Section C & D Flashcards

Question

Describe the Underwriting Risk category of BCAR

Answer 1

• Two components 1. Loss and Loss-Adjustment Expense Reserves - Risk inherent in a company’s loss reserves, Adjusted for estimated reserve deficiency, payout pattern, discount rate 2. Net Premiums Written - Based on pricing risk in company’s mix of business • Components may be increased for “excessive” growth in exposure • Limited credit for a well-diversified book #03 - AM Best BCAR

Answer 2

* Underwriting risk, typically two-thirds of a company's gross required capital * Investment, credit and underwriting risk comprise more than 99% of gross required capital * Less than 1% is for off-balance sheet risk #03 - AM Best BCAR

Answer 3

Additional business risk for off-balance-sheet items: 1. Non-controlled assets 2. Gurantees for affiliates 3. Contigent liabilities 4. Pension and other post-employment obligations #03 - AM Best BCAR

Answer 4

1. Investment 2. Credit 3. Underwriting #03 - AM Best BCAR

Answer 5

* Stress tests include above-normal catastrophes, decline in equity markets, and a rise in interest rates * Best will also stress a company’s BCAR for a second catastrophe event (natural catastrophes and/or man-made events such as terrorism) #03 - AM Best BCAR

Answer 6

o Goodwill and other intangible assets are eliminated o Adjustments related to equity embedded in loss and LAE reserves, fixed-income securities, and common stocks o Adjustments to reflect the pricing risk inherent in UPR and non-balance sheet risks #03 - AM Best BCAR

Answer 7

1. Mix of business 2. Size of surplus 3. Stability of loss development 4. Profitability 5. Loss-reserve adequacy 6. Length of claims payout o BCAR is generally lower if higher underwriting leverage, greater indicated reserve deficiencies, and unstable or unprofitable business #03 - AM Best BCAR

Answer 8

BCAR is generally lower if aggressive investment portfolio, pyramided capital, excessive credit risk or excessive dependence on reinsurance #03 - AM Best BCAR

Answer 9

o More capital-intensive UW risk components are accentuated disproportionately while less capital-intensive asset risk components are diminished in their relative contributions to NRC. o AM Best counteracts this shortfall by using other distinct capital measures #03 - AM Best BCAR

Answer 10

Gross required capital is the capital to support all risks were they to develop simultaneously. The covariance adjustment in NRC reflects the assumed statistical independence of the risk components and serves to reduce a company’s overall required capital (Generally by 35% to 45%) #03 - AM Best BCAR

Answer 11

* Reserve deficiency of a company * Size of a company * Volatility of a company's case incurred LDFs * Growth in a company's exposure * Diversification benefits #03 - AM Best BCAR

Answer 12

* BCAR uses different risk factors by line of business, OSFI applies the same factor * OSFI's fomula applies a risk on the max of NUPR and 30% of NWP * BCAR includes diversification benefits, OSFI does not #03 - AM Best BCAR

Answer 13

Canadian BCAR is based on the consolidated P&C1 and P&C 2 reports. This creates a stand-alone BCAR for subsidiaries. If the parent company is the reason for a weaker BCAR then a stand-alone BCAR for the parent-only insurer can be created based on additional information supplied by the parent company. #03 - AM Best BCAR

Answer 14

* Can have a significant, rapid and unexpected impact * Increasing frequency and severity of catastrohpes has made this event more important (Need stronger capitalization to support risk; shift in frequency expectations; concentrated population growth in urban settings; losses across exposures thought to be uncorrelated #05 - AM Best Catastrophe

Answer 15

1. Data Quality o Proper coding of exposure; Geocoded properties; Timely information capture and auditing; Current Insurance-to-Value; Prevention of data manipulation 2. Monitor Exposure o Understand PML; Use catastrophe models and “what-if” testing for highly concentrated risk areas; Monitor aggregate exposure; Consider potential tail-risk scenarios 3. Controls o Catastrophe management integrated with UW; Monitoring should be a continual process; Use of reinsurance; Specific aggregate limits are established #05 - AM Best Catastrophe

Answer 16

• Reduce surplus by the larger of o a 1-in-100-year hurricane/windstorm PML o a 1-in-250-year earthquake PML o a recent actual large loss #05 - AM Best Catastrophe

Answer 17

It is inteneded to be a reasonable reflection of the stressed risk profile. Insurers are not required to withstand two major events #05 - AM Best Catastrophe

Answer 18

1. Subtract net after-tax PML of the 1st event from surplus 2. Reinsurance recoverables are increased by 40% of difference between gross and net pre-tax loss of the 1st event 3. 40% of net pre-tax PML of 1st event is added to existing reserves - Captures potential for adverse development 4. The after-tax net PML for an additional event is deducted from risk-adjusted surplus a. Where hurricanes are major risk, PML is same for 2nd event b. When earthquakes are main exposure, 2nd event reduced to 1 in 100 year event #05 - AM Best Catastrophe

Answer 19

• Stress-tested BCAR can fall a maximum of 30 points below published guidelines • Tolerance is based on o Perceived financial flexibility (+) o Historical volatility of operating performance and the balance sheet (-) o Exposure to multiple events (-) o Business profile and risk management (+/-) #05 - AM Best Catastrophe

Answer 20

Commissions that are not exclusively attributable to premium volume and thus are non-deferable #11 - CCIR

Answer 21

Commissions that cannot be readily identified as exclusively relating to and varying with the acquisition of premiums and are therefore not recoverable #11 - CCIR

Answer 22

Expenses incurred on the acquisition of new and renewal business #11 - CCIR

Answer 23

Consolidated #11 - CCIR

Answer 24

Exists where the unearned premiums will not be sufficient to discharge all the expected liabilities that will accrue on policies, including all expenses associated with servicing of the policies #11 - CCIR

Answer 25

Total Equity – Non-controlling Interest – Capital required for catastrophes – Capital required for Unregistered reinsurance Similar to MSA, if not the same #11 - CCIR

Answer 26

= Min[(Investment Yield) x (A + B + C + D - E - F), Net Investment Income] o A = Average net unpaid claims and AE for the year o B = average net unearned premiums for the year o C = average unearned commissions for the year o D = Average premium deficiency for the year o E = Average DPAE for the year end for the year o F = average receivables from agents/brokers, policyholders, and instalment premiums for the year #11 - CCIR

Answer 27

= (Receivables-unaffiliated agent and brokers + Receivables-subsidiaries, associates and joint ventures) / Adjusted Equity #11 - CCIR

Answer 28

=Excess or Deficiency Amount (Runoff) / Adjusted Equity #11 - CCIR

Answer 29

Unpaid Claims and LAE should be on GROSS basis #11 - CCIR

Answer 30

Other - Net Premiums Earned [08]: includes ph dividends and rating refunds (experience rating refunds and retro credits are not to be deducted from WP and must be treated as a payment to phs the same way as dividends to phs); Other - Revenue [44]: include interest income on deposits made by reinsurers, investment income from facility/pools, refunds from reinsurers, interest from financing activities #11 - CCIR

Answer 31

Net Income before Tax = Underwriting Income + Net Investment Income + Other Revenue & Expenses #11 - CCIR

Answer 32

= NPW + Decr. (incr.) in NUP + Service Charges = NPE + Service Charges #11 - CCIR

Answer 33

Total Claims and Expenses = Net Claims and Adjustment Expense + Acquisition Costs + General Expense + Taxes #11 - CCIR

Answer 34

= Total Underwriting Revenue – Total Claims and Expense = Net Premiums Earned x (1 – Claims Ratio – Expense Ratio) – Taxes #11 - CCIR

Answer 35

Net Investment Income = Income on Investments + Realized Gains on Investments – Investment Expense #11 - CCIR

Answer 36

Total Equity = Shares Issued and Paid + Contributed Surplus + Retained Earnings + Reserves + Accumulated Other Comprehensive Income #11 - CCIR

Answer 37

Incr. (Decr.) in Retained Earnings = Net Income – Dividends Declared to Shareholders – Increase in Reserves Required #11 - CCIR

Answer 38

Total Equity = Total Assets - Total Liabilities + Net Income #11 - CCIR

Answer 39

Total Assets = Cash + Bonds & Debentures + Preferred Shares + DPAE + Recoverable from Reinsurers + Receivables #11 - CCIR

Answer 40

Total Liabilities = Unearned Premiums + Unpaid Claim and Adjustment Expenses #11 - CCIR

Answer 41

Total Comprehensive Income = Net Income + Other Comprehensive Income #11 - CCIR

Answer 42

All amounts should be reported on an after tax basis #11 - CCIR

Answer 43

=MAX[(Balance Sheet Value of Commissions – UEComm)*35%,0] #11 - CCIR

Answer 44

=35% * MIN[Total Other Assets and Equipment, 1% of Total Assets] NOTE: if assets greater than 1% then report as 100% capital required factor and subtract from capital available. #11 - CCIR

Answer 45

• (Average net unpaid claims and adjustment expenses of prior years) x (investment yield) • If (A+B+C+D-E-F) > Average Total Investments [Cash + Investment Income due and accrued + Total Investments] o Multiply the investment yield by Average Total Investment / (A+B+C+D-E-F)

Answer 46

= Opening Unpaid claim and AE & IBNR – Claims Paid for each Subsequent Year – Ending UCAE & IBNR #11 - CCIR

Answer 47

= Amount of Excess/Def. / (Opening Unpaid claim and LAE & IBNR) #11 - CCIR

Answer 48

Investment Income from UCAE & INBR = [Average Net UCAE & IBNR] x [Investment Yield Selected] #11 - CCIR

Answer 49

* For an SIR receivable to be admissible, regulators need to be satisfied with its collectibility, i.e., the policyholder is solvent and has proven the ability to pay the retention * The regulator can request acceptable collateral #11 - CCIR

Answer 50

1. The insurer owns an annuity with payments irrevocably directed at the claimant • Non-commutable, non-assignable and non-transferable 2. It provides no current or future benefit to the insurer 3. The insurer is released by the claimant from its obligation 4. The insurer remains liable if required payments are not made #11 - CCIR

Answer 51

ROE = 2 x (Net Income after Tax) / (Beg + End Equity) #11 - CCIR

Answer 52

Yield = 2 x NII / (Vb + Ve -I) where V = Cash + Investment Income Due and Accrued + Total Investments #11 - CCIR

Answer 53

Margin Required for Reinsurance Ceded = + Unearned premiums ceded to assuming insurer + Outstanding losses recoverable from assuming insurer + 10% margin on unearned premiums ceded and outstanding losses recoverable + Receivable from assuming insurer - Payable to assuming insurer - Non-owned deposits held as security from assuming insurer (vested in trust) - Letters of credit held as security from assuming insurer (vested in trust) #11 - CCIR

Answer 54

* Provides a cushion above the minimum requirement * Facilitates OSFI's early intervention process #56 - OSFI MCT

Answer 55

* To absorb unexpected losses beyond those covered by the supervisory target * Provide adequate time for management to resolve financial problems that arise before OSFI intervention • If an insurer falls or anticipates falling below their internal target, must inform OSFI and outline their plans, subject to OSFI's approval, to return to their internal target #56 - OSFI MCT

Answer 56

• Minimum capital requirements are calculated on a consolidated basis Minimum capital required = + Capital required for Insurance Risk (chapter 4) • Capital required for unpaid claims and premium liabilities • Catastrophe reserves • Margin required for reinsurance ceded to unregistered reinsurers + Capital required for Market Risk (chapter 5) • Capital required for... interest rate risk, foreign exchange risk, equity risk, real estate risk, other market risk exposures + Capital required for Credit Risk (chapter 6) • Capital required for... counterparty default risk on balance sheet assets, counterparty default risk on off-balance sheet exposures, collateral held for unregistered reinsurance and SIR + Capital required for Operational Risk (chapter 7) - Diversification Credit (chapter 8) ÷ 1.5 #56 - OSFI MCT

Answer 57

* Risk from the potential for claims or payouts to be made to the policyholder or beneficiaries * Uncertainties around the ultimate amount of net cash flows, and the timing of the receipt and payment of these cash flows #56 - OSFI MCT

Answer 58

1. Capital required for unpaid claims and premium laibilities (includes A&S business) 2. Catastrophe Reserves (Earthquake and nuclear) 3. Margin for reinsurance ceded to unregistered reinsurers #56 - OSFI MCT

Answer 59

• Margin applied to the net amount at risk less PfAD #56 - OSFI MCT

Answer 60

• Margin applied to the greater of net premium liabilities less PfAD and 30% of net premiums written for the past 12 months #56 - OSFI MCT

Answer 61

* Incorporated federally * Incorporated provincially, but approved by the Superintendent * Foreign insurer that is authorized by the Superintendent #56 - OSFI MCT

Answer 62

Max( 0, Unearned Premiums Ceded + OS Losses Recoverable + Receivables - Payables - Non-Owned Deposits - Letters of Credit) #56 - OSFI MCT

Answer 63

* Margin = 15% of unearned premiums ceded and losses recoverable * Margin Required = Margin - Credit * Credit = Max( 0, Non-owned deposits + Letters of Credit + Payables - Unearned premiums ceded - OS Losses recoverable - Receivables) ÷ 1.5 #56 - OSFI MCT

Answer 64

* Must materially reduce risk from credit quality of unregistered reinsurance * Consists of non-owned deposits and letters of credit * LOCs limited to 30% of ceded uneared premium and OS losses recoverable, applied to the aggregate exposure #56 - OSFI MCT

Answer 65

* Non-owned deposits and letters of credit that are greater than the unregistered reinsurance requirements * Reduces capital required #56 - OSFI MCT

Answer 66

* Unregistered Reinsurance Exposure = Margin x (UEP ceded + OS Loss Recoverable) + Receivables - Payables * Total Collateral = Non-owned deposits + Letters of Credit * Excess Collateral = Total Collateral - Unregistered Reinsurance Exposure • Reduction to Capital Required = Ratio of (Excess Collateral / Total Collateral) x Total Capital Required (Indv. Collateral Amount x Risk Factor) #56 - OSFI MCT

Answer 67

OSFI must be satisfied with its collectability or may require collateral #56 - OSFI MCT

Answer 68

1. Capital & Surplus - Up to a maximum of 10% of capital and surplus 2. Earthquake Premium Reserve - Voluntary accumulation of EQ premiums 3. Reinsurance Coverage 4. Capital Market Financing - requires supervisory approval #56 - OSFI MCT

Answer 69

* Earthquake Reserves = 1.25 x (EPR + ERC) * Earthquake reserve is added to total capital requirement * Earthquake Reserve Component = {Earthquake Risk Exposure} - {Financial Resources Available} >= 0 * ERC must be greater than 0 * Earthquake Risk Exposure = CountrywidePML500 x (year - 2014) / 8 + Max (EastCanadaPML420, WestCanadaPML420) x (2022-year) / 8 * CountrywidePML500 = (EastCanadaPML500^1.5 + WestCanadaPML500^1.5) ^(1/1.5) * Gross PML is used for regulatory purposes * If insurer does not use an earthquake model or a technique approved by OSFI then CountryWidePML = Max (EastCanadaPTIV - applicable deductibles, WestCanadaPTIV - applicable deducibles), where PTIV is Property Total Insured Value * Financial Resources Available = Capital & Surplus + EPR + Reinsurance Cover + Capital Market Financing * If the EPR is not required as a financial resource to cover capital requirements, EPR can be deducted from capital available instead of added to capital required #56 - OSFI MCT

Answer 70

* Additional provision of 100% of NPW, net of commissions, x1.25 * May reverse after 20 years #56 - OSFI MCT

Answer 71

* Margins for risk that mortality and morbidity rates will be wrong * Margins to be included in MCT's margin for unpaid claims and premium liabilities * Apply factors to unpaid claims and unearned premiums #56 - OSFI MCT

Answer 72

Risk from changes in rates or prices in various markets #56 - OSFI MCT

Answer 73

1. Interest Rate Risk - Risk of economic loss resulting from market changes in interest rates 2. Foreign Exchange Risk - Risk of loss resulting in fluctiations in currency exchange rates 3. Equity Risk - Risk of economic loss due to flucuations in the prices of common shares 4. Real Estate Risk - Risk of economic loss due to changes in the value of property or in the amount and timing of cash flows from investments in real estate 5. Other Market Risk - other assets exposed to asset value fluctuations #56 - OSFI MCT

Answer 74

* To compute, apply a duration and interest rate shock factor to the fair value of interest rate seinsitive assets and liabilities * Margin is the difference between the change in value of interest rate sensitive assets and the change in value of interest rate sensitive liabilities * Interest rate sensitive assets/liabilities are those which their fair value will change with movements in interest rates • Measure economic impact of a ?y change in interest rate • ?y interest rate shock factor is 1.25% A. Change in the interest rate sensitive asset portfolio = Duration of Portfolio x ?y x Fair Value of Portfolio B. Change in the interest rate sensitive liabilities = Duration of Liabilities x ?y x Fair Value of Liabilities C. Change in the allowable interest rate derivatives = ? Effective dollar duration of allowable interest rate derivatives for change ?y D. Capital requirement for an interest rate shock factor increase of ?y = Max( A – B + C , 0 ) E. Capital requirement for an interest rate shock factor decrease of ?y (i.e. -?y) = Max( A – B + C , 0 ) • Interest rate risk margin = Max (D, E) #56 - OSFI MCT

Answer 75

• Derivatives with cash flows dependent on future interest rates and may hedge and insurer's interest rate risk • Only "plain-vanilla" interest rate derivatives may be included in interest rate risk o Future and forward interest rate and bond contracts and currency swaps • Insurers must be able to demonstrate that interest rate hedge reduces risk #56 - OSFI MCT

Answer 76

* Percentage change in an asset or liability given a change in interest rate * Measure of the sensitivity in value to a change in interest rates #56 - OSFI MCT

Answer 77

• Assumes intrest rate changes do not change expected cash flows = [1/(1+yield)] x sum of [t x PVCF@t / Market value] #56 - OSFI MCT

Answer 78

• Recognizes that interest rate changes may change expected cash flows = [ V(-) - V(+) ] / [ 2 x V(0) x ?y ] #56 - OSFI MCT

Answer 79

• Change in dollar value of an asset or liability for a given change in interest rates = duration x dollar fair value x ?y #56 - OSFI MCT

Answer 80

• Weighted average of duration of assets or liabilities in a portfolio = w1D1 + w2D2 + … + wkDk #56 - OSFI MCT

Answer 81

Should be using effective dollar duration because the insurer is hedgin the dollar interest rate exposure #56 - OSFI MCT

Answer 82

* Foreign Exchange Risk Margin = 10% of the greater of (the aggregate net long positions in each currency, |the aggregate net short positions in each currency|) * Net Spot Position = Assets - Liabilites (Long position if assets > liabilities) #56 - OSFI MCT

Answer 83

30% risk factor on investments in common shares and joint ventures (with less than 10% ownership)

Answer 84

Risk factors applied to "held for own use" and "held for investment purposes" real estate #56 - OSFI MCT

Answer 85

10% risk factor applies to other assets (other assets exposed to asset value fluctuations) #56 - OSFI MCT

Answer 86

* Definition: Risk of loss arising from a counterparty's potential inability or unwillingness to fully meet contractual obligations due to an insurer * All on- and off- balance sheet exposures are subject to risk factors * Risk factors correspond to either external credit rating or prescribed risk factors * Collateral and other forms of credit risk mitigators may reduce exposure * Components of credit risk include: Loan loss/principal risk, pre-settlement/replacement risk, settlement risk #56 - OSFI MCT

Answer 87

* Risk factors depend on external credit rating and the remaining term to maturity * Effective Maturity (M) = Sum ( t x CF@t) / Sum (CF@t) #56 - OSFI MCT

Answer 88

= ([Credit equivalent amount of instrument at reporting date] - [value of eligible collateral securities or guarantees]) x [factor reflecting nature and maturity of instrument] x [factor reflecting counterparty risk] • Credit equivalent amount varies by type of instrument #56 - OSFI MCT

Answer 89

* Risk of loss resulting from inadequate or failed internal processes, people and systems or from external events * Includes legal risk, but excludes strategic and reputation risk #56 - OSFI MCT

Answer 90

* Operational risk margin = Min { 30% x CR(0) , [8.5% x CR(0) + 2.5% x P(w) + 1.75% x P(a) + 2.5% x P(c) + 2.5% x P(?) ] + Max[ 0.75% P(aig), 0.75% x P(cig) ] } * CR(0) is total capital required for the reporting period (Before the operational risk margin and diversification credit) * P(w) is direct premium written, in the past 12 months * P(a) is assumed premiums written, in the past 12 months, arising from third party reinsurance * P(aig) is assumed premiums written, in the past 12 month, arising from intra-group pooling * P(c) is ceded premiums written, in the past 12 month, arising from third party reinsurance * P(cig) is ceded premiums written, in the past 12 month, arising from intra-group pooling * P(?) is growth in gross premiums written, in the past 12 months, above a 20% threshold #56 - OSFI MCT

Answer 91

* Capital Required - reflecting overall riskiness of an insurer * Premium Volume - Risk factors for assumed/ceded premiums arising from Intra-Group Pooling Arrangements (IGPA) caputres operations risks associated with pooling premiums in a group * Year-over-year Premium Growth beyond Threshold - Companies with premium growth beyond 20% threshold subject to additional capital requirements * Cap on Operational Risk Margin (30% of Capital Required) - dampens operational risk for insurers with a high-volume/low-complexity business with high levels of reinsurance #56 - OSFI MCT

Answer 92

* Losses across some risk categories not perfectly correlated, so an explicit credit for diversification is permitted * Diversification Credit = A + I - ?(A^2 + I^2 + [ 2 x R x A x I ]) * A is the Asset Risk Margin (sum of Credit Risk and Market Risk) * I is the Insurance Risk Margin * R is the correlation factor between A and I (equal to 50%) #56 - OSFI MCT

Answer 93

1. Availability: extent to which capital is fully paid and available to absorb losses 2. Permanence: when capital element is available 3. Absence of encumbrances and mandatory servicing costs 4. Subordination: is capital element subordinated to the rights of policyholders and creditors in an insolvency or winding-up #56 - OSFI MCT

Answer 94

• Qualifying category A common shares • Contributed surplus • Retained Earnings o Less: Accumulated net after-tax fair value gains (losses) due to changes in the company’s own credit risk o Less: Unrealized net after-tax fair value gains (losses) on own use properties at conversion to IFRS – cost model o Add: Accumulated net after-tax fair revaluation losses in excess of gains on own use properties – revaluation model • Earthquake reserves o Less: EPR not used as part of financial resources to cover exposure • Nuclear Reserves • General contingency reserves • Accumulated other comprehensive income (losses) o Less: Fair value gains (losses) on cash flow hedges; Fair value gains (losses) due to changes in own credit risk; Unrealized gains on own-use properties – revaluation surplus; Impact of shadow accounting • Net qualifying category B instruments • Qualifying category B instruments o Non-cumulative perpetual preferred shares o Other • Net qualifying category C instruments o Preferred shares o Subordinated debt o Less: Accumulated amortization of category C instruments for capital adequacy (Subject to straight-line amortization in the final five years prior to maturity) • Non-Controlling Interests #56 - OSFI MCT

Answer 95

o Investments in non-qualifying subsidiaries, associates, and joint ventures (with >10% ownership) - Interests in and loans considered as capital o Unsecured unregistered reinsurance exposures and self-insured retentions o DPAE associated with A&S business o Goodwill and other intangible assets o Deferred tax assets, except those eligible for the 10% risk factor and those netted with associated deferred tax liabilities if related o Defined benefit pension fund assets and liabilities (unless OSFI written prior approval) o Investments in own capital instruments (treasury stock) o Reciprocal cross holdings in the common shares of insurance, banking, and financial entities • Items that are deducted from capital available will be subject to a 0% risk factor for capital required purposes #56 - OSFI MCT

Answer 96

* 40% limit (of total capital available) for category B and C capital instruments, excluding AOCI * 7% limit (of total capital available) for category C capital instruments, excluding AOCI * Exclusion of category C capital takes precedence over exclusion of category B capital #56 - OSFI MCT

Answer 97

asset default; loss of market value #56 - OSFI MCT

Answer 98

* Credit risk is risk from un-collectability of funds or the amount expected to be returned differ from what was actually returned * Actuarial risk accounts for the possible abnormal negative variation in the amounts calculated by actuaries. #56 - OSFI MCT

Answer 99

Capital Available = Unadjusted EQ + Market Adjustments - Assets with 100% Capital Requirements • Assets with 100% Capital Requirements: SIR, Goodwill/intangibles, non-qualifying subsidiaries, associates, join ventures >10% ownership, DPAE that doesn’t fall into 0% or 35% factor, other assets>1% total assets #56 - OSFI MCT

Answer 100

1. Increase large line capacity • Insurer wants to limit per policy exposure, but portions of the market demand greater coverage 2. Provide catastrophe protection • Insurer desires to reduce its potential loss from a catastrophic event 3. Stabilize loss experience • Annual loss experience fluctuations may be greater than management desires 4. Provide surplus relief • Reinsurance reduces net leverage ratios 5. Facilitate withdrawal from a market segment • Management desires to exit a market and do so quicker than through runoff 6. Provide underwriting guidance • Insurer wishes to enter a new market, but does not feel comfortable with its own expertise #10 - Blanchard & Klann

Answer 101

* Surplus - no impact other than requirement for credit risk * Loss Reserves - increase due to increased premium volume and slower development of larger claims * Unearned Premiums - increase in proportion to written * Leverage Ratios - net ratios change slightly, gross ratios will increase significantly * Income Statement - little change, riskier book and cost of reinsurance may increase volatility #10 - Blanchard & Klann

Answer 102

* Surplus - Decreases if no cat occurs, but is increased if a cat does occur * Loss Reserves - No impact if no cat, Net loss reserves are reduced if a cat occurs * Leverage Ratios - If no cat, biggest impact is from reduction of surplus, if cat occurs net ratios ate protected * Income statement - Decrease in investment income, UW income is protected #10 - Blanchard & Klann

Answer 103

* Surplus - will decrease but will be more stable * Loss reserves - smaller and more stable * Net UEP reserves - decrease from reinsurance premium * Leverage ratios - higher, but more stable * Income statement - investment and uw income lower, but more stable #10 - Blanchard & Klann

Answer 104

* Surplus will only increase when ceded business is not profitable * Leverage ratios improve * Income is reduced #10 - Blanchard & Klann

Answer 105

* Surplus - decreases if business was profitable, less volatile * Loss Reserves and UEP will disappear * Leverage Ratios - left over risk is reinsurance collectability risk * U/W income is reduced if profitable business, but less volatile #10 - Blanchard & Klann

Answer 106

Similar to Increasing Large Line Capacity * Surplus - no impact other than requirement for credit risk * Loss Reserves - increase due to increased premium volume and slower development of larger claims * Unearned Premiums - increase in proportion to written * Leverage Ratios - net ratios change slightly, gross ratios will increase significantly * Income Statement - little change, riskier book and cost of reinsurance may increase volatility #10 - Blanchard & Klann

Answer 107

1. Several approaches can be used to assess the existence of risk transfer 2. Professional judgment will be required when assessing the existence of risk transfer 3. The entire agreement, consisting of the reinsurance contract and all written and verbal agreements and correspondence, must be considered in assessing the existence of risk transfer 4. The existence of risk transfer must be assessed at inception of the contract and every time a change is made to the contract that significantly alters the expected future cash flows #23 - CIA Reinsurance

Answer 108

1. Profit Sharing 2. Adjustability of Reinsurance Premiums/Commissions 3. Pre-Set Limits to timing of payments 4. Expected Duration of Contract 5. High-Front End Reinsurance Commissions 6. Counter-parties #23 - CIA Reinsurance

Answer 109

1. Future Terms based on past experience – try to recover past losses 2. Forced Renewals – contract is in deficit and the cedant is obligated to cede future business to the reinsurer until losses are eliminated #23 - CIA Reinsurance

Answer 110

1. Side Agreements – agreements not directly incorporated into the contract 2. Mirroring and Communication – reinsurer's actuary and the insurer's actuary should have similar view of risks and those risks being transferred. Since there is no mirroring environment, the actuaries must have good communication 3. Bifurcation – separating contracts into basic constituents, identifying parts that are insurance based and parts that are not. Reinsurance contracts are not intended to be bifuricated and are only valid in their entirety 4. Reinsurance Counter-party Risk – credit risk from the reinsurer. Determine if a credit provision is needed. #23 - CIA Reinsurance

Answer 111

In order to determine if risk transfer exists: 1. See if there is "reasonably self-evident" risk transfer which means that it is intuitively obvious that the contract protects the cedant from future events that could adversely effects the cedant's financial position. Does not focus on the probability of events. Restricted to contracts that (i) are done at arms length; and (ii) have no risk limiting features. 2. If the conditions for 1. do NOT exist then the actuary would consider expanding the qualitative assessment or a quantitative assessment. Usually require substantially more documentation to prove risk transfer exists #23 - CIA Reinsurance

Answer 112

* Reinsurer assumes significant insurance risk under the reinsured portion of the contract * It is reasonably possible that the reinsurer may realize a significant loss #36 - Freihaut & Vendetti

Answer 113

* Underwriting Risk - Uncertainties around the ultimate amount of net cash flows * Timing Risk - Timing of the receipt and payment of those cash flows #36 - Freihaut & Vendetti

Answer 114

ERD = (probability of underwriting loss) x (NPV of average severity of underwriting loss) #36 - Freihaut & Vendetti

Answer 115

• Narrow exemption to requirement of significant loss when reinsurer assumes substantially all the insurance risk of reinsured portions of a contract o Allows reinsurance on inherently profitable business, e.g., straight quota share #36 - Freihaut & Vendetti

Answer 116

Required for every reinsurance contract for which risk transfer is not "reasonably self-evident" #36 - Freihaut & Vendetti

Answer 117

A reinsurance contract exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for the reinsurer #36 - Freihaut & Vendetti

Answer 118

Risk transfer exists if ERD is greater than 1% #36 - Freihaut & Vendetti

Answer 119

• 1% ERD is consistent with 10-10 rule o 10% chance is a reasonable chance and 10% loss is a significant loss • 10-10 rule ignores the possibility of significant risk transfer at higher percentiles • CAS does not endorse ERD, but prefers it to the 10%-10% rule #36 - Freihaut & Vendetti

Answer 120

* 10-10 Rule * ERD rule * Value at Risk (VaR) * Tail Value at Risk (TVaR) * Right tail deviation (RTD) * Risk coverage ratio (RCR) #36 - Freihaut & Vendetti

Answer 121

1. Understand the contract's terms and conditions, especially those affecting the amount of risk transfered 2. Determine reporting dates and premium due dates #36 - Freihaut & Vendetti

Answer 122

Not considered; may effect economic results and future premium amounts but do not explicitly effect risk transfer #36 - Freihaut & Vendetti

Answer 123

Not included; should only consider cash flows between ceding company and reinsurer #36 - Freihaut & Vendetti

Answer 124

Use a constant rate that only considers insurance risk (not investment, currency, or credit) #36 - Freihaut & Vendetti

Answer 125

Consider the present value of gross premiums #36 - Freihaut & Vendetti

Answer 126

Used in selection of interest rate and in determining how much is known about potential losses #36 - Freihaut & Vendetti

Answer 127

Commutation clauses restrict the amount of risk transfer, but may meet risk transfer requirements #36 - Freihaut & Vendetti

Answer 128

Timing risk requires the reinsurer to make timely reimbursement payments. If there is a prescribed payment pattern, no timing risk and thus not risk transfer #36 - Freihaut & Vendetti

Answer 129

=Deferred Comm @BOY + Net Commission WP + UEComm @EOY – (UEComm @BOY + Deferred Comm @EOY) #11 - CCIR

Answer 130

* Deferred - Those paid on direct and assumed business * Unearned - Those from reinsurance ceded * Net - Split between commission expense and income #11 - CCIR

Answer 131

=Assets from Prior Year – Liabilities from Prior Year + Net Income Current Year #11 - CCIR

Answer 132

1. There is some benefit to the insurer since the annuity is commutable 2. A legal release is not needed from claimant 3. Must recognize the liability on the balance sheet and recognize the annuity as an asset #11 - CCIR

Answer 133

NCPW = Direct CPW + Assumed CPW - Ceded CPW #11 - CCIR

Answer 134

Net Commission = NCPW + (End Unearned - Beg UE Comm) - (End Deferred Comm - Beg Deferred Comm) = Commission Expense - Commission Income #11 - CCIR

Answer 135

Commission Expense = Direct + Assumed + (Deferred Commissions @ BOY – Deferred Commission @EOY) = DCWP + ACWP + Decr Deferred Commissions #11 - CCIR

Answer 136

Commission Income = Ceded + (UE Comm @ BOY – UE Comm @ EOY) = CCWP + Decr Uneared Commissions • Note: This ceded amount is seen as income since the insurer will get this back from reinsurer #11 - CCIR

Answer 137

Total Commissions = Net Commissions + Contingent Commission + Other Non-Deferrable Commissions #11 - CCIR

Answer 138

Gross Risk Ratio = Gross WP / Adjusted Equity #11 - CCIR

Answer 139

Section 1620: Auditors Use of an Actuary’s Work • Actuary should cooperate with auditor reviewing the actuary’s work • Actuary to act in accordance with the CIA/CICA Joint Policy Statement #12 - CIA CSOP

Answer 140

Purpose is to discuss: • Communications between the auditor and actuary • How they should interact in performing their respective responsibilities • Disclosure their respective responsibilities to readers of the financial statements #12 - CIA CSOP

Answer 141

o Relevent considerations have been unstable during the experience period and the instability cannot be quantified; o Consideratons otherwise undermine confidence in the selection of the expected assumption o Otherwise tend towards a lower margin #12 - CIA CSOP

Answer 142

1. Insurer must be able to meet all of its future obligations under the base scenario and all plausible adverse scenarios throughout the forecast period 2. Insurer must meet minimum regulatory capital requirements under the base scenario throughout the forecast period #12 - CIA CSOP

Answer 143

* The auditor considers work of the actuary, in auditing financial statements according to generally accepted auditing standards and the statements were prepared by management with the help of an actuary * The actuary considers the work of the auditor in connection with conducting the actuarial valuation to determine the amount to include in the financial statements #12 - CIA CSOP

Answer 144

1. The financial statements are the responsibility of management; 2. The amounts in the statements determined by actuaries is what the actuary is responsible for. Estimates should be assessed for sufficiency and reliability of the data used in valuation. The actuary may consider the work of an auditory with respect to data integrity and controls; 3. The auditor is responsible to express an opinion on the fairness with which the financial statements present the financial position. The auditor may rely on the amounts in the financial statement determined by the actuary. #12 - CIA CSOP

Answer 145

Enquiring Professional o Actuary or auditor whose is considering the work of the other Responding Professional o Actuary or auditor whose work is being considered by the other #12 - CIA CSOP

Answer 146

[Reported Reserve - .95 x min(Reported Reserve, Claims Liability)] x [Future Tax Rate] x [1-PV Factor] #14 - CIA Taxes

Answer 147

The income tax deduction in respect of an insurer's claim liabilities is equal to 95% of the lesser of the reported reserve and claim liability. The prepayment of tax, as a result of the claim liability deducted for tax purposes being less than the amount reported on the balance sheet, gives rise to an asset for future income taxes #14 - CIA Taxes

Answer 148

PV Factor = (Discounted Estimate excluding PfADs + PfAD Investment Return) / Undiscounted Estimate #14 - CIA Taxes

Answer 149

1. Selecting payment patterns 2. Selection of discount rates 3. Application of MfAD #15 - CIA Discounting

Answer 150

* Data availability * Cash flow volatility * Reinsurance program - Type and consistency * Discount rate - Ceded may differ from net #15 - CIA Discounting

Answer 151

1. Method of valuing assets and reporting investment income 2. Allocation of income & assets among lines 3. Return on assets at balance sheet date 4. Yield on assets after balance sheet date 5. Capital gains/losses on assets sold after balance sheet date 6. Investment expenses & losses from default #15 - CIA Discounting

Answer 152

Internal rate of return (IRR) which, when applied to the cash flows, produces the book value at a future date of the corresponding assets #15 - CIA Discounting

Answer 153

• Present Value (PV) o Sum of expected future payments after recognizing the time value of money • Actuarial Present Value (APV) o The sum of the Present Value and the Provision for Adverse Deviations (APV= PV + PfAD) #15 - CIA Discounting

Answer 154

1. Assets selected to support liabilities 2. Reinvestment risk - reinvestment of positive net cash flows - Company's investment strategy 3. Liquidation of assets 4. Investment expenses #15 - CIA Discounting

Answer 155

* Portfolio Yield Rate - use if the company's assets are similar to the cedant's assets or if company's investments can support its gross policy liabilities * Risk-Free Rate - reflects current or new money yield * Assuming Company's Discount Rate - reflects evaluation from the reinsurer's point of view #15 - CIA Discounting

Answer 156

Common for a subset of an insurance companies assets, such as bonds, to be matched to policy liabilities while riskier assets, such as equities, are matched to capital and surplus #15 - CIA Discounting

Answer 157

=Ceded PV + PfAD Ceded Dev + PfAD Ceded IR – PfAD Ceded RR #15 - CIA Discounting

Answer 158

=Net PV + PfAD Net Dev + PfAD Net IR + PfAD Ceded RR #15 - CIA Discounting

Answer 159

=Gross PV + PfAD Gross Dev + PfAD Gross IR #15 - CIA Discounting

Answer 160

1. The claim payment pattern may be derived from selected paid development factors 2. Different methods of selecting the payment pattern may be used such as historical ratios of paid losses to ultimate losses at various maturity dates. #15 - CIA Discounting

Answer 161

1. The timing of the payment of applicable reinsurance premiums 2. The earning period of the unexpired portion of in-force policies #15 - CIA Discounting

Answer 162

(1) Paid losses during CY t (2) Discounted Claims Liabilities at t (3) Discounted Claims Liabilities at t-1 (4) Investment Income in CY t on Unpaid Claims = Annual Yield x CY Average Outstanding Claims (5) Emergence During t = (3) + (4) – (1) – (2) • Excess (Deficiency) Ratio @ t-1 as of year t = [(3) + (4) – (1) – (2)] / (3) #17 - CIA Runoff

Answer 163

1. Discount paid and change in outstanding to beginning of year (from time t to t-1); or 2. Subtract provision for investment income earned during the year on assets supporting liabilities #17 - CIA Runoff

Answer 164

* Investment Income Attributable to Policy Liabilities = (Yield Rate) x (Average Policy Liabilities) * where Average Policy Liabilities = Average starting and end values of (Net unpaid claims + net unearned premium - gross DPAC + premium deficiency + unearned commission - agents and brokers receivables - instalment premiums) * This is just (Liabilities - Assets)/2 #17 - CIA Runoff

Answer 165

Indicates the adequacy of reserves at time (t-x) #17 - CIA Runoff

Answer 166

Market value, amortized value, or any other value consistent with Canadian GAAP #18 - CIA Accounting Standards

Answer 167

Contract that creates an asset for one party and a liability or equity instrument for the other #18 - CIA Accounting Standards

Answer 168

* Change in the measurement of the value of assets affect the measrement of the investment return rate and the NPV of policy liabilities * Net income affected even if assets categorized as available for sale #18 - CIA Accounting Standards

Answer 169

1. Most relevant basis for financial instruments (if it can be reliably measured) 2. Reflects market risk preferences and expectations regarding the amounts, timing, and uncertainty of future cash flows 3. Based on discounting at the risk-adjusted rate of return available in the market #18 - CIA Accounting Standards

Answer 170

= (Sum of all coupons during CY) + (Market - Amortized Value, of all "Held-for-Trading" Bonds) #18 - CIA Accounting Standards

Answer 171

* Comprehensive Income - Change in the value of net assets that is not due to owner activities * Other Comprehensive Income - Temporary presentation of certain gains and losses outside of net income * Comprehensive Income = Net Income + Other Comprehensive Income #18 - CIA Accounting Standards

Answer 172

* Subsequent measurement is on an amortized cost basis * Gains and losses are recognized in Net Income when the asset is derecognized #18 - CIA Accounting Standards

Answer 173

If a company sells more than an insignificant amount of held-to-maturity assets, ALL held-to-maturity assets must be reclassified as available-for-sale for at least two years #18 - CIA Accounting Standards

Answer 174

* Subsequent measurement is at fair value * Gains and losses are recognized in Other Comprehensive Income, transferred to Net Income when the asset is derecognized #18 - CIA Accounting Standards

Answer 175

* Subsequent measurement is at fair value * Gains and losses are recognized immediately in Net Income #18 - CIA Accounting Standards

Answer 176

Either (1) It significantly reduces the accounting mismatch form measuring assets and liabilities on different bases, or (2) the company has a documented risk management strategy for managing the group of financial instruments and can demonstrate significant financial risks are significantly reduced #18 - CIA Accounting Standards

Answer 177

1. Observable market prices - including market-based adjustments 2. Accepted valuation models - inputs are consistent with the market 3. Current cost or possibly historical cost 4. Models which use entity inputs #18 - CIA Accounting Standards

Answer 178

MCT 1. Adjust for excess market value over the current book value 2. Capital required for assets will change 3. Capital required for UEP & Unpaid Claims since the discount rate will be affected DCAT 1. Adverse scenarios relating to interest rates may have more impact on projected results #18 - CIA Accounting Standards

Answer 179

1. Selection of Discount Rate will depend on asset classification 2. Volatility Considerations – the market rate is more volatile than book value and since the discount rate will be changing more often, then volatility of the policy liabilities may increase 3. Future Income Tax – depending on how assets are classified may create tax timing differences 4. Other Issues – If policy liabilities estimated prior to the close of the accounting period, may need to re-assess portfolio yield and selected discount rate at year-end #18 - CIA Accounting Standards

Answer 180

Available-for-sale will have an income mismatch since policy liabilities flow through to Net Income and changes in assets flow through to OCI. These changes offset eachother in Comprehensive Income. Note that Available-for-sale is the only classification with OCI. PL are impacted by the discount rate but changes in assets classified as AFS will not hit the net income statement until they are de-recognized. This creates a mismatch. All the other classifications either stay on the BS or go right to net income statement. #18 - CIA Accounting Standards

Answer 181

Materiality arises in the context of: • Inclusion - Whether an item shuold be considered • Refinement - Whether an item is accurate enough • Disclosure - Whether a fact needs to be reported #21 - CIA Materiality

Answer 182

* CSOP: An omission, understatement, or overstatement is material if the actuary expects it materially to affect either the user's decision making or the user's reasonable expectations * Loosely defined as "importance", whether or not information matters to the user. Materiality arises in the context of inclusion, refinement, and disclosure. #21 - CIA Materiality

Answer 183

* The range of reasonable values in an actuarial estimate * The inherent uncertainty associated with actuarial estimates #21 - CIA Materiality

Answer 184

Consider the intended users, their knowledge, and their situations. The user's perspective is key. #21 - CIA Materiality

Answer 185

* Size * Type of business * Access to capital * Stage in the organizational life cycle * Net retention * ? Financial strength #21 - CIA Materiality

Answer 186

* Complexity of the concept * Importance of the concept to users * Sophistication of users #21 - CIA Materiality

Answer 187

Materiality level should be related to the purposes and intended uses of the work • For regulatory or solvency issues, the materiality level is typically related to statutory surplus or the solvency benchmark ratio; • For appraisal work, the materiality level is generally related to net worth, net income or Earnings Per Share • For DCAT work, the materiality level is less rigorous than valuation work; • For general financial statement work, the materiality level is generally related to both net income and net capital (or net surplus); Exclusive reliance on quantitative benchmarks is inappropriate (such as a rule of thumb) #21 - CIA Materiality

Answer 188

1. Classification of Insurance Contracts 2. Enhanced disclosures in financial statements #22 - CIA Disclosure

Answer 189

An insurer shall 36. Disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts 38. Disclose information needed for users of the financial statements to evaluate the nature and extent of insurance risks #22 - CIA Disclosure

Answer 190

1. Accounting policies for contracts, assets, liabilities, income and expenses; 2. Be able to identify the assets, liabilities, income and expense arising from insurance contracts. Cedants should also disclose gains or loss on buying reinsurance; 3. Disclose the process used to determine assumptions 4. Effect of changes in assumptions; 5. Disclose movement in premium & claim liabilities since prior year end #22 - CIA Disclosure

Answer 191

1. How the company manages risks (disclose objectives, methods, policies and processes); 2. Information about the insurance risk such as (a) Sensitivity to insurance risk (sensitivity analysis & qualitative info about sensitivity); (b) Concentrations of insurance risk; and (c) Actual claims compared to previous estimates, i.e., claims development 3. Information about credit, liquidity, and market risk; and 4. Information about exposure to market risk arising from embedded derivatives (not applicable to P&C) #22 - CIA Disclosure

Answer 192

Dislocse concentrations of insurance risk including a description of how management determines concentrations and a description of the shared chracteristic that identifies each May group by business segment, geographic region, product, or any other characteristic relevant to its business operations #22 - CIA Disclosure

Answer 193

1. Diversification 2. Underwriting limits 3. Reinsurance #22 - CIA Disclosure

Answer 194

• Reflects the degree of uncertainty of the best estimate assumption • Difference between the assumption for a calculation and the corresponding best estimate assumption • Results from: 1. Error in estimations 2. Unanticipated deterioration or improvement of expected experience 3. Statistical fluctuation • Are not expected to be so high that the probablity of unfavourable development is less than 5% (this is for the DCAT) #20 - CIA MfAD

Answer 195

* Directionalty relate to lack of knowledge about the current estimate and its trend * Higher for low frequency and high severity risks * Higher for longer term contracts * Higher for wider probability distributions * Decrease as experience emerges (experience reduces uncertainty) #20 - CIA MfAD

Answer 196

* Claims development * Recovery from Reinsurance Ceded * Investment Return Rates #20 - CIA MfAD

Answer 197

Unusually high uncertainty; MfAD expressed as a percentage unusually low #20 - CIA MfAD

Answer 198

20% is sometimes appropriate - ex: 2008 when economic crisis #20 - CIA MfAD

Answer 199

Total Margin = Asset/Liability Mismatch Margin + Timing Risk Margin + Credit Risk Margin #20 - CIA MfAD

Answer 200

* Mismatch Risk Margin = (Coverage Ratio) x [(Asset D - Liability D) / Liability D] x (Interest Rate Movement in Runoff Period) * Coverage ratio = policy liabilities / invested assets #20 - CIA MfAD

Answer 201

Reduce duration by 10% and see what discount rate is needed at full duration; L/(1+dhat)^D = L/(1+d)^0.9Dhat #20 - CIA MfAD

Answer 202

Extra yield on a corporate bond compated to a risk-free bond #20 - CIA MfAD

Answer 203

``` • Undermines the integrity of the AA • Time consuming testing required • Large number of assumptions ?•unique company circumstances ?•updating ``` #20 - CIA MfAD

Answer 204

* Complexity of the concept * Importance of the concept to users * Sophistication of users NOTE: These are same as AA disclosure considerations #20 - CIA MfAD

Answer 205

Measures to select a MfAD 1. Multiples of Standard Deviation - simple and practical 2. Percentiles or Confidene Levels - most common 3. Conditional Tail Expectation - better for more skewed distributions #20 - CIA MfAD

Answer 206

* MfAD = iPM – iAM * iAM = MIN [ iPM , iRFM x (1 – k) ] = interest rate for discounting after MfAD * iPM = interest rate for discounting, prior to MfAD * iRFM = interest rate of risk-free bonds that matches the payout of liabilities * k is a factor between 0% to 100% to reflect the percentage by which iRFM would need to be adjusted to reflect a plausible shortening of the uncertain duration of the claim liabs #20 - CIA MfAD

Answer 207

Minimum level of capital necessary for an insurer to cover risks specified in the Capital Guidelines #59 - OSFI Target Capital

Answer 208

* Level of capital necessary for an insurer to cover the risks specified in the Capital Guidelines as well as provide a margin for other risks * Provides an early signal to OSFI to ensure intervention is timely #59 - OSFI Target Capital

Answer 209

• Target level of capital, determined as part of an insurer's ORSA, needed to cover all risks of the insurer, including those risks specified in the Capital Guidelines #59 - OSFI Target Capital

Answer 210

Only if the capital injection is planned and certain #59 - OSFI Target Capital

Answer 211

If available capital falls, or is anticipated to fall within two years, below the internal target the insurer must inform OSFI immediately and outline plans to return to target in a reasonable and relatively short time period #59 - OSFI Target Capital

Answer 212

* On-going process of determining and maintaining the quantity and quality of capital appropriate to support an insurer's planned operations * Capital should be managed to: 1. maintain financial strength; 2. absorb losses; 3. allow for growth; 4. meet other risk management and business objectives; 5. provide sufficient assets to run-off obligations #59 - OSFI Target Capital

Answer 213

Principle-Based describes general accounting approach that must be interpreted and applied since its not just a set of rules; more adaptable to changes in the business environment. Rule-Based depends on rules that provide specific guidance on how something should be done. Easier to audit and understand. #26 - CAS Financial Reporting

Answer 214

In Canada there is a desire to achieve consistency with published financial statements (use CGAAP & IFRS) and in the U.S. there is a focus on insurer solvency (use SAP to report to the state) #26 - CAS Financial Reporting

Answer 215

Objectives o GAAP stresses measurement of emerging earnings of a business from period to period o SAP stresses measurement of ability to pay claims in the future Intended Users o GAAP designed to meet the varying needs of the different users of financial statements o SAP is designed to address the concerns of regulators Asset Recognition o GAAP has recognized certain assets such as deferred policy acquisition costs o SAP treats DPAC as expense when incurred Deferred Income Taxes o Recognized by GAAP but not SAP #26 - CAS Financial Reporting

Answer 216

Direct WP + Assumed WP - Ceded WP #26 - CAS Financial Reporting

Answer 217

Net WP + Beg UEP - End UEP #26 - CAS Financial Reporting

Answer 218

Net EP - Net Claims & Expense - Acquisition Expense - General Expense - Change in Premium Deficiency #26 - CAS Financial Reporting

Answer 219

BOY Balance + Net Income - Dividends Declared - Change in Reserves Note that Change in Reserves is Required Reserves on Pg. 20.40 and includes EQ, Nuclear, Mortgage, and Gen & Contingency Reserves #26 - CAS Financial Reporting

Answer 220

Investors may prefer going concern while regulators prefer liquidation (to protect policyholders) #26 - CAS Financial Reporting

Answer 221

Fair value accounting records assets at the value that it would be bought or sold on the open market. More accurate in terms of real value but usually less certain. Historical cost is more reliable and objectively verifiable, but may be less accurate. #26 - CAS Financial Reporting

Answer 222

* Supervise all federally regulated financial institutions * Monitor federally regulated pension plans * Contribute to public confidence #26 - CAS Financial Reporting

Answer 223

* Process in which one party is relieved of its obligations in respect of the claim in exchange for a cash payment. * Reinsurance contracts may contain commutation clause which requires the insurer to relive the reinsurer of its obligations in exchange for cash payment. More typical for long tailed liabilities. * Benefits for Reinsurer: Bring certainty to reinsurers results; capital relief; savings in claims adjustment and administrative expenses * Beneficial to Insurer: if concerns surrounding credit-worthiness of the reinsurer; save on administrative costs * Disadvantages for Insurer: Risk of adverse develoment and must hold additional capital for this risk #26 - CAS Financial Reporting

Answer 224

1. Claim Liabilities - for events prior to evaluation date, whether reported or not 2. Premium Liabilities - for events after evaluation date on policies in force, i.e., liabilities associated with the unexpired portion of the contract #26 - CAS Financial Reporting

Answer 225

Present Value of Future Claims Cash Flow + Risk Margin where Risk Margin is PV[ (Total Estimated Value of Future Claims - Payment at time t-1) * Required Margin * Regulatory Capital % * Risk Cost of Capital] #26 - CAS Financial Reporting

Answer 226

* Credit rating for corporate, municipal & government bonds * Financial strength ratings for insurers #32 - Feldblum

Answer 227

• RAs assess the financial strength of insurers o Public lacks the expertise, resources, and time to do so themselves o RAs can hire financial analysts, actuaries, and economist o Meetings with management give RAs proprietary information o Ratings are accepted by the public, evidenced by insurers paying for ratings and investors/agents use of them • RAs respond more slowly than the stock market to company changes #32 - Feldblum

Answer 228

1. Agencies hesitate to use an unrated insurer (they may be financially distressed) 2. Banks may not issue mortgages 3. May receive public rating (less control over information reviewed and greater chance of errors) #32 - Feldblum

Answer 229

1. Background research by ratings analyst and submission of proprietary data from insurer; 2. Interactive meetings (between rating analysts and senior managers of insurer); 3. Ratings proposal by lead analyst (preparation of ratings proposed by lead analyst and submission of additional data if needed from insurer); 4. Decision by rating committee (lead analyst presents their proposal to rating committee); 5. Publication of rating (on websites and analysis for fee-paying subscribers) #32 - Feldblum

Answer 230

1. The insurer seeks a debt rating from an agency with more experience 2. A publicly traded insurer may want a rating from an agency better known to investors 3. The insurer may be dissatisfied with its current rating and believes the second rating will be higher #32 - Feldblum

Answer 231

no reinsurance attachment points or limits; no derivative data; no segmented reserve data #32 - Feldblum

Answer 232

* Reinsurance, surety, structured settlements, homeowners, specialty lines * These are high risk lines which require good ratings to attract business and to meet regulatory conditions #32 - Feldblum

Answer 233

1. Agents are wary of unrated insurers (they might be financially distressed) 2. Relance by consumers and third parties (to evaluate financial strength) 3. Efficiency (its time consuming, costly, and most consumers don't have the expertise or reasources to perform this type of analysis on their own) #32 - Feldblum

Answer 234

1. AM Best uses Expected Policyholder Deficit (EPD) method 2/3. Moody's and Fitch use stochastic cash flow models to asses capital requirements 4. S&P focuses on principles-based models, evaluating internal capital models and ERM practices #32 - Feldblum

Answer 235

• A. M. Best’s uses Expected Policyholder Deficit (EPD) to calibrate risk o Retains the RBC structure of independent risk categories with a covariance adjustment • BCAR uses 1% EPD ratio for all sources of risk o In financial terms, the charge for each risk is the amount of capital such that the cost of a put option offsetting the risk is 1% of policyholder reserves o In insurance terms, EPD is the pure premium for unlimited aggregate excess-of-loss-reinsurance. The EPD Ratio is the EPD divided by the market value of reserves held #32 - Feldblum

Answer 236

NRC = ?(B1^2+B2^2+B3^2+B4^2+B5^2+B6^2)+B7 • B7 is off-balance sheet risks; B1-6 are bond, equity, interest rate, credit, reserves, and new business risks #32 - Feldblum

Answer 237

* Moody’s and Fitch’s use stochastic cash flow models to asses capital requirements * Models examine the accumulated cash flows of assets vs liabilities * Asset returns are based on interest rate models and random walk simulations of equity returns * Cash flows are projected until all current liabilities are settled * Required capital is set by a value at risk (VaR) or tail value at risk (TVaR) measure #32 - Feldblum

Answer 238

• Standard and Poor’s focused on evaluating internal capital models and ERM practices o Bases capital requirements on a weighted average of its own formula and the client’s economic capital model • S&P reasons that well-managed insurers understand their own capital needs more accurately than a rating agency can #32 - Feldblum

Answer 239

* Capital available / capital required * Primary regulatory solvency test * Minimum 150% #50 - MSA

Answer 240

* Net Income / Equity * Return to shareholders per unit of invested capital * Minimum 5.4% #50 - MSA

Answer 241

* ROR = [UW Income + Investment Income (excl gains) + Income from Subsidiaries] / Gross Written Premiums * Income relative to revenue generating capacity * Minimum 6.2% #50 - MSA

Answer 242

* ROA = Net Income after Tax / [Average Begin. and End. Year Assets] * Measure of efficiency in generating income from assets * Minimum 2.6% #50 - MSA

Answer 243

* IRNPE = [UW Income + Investment Income (excl. gains)] / Net Premiums Earned * Measure core earning capacity * Minimum 4% #50 - MSA

Answer 244

* LLA = Liabilities / Liquid Assets * Measures the insurer's liquidity * Higher ratio means less assets to back liabbilities * Balance sheet values are used to measure liquid assets * Maximum 105% #50 - MSA

Answer 245

* NLRE = Net Loss Reserve / Equity * High ratio could mean the insurer is exposed to financial distress due to the uncertainty in assessing unpaid claim liabilities * If this ratio is too high then small % deviations in o/s reserves can have devastating effects on solvency * Maximum 200% #50 - MSA

Answer 246

DISCONTINUED!; ability to convert premium to positive cash flows; min 0% #50 - MSA

Answer 247

* DE = 1-Year Development Deficiency / Equity * Minimum -10% * Measures an insurers one year development margin or deficiency on unpaid claims to equity. * Adverse development indicates underreserving, hence over-stated equity * Includes investment income and discounted loss reserves #50 - MSA

Answer 248

* ONL = (Net Written Premium + Net Liabilities) / Equity * Excessive premium writings relative to capital or deterioration in liabilities will erode a company's financial stability * Maximum 500% #50 - MSA

Answer 249

* AIY = 2*(Net Investment Income + OCI)/(Begin. Year + End Year Invested Assets - Net Investment Income - OCI) * Measures income and capital gains relative to deployed assets #50 - MSA

Answer 250

• Annual percentage change in net premiums written #50 - MSA

Answer 251

• Annual percentage change in gross premiums written #50 - MSA

Answer 252

* Annual percentage change in equity * Declines in equity decrease the company's cushion available to support premium writings and absorb losses #50 - MSA

Answer 253

* = AOCI / Equity * Measures AOCI's proportion to overall capital #50 - MSA

Answer 254

* RRE = (RR from UEP + RR from Unpaid Claims) / Equity * Gross measure since not offset by payables * Includes for S&S recoverables * High ratio means the insurer depends on the recoverability of those funds and thus the financial health of the reinsurers #50 - MSA

Answer 255

* NUWL = Net Written Premium / Equity * Measure the company's UW exposure relative to its capital base * Usefulness reduced by the fact that WP is an imperfect proxy for exposure * Maximum 300% #50 - MSA

Answer 256

* CR = Loss Ratio + Expense Ratio + (LAE/EP) * Provides a smoother measure of the company's UW performance than single year measure * Under 100 % is profit #50 - MSA

Answer 257

* Measures how closely the insurer tracks the overall Canadian market both geographic and line-of-business spread * Product of geographic and line of business diversification scores, each within a 1-10 range * Higher score means the company tracks closely to overall industry * Scores in excess of 65 means the insurer is well-diversified * Niche or regional insurers will have lower scores * Low and high scores can be profitable * Excludes ICBC * If part of a group, looks at the group's score #50 - MSA

Answer 258

* SS = Assets – Liabilities – Required Reserves * Adjusted Equity = Total Equity – Capital needed for catastrophes – Capital needed for reinsurance ceded to unregistered reinsurers #50 - MSA

Answer 259

* Failure of some ratios may not indicate distress, must look at tests as a whole and evaluate trends over time * Ratios don't capture market position, prospects, parental support, sources of capital, quality of and sustainability of reinsurance support, management quality, and sustainability of earnings #50 - MSA

Answer 260

score at time of underwriting; remediate sources of inadequate data; implement safeguards; invest in technology #54 - OSFI Earthquake

Answer 261

1. EQ Exposure Risk Management 2. EQ Exposure Data 3. EQ Models 4. PML Estimates 5. Financial Resources & Contingency Plans #54 - OSFI Earthquake

Answer 262

• Insurers should have a sound earthquake risk management policy subject to oversight by the BOD and implemented by senior management. Policy should include: 1. Risk Appetite & Risk Tolerance 2. Data Management Practices 3. Exposure aggregation monitoring 4. Appropriate models 5. Adequacy of resources in relation to PML 6. Contingency plans for claim handling #54 - OSFI Earthquake

Answer 263

• Exposure data needs to be appropriately captured and regularly tested for accuracy & completeness 1. Data Integrity - data quality (accuracy, completeness, and consistency) can reduce model uncertainty 2. Data Verification - data needs to be appropriately captured and regularly tested 3. Data Limitation - management should be aware of data limitations and account for them #54 - OSFI Earthquake

Answer 264

Should be used with sound knowledge of their assumptions and methods as well as high degree of caution that reflects significant uncertainty in estimates #54 - OSFI Earthquake

Answer 265

Should properly reflect total expected ultimate cost to insurer, including considerations for data quality, non-modeled exposures, model uncertainty and exposures to multiple regions. #54 - OSFI Earthquake

Answer 266

* Insurers need to ensure that they have an adequate level of financial resources and appropriate contingency plans to successfully manage through a major earthquake. * Financial Resources: Earthquake exposures should be supported by: capital and surplus, earthquake reserves, reinsurance coverage, and capital market financing #54 - OSFI Earthquake

Answer 267

* Threshold dolar value of losses beyond which losses caused by a major earthquake are unlikely * When probabilistic models are used, PML is the return period loss, defined as the dollar level of loss expected to be exceeded once in every X years * Amount after deductibles #54 - OSFI Earthquake

Answer 268

Total level and type of risk exposure that an insurer is willing to undertake, often a qualitative assessment #54 - OSFI Earthquake

Answer 269

Specific parameters and/or limits on the level and amount of risk an insurer is willing to accept/retain #54 - OSFI Earthquake

Answer 270

• All insurers must annually file the EQ Exposure Data form with OSFI o If an insurer does not have material EQ exposure then submit a letter stating so • Insurers with material exposure to earthquake risk are required to maintain and provide to OSFI, upon request, their policies that govern the earthquake exposure risk management o OSFI expects the DCAT will consider an earthquake event • If companies do not meet the standards in the guideline then OSFI may adjust the insurer's capital/asset requirements or target solvency ratios. #54 - OSFI Earthquake

Answer 271

1. Opinion of the Appointed Actuary concerning the fairness and adequacy of the policy liabilities included in the insurer's financial statements 2. Detailed commentary 3. Data exhibits and calculations supporting that opinion #57 - OSFI Memorandum for the AAR

Answer 272

1. Valuations to be done in accordance with generally accepted actuarial practice and other requirements of Super 2. Discuss the differences between boked and estimated policy liabilities 3. Booked policy liabilities shown in the balance sheet of the annual return must be NO LESS than the Actuary's estimated policy liabilities (discounted with PfADs) 4. Must file the AAR with the Annual Return. Without AAR, Return will not be considered complete. Must be filed within 60 days of year end, failure will result in a penalty #57 - OSFI Memorandum for the AAR

Answer 273

Marine Insurance, Title Insurance, and Accident & Sickness Insurance #57 - OSFI Memorandum for the AAR

Answer 274

1. Introduction - Company, author's info, date of valuation 2. Expression of Opinion - Opine on the AA's estimate of policy liabilities; note any qualifications or limitations concerning any aspect of AAR 3. Supplementary Information Supporting the Opinion - Reference exhibits and report sections where results of AAR are derived or summarized 4. Executive Summary - Summary of key results and findings; Compare actual with expected experience; deviations from CIA standards; changes to methods or assumptions 5. Description of Company - Ownership/management, business, reinsurance details, materiality standards 6. Data - extent of data review and reliance on data prepared by others 7. Claim Liabilities - gross, net & ceded discounted & undiscounted claim liabilities; claim expense; comparison of actual vs expected from previous years 8. Premium Liabilities - Discounted/undiscounted with margins; comment on all components of premium liabilities 9. Other Liabilities/Other Assets - Comment on adequacy of SIR reserves; Material amounts to recover (such as S&S) 10. Compliance 11. Exhibits & Appendices #57 - OSFI Memorandum for the AAR

Answer 275

DCAT - For the past 3 years: dates signed and presented, to whom the DCAT was presented, presentation medium (in person or written), starting dates of projection periods used Other - Info about new appointed of AA, if it occurred during the year AA - continuing education requirements, compensation, peer reviews in past 3 years #57 - OSFI Memorandum for the AAR

Answer 276

• The AA must issue a qualified opinion, conditional upon receiving an unqualified opinion from the External Auditor, along with the expected completion of the Auditors work • When completed, the Actuary must either: a) File an unqualified opinion; b) File a revised opinion with supporting AAR if the Auditor is unable to give an unqualified opinion or modifies the financial statements #57 - OSFI Memorandum for the AAR

Answer 277

• Reinsurance Arrangements o Types, term, order of application, changes during experience period • Reinsurance Ceded o Reduced for expected reinsurer defaults, disputes, time value of money (due to delays in payments) o AAR should address: 1. Dispute with reinsurer 2. Reinsurance collectible that is significantly overdue 3. Reinsurer with history of not settling accounts promptly 4. Reinsurer subject to regulatory restrictions in home jurisdiction 5. Reinsurer has poor credit history o Comment on unsual problems and/or delays epected to be encountered in collecting the relevant amounts and how commuted or changed reinsurance agreements were considered • Financial Reinsurance Agreements o Material financial reinsurance agreements without risk transfer o Material financial agreement that could offset the financial effects of reinsurance #57 - OSFI Memorandum for the AAR

Answer 278

* Undiscounted LR = (Paid Losses + Undiscounted Unpaid Claims &LAE) / Net Earned Premium * Discounted LR = (Paid Losses + Discounted Unpaid Claims & LAE Including PfAD - Cumulative Investment Income from Unpaid Claim Reserves) / (Net Earned Premium + Investment Income from UPR) #57 - OSFI Memorandum for the AAR

Answer 279

1. Development of a base scenario 2. Analysis of the impact of adverse scenarios 3. Identification and analysis of the effectiveness of various risk mitigation strategies 4. Report on the results of the analysis and recommendations to the insurer’s management and the Board of Directors 5. Opinion signed by actuary and included in report on the financial condition of insurer #16 - CIA DCAT

Answer 280

Size of company; financial position; nature of regulatory test #16 - CIA DCAT

Answer 281

Adverse scenario which triggers a change in one or more interdependent assumptions or risk factors Examples: 1. Adjustments to assumptions used in the base scenario 2. Insurer's expected response 3. Policyholder actions 4. Regulatory actions 5. Rating agency actions 6. Likelihood of changes in planned capital injections or distributions #16 - CIA DCAT

Answer 282

• Scenario of adverse, but plausible, assumptions about matters to which the insurer’s financial condition is sensitive o Adverse scenario > 95th percentile o Realistic scenario less than 99th

Answer 283

* Start with a specific result and work backwards to analyze the change to make that result happen and assess if that degree of change is plausible * In the DCAT, this involves determining how far the risk factor has to change to make surplus negative #16 - CIA DCAT

Answer 284

Identify possible threats to the financial condition of the insurer and appropriate risk management or corrective actins to address those threats #16 - CIA DCAT

Answer 285

1. Review operations in recent years (at LEAST 3) and ending financial position 2. Develop and model the base scenario for the forecast period 3. Identify risk categories relevant to the insurer 4. Select plausible adverse scenarios requiring further analysis 5. Select at least 3 adverse scenarios with the greatest sensitivity to surplus 6. Identify management actions and the impact of these on the insurer's financial position 7. Identify possible regulatory actions for each scenario that will lead to the insurers falling below the 150% target capital 8. Report findings and disclosure #16 - CIA DCAT

Answer 286

A realistic set of assumptions, usually consistent with the insurer's business plan #16 - CIA DCAT

Answer 287

* Cannot assume under adverse scenarios unless the adverse factor is under management control * Acceptable under the base scenario if within the business plan and under management control #16 - CIA DCAT

Answer 288

An adverse scenario that combines two or more plausible adverse scenarios #16 - CIA DCAT

Answer 289

1. Market Risk - Sum of basis and liquidity risk • Basis Risk - derivative's price behaviour does not act as expected, undoing hedging benefits • Liquidity Risk - not being able to cancel or unwind one's contract when desired or at a favourable price 2. Default/Credit Risk - Loss will be incurred due to default in making the full payments when due, in accordance with the terms of the contract 3. Management Risk - Potential for incurring material, unexpected losses on derivatives due to inadequate supervision and understanding, systems, controls, procedures, accounting, and reporting 4. Legal Risk - Derivative agreement is not binded as intended #16 - CIA DCAT

Answer 290

Major Risk Categories 1. Claim Frequency and Severity Risk 2. Policy Liabilities Risk 3. Inflation Risk 4. Premium Risk 5. Reinsurance Risk/Counterparty Risk 6. Investment Risk 7. Political Risk 8. Off-Balance Sheet Risk 9. Related Company Risk [See side note] #16 - CIA DCAT

Answer 291

• Insurer, throughout the forecast period, is 1. Able to meet its future obligations under the base scenario and all plausible adverse scenarios, i.e., must have positive surplus under all scenarios 2. Under the base scenario it meets the supervisory target capital requirement, i.e., MCT over 100% #16 - CIA DCAT

Answer 292

1. Risk Identification & Control - considers concentrations and interactions 2. Complementing Other Risk Management Tools • provide insight about validity of other statistical models; • assess robustness of other models to economic and financial environment changes; • simulate shocks not found in historical data • assess customer behaviour 3. Supporting Capital Management – can identify severe events 4. Improving Liquidity Management - assess liquidity profile and adequacy of buffers #60 - OSFI Stress Testing

Answer 293

Risk management technique used to evaluate the potential effects on an institution's financial condition, of a set of changes in risk factors, corresponding to exceptional but plausible events #60 - OSFI Stress Testing

Answer 294

* Scenario Testing - Uses a hypothical future state of the world to define changes in risk factors affecting an institution's operations. Includes ripple effects and uses appropriate time horizon * Sensitivity Testing - Typically involves an incremental change in a risk factor (or limited numer of). Conducted over a shorter, or even instantaneous, period. Simpler technique using fewer resources. #60 - OSFI Stress Testing

Answer 295

* Board has ultimate responsibility for stress testing program and should be aware of results * Senior management is responsible for: implementation, management, oversight, risk mitigation strategies and plans for stress scenario, and should understand the company’s risk appetite #60 - OSFI Stress Testing

Answer 296

* Include a range of perspectives (experts) and techniques (qualitative and quantitative) * Fully document the program’s procedures and assumptions * Need for a flexible infrastructure to accommodate different and changing stress tests * Regularly maintain and update the stress testing framework and assess its effectiveness #60 - OSFI Stress Testing

Answer 297

1. Risk Mitigation o Stress testing should facilitate risk mitigation or contingency plans 2. Securitization and Warehousing Risks o Consider complex and customized products along with warehousing risks (arise from the need to hold assets for longer than planned) 3. Risks to Reputation o Should have an approach to mitigate reputational risks and maintain market confidence 4. Counterparty Credit Risk o Assess large exposures to leveraged counterparties (banks, funds, etc.) that may be particularly exposed to market movements 5. Risk Concentrations o By region, industry, risk factor, and off-balance or contingent exposures #60 - OSFI Stress Testing

Answer 298

* Align regulatory and economic capital - consistent regulation in EU allows companies to operate with a single license * Freedom for companies to choose their own risk profile * Early warning system * Better alignment of risk and capital management, improving identification and mitigation of risks #44 - KPMG Solvency II

Answer 299

* A conceptual way of grouping the Solvency II requirements * Holistic approach that adresses better risk measurement and management, improves processes and controls, and institutes an enterprise wide-governance and control structure #44 - KPMG Solvency II

Answer 300

Pillar 1 - Quantitative requirements • Aims to ensure firms are adequately capitalized with risk-based capital • Includes: balance sheet evaluation, Solvency Captail Requirements, Minimum capital requirements Pillar 2 - Qualitative requirements • Imposes higher standards of risk management and governance on an insurer • Includes: system of governance, the ORSA, and the supervisory review process Pillar 3 - Disclosure requiremets • Aims for a greater level of transparency for supervisors and the publoc • Includes: Annual published solvency and financial reports, private annual report to supervisors, and the link with IFRS 2 #44 - KPMG Solvency II

Answer 301

1. Technical provisions to match insurer liabilities (best estimate) 2. Regulatory capital requirements 3. Surplus capital #44 - KPMG Solvency II

Answer 302

* Enhance an insurer’s understanding of the inter-relationships between its risk profile and capital needs * Consider all reasonably foreseeable and relevant material risks, be forward-looking, and congruent with an insurer's business and strategic planning #58 - OSFI ORSA

Answer 303

1. Comprehensive Identification and Assessment of Risks - all known, reasonably foreseeable, emerging and other risks that may have an impact on continuing operations, in normal or stressed situations 2. Relating Risk to Capital - Internal targets based on own capital needs 3. Board Oversight & Senior Management Responsibility - board is responsible for overseeing ORSA, may delegate some tasks to Senior Management for design and implementation 4. Monitoring & Reporting - performed and reported to the board at least annually 5. Internal Controls & Objective Review - should review ORSA process for integrity, accuracy, and reasonableness #58 - OSFI ORSA

Answer 304

1. Nature, Scale and Complexity - more sophisticated methods for more complex risks; 2. Determine Own Company Needs - each risk must have capital requirement and this needs to be quantified individually and on an aggregate level; 3. Set Internal Targets - use DCAT results and compare with external sources; 4. Integration with other Business Processes - Forward looking and consistent with strategic and business plans #58 - OSFI ORSA

Answer 305

1. Emerging/Evolving Risks – risks that were once immaterial may become material as the insurer’s environment changes 2. Risk Transfer/Mitigation Activities – how risks behave with respect to risk transfer and mitigation 3. Cross-border activities 3. Aggregation/Diversification Adjustment 4. Concentrations, Dependencies and Interactions of Risks #58 - OSFI ORSA

Answer 306

An event which an actuary first becomes aware after a calculation date but before the corresponding report date #13 - CIA Subsequent Events

Answer 307

o Provides information about the entity as it was at the calculation date o Retroactively makes the entity different at the calculation date o Makes the entity different after the calculation date and a purpose of the work is to report on the entity as it will be as a result of the event #13 - CIA Subsequent Events

Answer 308

1. Adjusting Events - Events that provide evidence of conditions that existed at the end of the reporting period and need to be taken into account 2. Non-Adjusting Events - Events that indicate conditions that arose after the reporting period. If material, require disclosue #13 - CIA Subsequent Events

Answer 309

1. Not a subsequent event - reflect in the analysis 2. This is the definition of a subsequent event 2a. Data defect or calculation error - Must correct if material, must communicate to management and the auditor regardless of materiality 2b. No Data defect or calculation error, occurence on or before the Calculation date - Not a subsequeny event, reflect in analysis 2c. No data defect or calculation error, occurence after the calculation date - This is a subsequent event. If it is an adjusting event, must recalculate. If it is a non-adjusting event, disclose in the notes to the financial statements 3. Not a subsequent event. If the event would have been reflected were it a subsequent event, if it invalidates the report then consider withdrawing or amending the report. If it does not invalidate the report, then inform users but don't reflect. If it would NOT have been refleted, then take no action #13 - CIA Subsequent Events

Answer 310

* Disclose materially non-adjusting events (in oral presentation or written report) * Disclose the nature of the event and an estimate of the financial effect (On claims; On reinsurance recoveries and reinstatement premiums; Discuss the impact on future results, reinsurance collectability risk, and other related events ) #13 - CIA Subsequent Events

Answer 311

* Each company must have an AA who is an FCIA and notify the Superintendent in writing * Cannot be a CEO or COO, unless authorized by the Superintendent * Cannot be CFO without audit committee permission (must be satisfied both dutues with be adequately and independently performed) and authorization by the Superintendent #52 - OSFI AA

Answer 312

* AA must submit a written statement to superintendent and directors statement of including circumstances and reasons, in the actuary's opinion, for leaving the position * Company must notify the Superintendent in writing of the revocation as well * No new actuary can accept the position before reviewing this statement (15 day wait limit if no response) #52 - OSFI AA

Answer 313

* Value actuarial and other policy liabilities as at the end of the financial year, and any other matter required by the Superintendent * Make the Appointed Actuary's Report * Each year, meet with and report to the directors on the company's future position and expected future financial condition * Report to the CEO and CFO in writing matters with material adverse effects that require rectification (if suitabile action not taken, AA to send copy of report to the Super) * Report to the directors on the fairness of dividends to policyholders * Opine on whether the method selected for allocating investment income or lesses and expenses to the participating account is fair and equitable #52 - OSFI AA

Answer 314

* FCIA (subject to CIA's rules of professional conduct); * Appropriate work experience (Work in Canada 3 of last 6 years in Canada, one year in valuation); * Familiar with CSOPs, relevant insurance legislation and regulations * Up to date with Continuing Professional Development * Not subject to an adverse finding by the CIA Disciplinary Tribunal #52 - OSFI AA

Answer 315

1. Assist OSFI in assessment of insurer’s safety and soundness 2. Benefit AA by providing source of independent consultation advice and additional source of professional education 3. Maintain and strengthen confidence in the work of the AA by the public & others #52 - OSFI AA

Answer 316

* Objective of Auditor is to obtain reasonable assurance about whether the financial statements are free from material misstatements * Objective of Peer Reviewer is to asses the safety and soundness of insurers by reviewing the AA's work at a more granular level #52 - OSFI AA

Answer 317

At least every 3 years; material changes should be reviewed and reported annually #52 - OSFI AA

Answer 318

• Reviewer expected to meet same guidelines as AA, with sufficient relevant experience being exposure to two or more unrelated insurance companies and knowledge of industry best practices • Reviewer should be objective with no relationship to the AA or insurer o Not an employee of company or affiliate o Not previously an employee or AA during the three years prior o Must not be a shareholder or have a direct financial investment (indirect investment, such as mutual fund, is fine) o If member of consulting firm is AA, another member cannot be the peer reviewer o If member of consulting firm provided actuarial work, another member CAN be peer reviewer if he/she is not involved in this work for the company o May be actuary in external audit firm (not preferred) #52 - OSFI AA

Answer 319

1. Valuation of the policy liabilities and ceded reinsurance assets o Appropriateness and extent if internal and external material changes o In compliance with accepted actuarial practice o Assumptions and methods used 2. Adequacy of procedures, systems and work (including data) relied on by AA 3. Appointed Actuary’s Report (AAR) sufficiently describes valuation assumptions and methods 4. Assumptions, methodology and scenarios used for future financial conditions reporting (DCAT Report) #52 - OSFI AA

Answer 320

All components of Premium Liabilities o Expected losses, loss expenses, and servicing costs on the policies in force o Expected adjustments to swing-rated policies o Expected changes to premiums from audits, late reporting, or endorsements o Expected commission adjustments on policies with variable commissions o Anticipated broker/agent commissions #57 - OSFI Memorandum for the AAR

Answer 321

Net = Direct + Assumed - Ceded - Oter Amounts to Recover + Other Net Liabilities #57 - OSFI Memorandum for the AAR

Answer 322

* Gross, ceded, and net provisions for claim liabilities * Gross and net policy liabilities in connection with unearned premium, any premium deficiency, and other net liabilities #57 - OSFI Memorandum for the AAR

Answer 323

* First IFRS to deal with insurance and reinsurance contracts * Issued by the Internation Accounting Standards Board (IASB) in 2004 * Applies to all insurance contracts that an entity issues and reinsurance contracts that it holds #38 - IFRS 4

Answer 324

* At the end of each reporting period, insurer shall assess whether its recognized insurance liabilities are adequate, using current estimates of future cash flows * If inadequate, he entire deficiency shall be recognized in profit and loss #38 - IFRS 4

Answer 325

* An insurer need not change its accounting policies to eliminate excessive prudence * An insurer should not introduce additional prudence if already sufficient #38 - IFRS 4

Answer 326

* Explanation of recognised amounts in the financial statement arising from insurance contracts * Nature and extent of risks arising from insurance contracts #38 - IFRS 4

Answer 327

* Measuring liabilities on an undiscounted basis * Measuring future investment management fees at amounts that exceed fair value * Using non-uniform accounting policies for insurance liabilities of subsidiaries #38 - IFRS 4

Answer 328

An insurer may change its accounting policies if the change makes the financial statements more relevant and no less reliable, or more reliable and no less relevant #38 - IFRS 4