guarantee from one of NAIC’s acceptable rating organizations

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14
Q

To qualify as federal non guaranteed, the LIHTC must include the following 2 risk mitigation features:

A
  • leverage ratio under 50%
  • tax guarantee from a general partner / managing member that requires this party to reimburse investors for any shortfalls in tax credits due to compliance errors
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15
Q

To qualify for state guaranteed or state non guaranteed, the LITHC must

A

meet the federal requirements for guaranteed or non-guaranteed LIHTC investments

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16
Q

RBC charge for :

Upstream affiliate (parent)
P&C, life, health insurance affiliates not subject to RBC
Other affiliates

A

0.225 * carrying value of common/preferred stock

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17
Q

For real estate, do NOT

A

net out encumbrance, the entire value gross of encumbrance would be subject to loss

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18
Q

asset concentration factors

A

reflects the level of diversification. doubles the RBC charge of the 10 largest issuers that the insurer is exposed to

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19
Q

total charge factor for each asset after the asset concentration factor adjustment is limited to

A

0.3

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20
Q

2 reasons why assets are excluded from the asset concentration factor

A

low risk

factor is already 0.3

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21
Q

r1 assets subject to asset concentration factor

A 
bonds (class 2-5)
collateral loans
mortgage loans
working capital finance investments naic 02
LIHTC
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22
Q

r2 assets subject to the charge

A 
unaffiliated preferred stocks and hybrid securities (class 2-5)
unaffiliated common stock
investment in real estate
encumbrances on invested real estate
schedule BA assets (excluding collateral loans)
receivables for securities
aggregate write-ins for invested assets
derivatives
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23
Q

How to get the Industry reserve RBC % adjusted for company experience

A

multiply the adjustment for company for experience by the industry reserve rbc %

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24
Q

The adjustment for investment income is provided by the NAIC and is based on

A

5% interest rate and payment patterns

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25
Q

RBC adjusted for loss sensitive discount

A

base loss & lae reserve RBC - loss senstive discount

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26
Q

loss concentration factor reflects the

A

level of diversification across the lines

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27
Q

how to apply 40% cap for excess growth rate factor

A

cap average growth rate for each of the 3 years at 40% before averaging

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28
Q

R4 and discount

A

gross of non tabular / net of tabular

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29
Q

if the insurer in its first year, the average growth rate is assumed to be

30
Q

insurer cannot make the company adjustment to loss ratio if

A

loss and LAE ratio for any accident year is 0 or negative
OR
net EP for any accident year is 0 or negative
OR
more than 2 years’ net EP for a line is under 20% of all the year average of each line

31
Q

For r5, adjustment for loss sensitive business is based on

A

the portion of written premium in loss sensitive contracts in each line

32
Q

Combined ratio

A

loss and LAE ratio + dividend ratio + expense ratio

33
Q

Iris ratio 1

A

GWP to PHS

GWP/PHS

34
Q

Iris ratio 2

A

NWP to PHS

NWP/PHS

35
Q

IRIS ratio 3

A

change in NWP

(NWP-prior NWP)/Prior NWP

36
Q

IRIS ratio 4

A

surplus aid to PHS

surplus aid/PHS

surplus aid = ceding commission % * UEPR

37
Q

IRIS ratio 5

A

2 yr overall operating ratio

2yr LR + 2yr Expense ratio - 2yr II ratio

38
Q

Iris ratio 6

A

investment yield

2(net investment income earned / cash & invested assets between prior and current year)

39
Q

Iris ratio 7

A

gross change in PHS

(PHS- prior PHS)/Prior PHS

40
Q

Iris ratio 8

A

change in adjusted PHS

change in adjusted PHS/Prior PHS

Adjusted PHS = change in PHS - change in surplus notes - capital and surplus paid in

41
Q

Iris ratio 9

A

adjusted liabilities to liquid assets

adjusted liabilities/liquid assets

adjusted liabilities = liabilities - deferred agents’ balances

liquid assets = liquid assets - investments in parents, subsidiaries and affiliates

42
Q

Iris ratio 10

A

gross agents’ balances to PHS

gross agents’ balances in course of collection / PHS

43
Q

Iris ratio 11

A

1 yr reserve development to PHS

1 yr reserve development / Prior PHS

44
Q

Iris raio 12

A

2yr reserve development / 2nd prior PHS

45
Q

Iris ratio 13

A

estimated current reserve deficiency to PHS

estimated deficiency / PHS

Estimated deficiency = reserves required - current reserves

reserves required = EP * ratio of reserves to premium

46
Q

All Iris ratios are rounded to the nearest percent, except

A

for Investment yield, which is rounded to the nearest tenth of a percent

47
Q

GWP/PHS reasonable range

48
Q

NWP/PHS reasonable range

49
Q

change in NWP reasonable range

A

-33 < x < 33

50
Q

surplus aid /PHS reasonable range

51
Q

2 yr overall operating ratio reasonable range

52
Q

investment yield reasonable range

A

2 < x < 5.5

53
Q

gross change in PHS reasonable range

A

-10 < x < 50

54
Q

change in adjusted PHS reasonable range

A

-10 < x < 25

55
Q

adjusted liabilities to liquid assets reasonable range

56
Q

gross agents’ balances to PHS reasonable range

57
Q

1 yr reserve development to PHS reasonable range

58
Q

2yr reserve development to PHS reasonable range

59
Q

Estimated current reserve deficiency to PHs reasonable range

60
Q

if the surplus aid ratio lies outside the normal range, these ratios should be adjusted to completely remove the surplus aid from the denominator

A

Ratios 1, 2, 7 (including prior year surplus), 10 and 13

61
Q

If the insurer is outside the normal range for ratio 11, it needs to

A

recalculate ratio 5 after removing all of the prior year’s development

62
Q

cash and invested assets between current and prior year

A

(current + prior year cash and invested assets)
+
(current + prior year investment income due and accrued)
-
(current + prior year borrow money)
-
net investment income earned (ONLY current year)

63
Q

6 things that can cause low investment yields

A

speculative investments
large investments in affiliated companies
large investments in home office facilities
large investment in tax exempt bonds
significant interest payments on borrowed money
extraordinarily high investment expenses

64
Q

the ultimate measure of the change in financial condition

A

Iris ratio 7 : gross change in PHS

65
Q

change in adjusted PHS measures

A

change in financial condition based on operational results

66
Q

adjusted liabilities to liquid assets measures

A

ability to meet the financial demands

67
Q

reserve development for ratios 11 and 12 are pulled from

A

schedule P part 2

68
Q

how to find ratio of reserves:premium for ratio 13

A

ratio of reserves:premium = average ( reserves:premium from prior year, reserves:premium from 2nd prior year)

69
Q

reserves:premim from prior yr

A

(reserves from prior yr + 1 yr loss development)/ premiums earned in prior year

70
Q

reserves:premium from 2nd prior year

A

(reserves from 2nd prior yr + 2 yr loss development)/ premiums earned in 2nd prior year

71
Q

3 things to keep in mind regarding measurement tools

A

they are only one piece of evidence
they do not replace an audit
they will not uncover fraud

Exam 6 (8 decks)

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