Section C & D Flashcards
ICA: Section 165: Duties of the Directors of the Company
40 - ICA
• Directors shall supervise the management of the business and affairs of the company
• Duties
1. Establish an audit committee
2. Establish a conduct review committee
3. Establish procedures regarding conflicts of interest (and a committee to monitor this)
4. Establish a policy for dividends and bonuses
5. Establish procedures to provide required disclosures (and a committee to monitor this)
6. Establish investment and lending policies
7. Appoint the actuary of the company
ICA: Section 203: Audit Committee
40 - ICA
• To consist of at least three directors
• Majority of members must be unaffiliated directors; none may be officers or employees
• Must report to the directors, before approval of annual statement and returns is given
• May call a meeting of the directors to consider any matter of concern
• Duties
1. Review the annual statement before approved by directors
2. Review returns of the company specified by the Superintendent
3. Require, review, evaluate, and approve internal control procedures
4. Review investments and transactions that could adversely affect company
5. Meet with auditor to discuss annual statement, or other indicated transactions
6. Meet with actuary to discuss parts of annual statement prepared by actuary
7. Meet with chief internal auditor and management regarding internal control procedures
ICA: Section 331: Annual Financial Statement
40 - ICA
• The directors shall place before shareholders at every annual meeting:
- Comparative annul financial statements, for the last and previous years
- Appointed Auditor’s Report
- Appointed Actuary’s Report
- Description of the roles of the auditor and actuary
- Further information required by the by-laws of the company
• Annual Statement to contain
- Balance sheet
- Income statement
- Statement of Change in Financial Position
- Statement of Changes in Shareholder’s Equity
- Statement of Changes for Participating Accounts
• Statements to be prepared in accordance with GAAP from CICA, unless Supt. specifies otherwise
ICA: Section 346: Auditor’s Examination
40 - ICA
- Auditor to make an examination so as to report on financial statements
- Exam conducted in accordance with GAAP based on CICA, unless Supt. specifies otherwise
- Can use the actuary’s valuation for year-end and increases in policy liabilities
ICA: Section 357: Notice of Appointment (AA)
40 - ICA
(1) A company shall notify the Superintendent in writing of the appointment of the actuary
ICA: Section 359: Officer Precluded (AA)
40 - ICA
• CEO/COO or CFO can be appointed, but must be authorized by the Superintendent
• CEO
o Can hold position no longer than six months
• CFO
o Authorization may contain limitations and conditions, e.g. time limitation
o Audit committee must provide OSFI a written statement that it is satisfied that both duties will be performed adequately and independently
ICA: Section 360: Revocation of Appointment (AA)
40 - ICA
(1) The company (directors) may revoke the appointment of the actuary, but must notify the Superintendent in writing
ICA: Section 362-364: Filling Vacancy (AA)
40 - ICA
- Directors must notify Superintendent and fill the position
- Actuary must submit a written statement to the directors and Superintendent explaining the circumstances and reasons why, in the actuary’s opinion, the revocation or resignation occurred
- Replacement actuary must request the statement from prior actuary regarding resignation/revocation before accepting the position (must not accept until after receiving the statement or until 15 days have passed)
ICA: Section 365: Actuary’s Valuation and Report
40 - ICA
• AA to value actuarial and other policy liabilities at year-end or other matters specified by Superintendent
o Made in accordance with generally accepted actuarial practice
• Superintendent may appoint an outside actuary to do this, at companies expense
o Company to provide access to records and information the actuary views as needed
o Communication in response to the actuary will not result in civil liability
• AA must submit report, 21 days prior to annual meeting, indicating whether the AR fairly presents the results of the valuation
ICA: Section 368: AA Report to Directors
40 - ICA
AA to meet with the directors of the company, or audit committee, at least once a year, to report on the financial position of the company and expected future financial condition
ICA: Section 369: AA Report to Officers
40 - ICA
• AA to report, in writing, to the CEO and CFO any matters with material adverse effects on the financial condition of the company requiring rectification
o AA should provide a copy of the report to the directors
o If suitable action, in the actuary’s opinion, is not taken, AA should send report to the Superintendent
ICA: Section 370: Qualified Privilege
40 - ICA
• Qualified privilege given to the actuary’s oral or written statements - has no civil liability for statements made in good faith
ICA: Section 464: Declaration of Policy Dividend or Bonus
40 - ICA
- Directors may declare such
- The directors must consider the actuary’s report before declaring
- Should not declare a dividend, bonus, or other benefit if in contravention of this Act or other regulation
ICA: Section 465: Regulations
40 - ICA
• Governor in Council may enact regulation limiting extent of a company’s reinsurance
ICA: Section 476-478, 516: Specific Restrictions
40 - ICA
- Shall not enter into any debt obligation if the total debt and stated capital of the company would exceed the prescribed percentage of total assets (L+S>A)
- Shall not guarantee another’s obligation (unless that of a subsidiary with an unqualified obligation to the company)
- Shall not lease personal property in Canada
ICA: Section 517: Notice of Value of an Asset
40 - ICA
Superintendent to notify the company auditor, actuary, and audit committee the value of an appraised asset that differs materially from the company’s value of that asset
ICA: Section 581: Conditions for Order of a Foreign Company
40 - ICA
• Superintendent shall not approve a foreign insurer unless it has:
1. Assets having a prescribed value (at least $5M)
2. Appointed an actuary and an auditor
3. Established a location where chief agency will be situated
• Superintendent may put conditions or limitations on a company
• For foreign entities, AA and Auditor largely similar to domestic sections (replace officers with chief agent)
What is the BCAR formula?
03 - AM Best BCAR
BCAR (Best’s Capital Adequacy Ratio) = Adjusted Surplus / Net Required Capital
Underwriting leverage is generated from:
03 - AM Best BCAR
- Current premium writings
- Reinsurance recoverables
- Loss reserves
- Consider factors unique to the company
Balance sheet strength depends on 3 types of leverage
03 - AM Best BCAR
- Underwriting
- Financial
- Asset
What does financial leverage measure?
03 - AM Best BCAR
exposure to debt
What does asset leverage measure?
03 - AM Best BCAR
exposure of surplus to investment, interest rate, and credit risks
Describe the Investment Risk category of BCAR
03 - AM Best BCAR
• Three main components
- Fixed-income securities
- Equities
- Interest Rate
- Capital charges are applied to different asset classes based on the risk of default, illiquidity, and market-value declines in both equity and fixed income securities
- Canadian model incorporates an interest-rate risk component that considers the market value decline in a company’s fixed-income portfolio as a result of rising interest rates
Describe the Credit Risk category of BCAR
03 - AM Best BCAR
- Capital charges for receivable balances,recoverables from reinsurance (registered and unregistered) and affiliates to reflect third-party default risk
- May be modified for: Collateral offsets for reinsurance balances; Quality of reinsurers; Dependence on reinsurance program; Premium receivables from agents, brokers, policyholders and installment premium balances; Funds held by residual markets; Other miscellaneous receivables
Describe the Underwriting Risk category of BCAR
03 - AM Best BCAR
• 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
What is the largest risk category in a company’s BCAR ? What is the smallest?
03 - AM Best BCAR
- 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
Describe the Additional Business Risk category of BCAR
03 - AM Best BCAR
Additional business risk for off-balance-sheet items:
- Non-controlled assets
- Gurantees for affiliates
- Contigent liabilities
- Pension and other post-employment obligations
What are the three broad risk categories that NRC supports
03 - AM Best BCAR
- Investment
- Credit
- Underwriting
What additional stress testing is done on a company’s BCAR score?
03 - AM Best BCAR
- 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)
What are the adjustments to reported surplus within the Canadian BCAR model?
03 - AM Best BCAR
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
What are the drivers of the underwriting risk component of the BCAR formula?
03 - AM Best BCAR
- Mix of business
- Size of surplus
- Stability of loss development
- Profitability
- Loss-reserve adequacy
- Length of claims payout
o BCAR is generally lower if higher underwriting leverage, greater indicated reserve deficiencies, and unstable or unprofitable business
What are the drivers of investment risk, interest-rate risk, and credit risk in BCAR?
03 - AM Best BCAR
BCAR is generally lower if aggressive investment portfolio, pyramided capital, excessive credit risk or excessive dependence on reinsurance
What distortion is caused by the “square root” rule in BCAR?
03 - AM Best BCAR
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
What is gross required capital and what does the covariance adjustment represent in NRC?
03 - AM Best BCAR
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%)
Identify four adjustments included in the calculation of the loss and loss-adjustment expense reserve factor for BCAR but NOT in OSFI’s formula
03 - AM Best BCAR
- 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
Identify two differences between BCAR’s net written premium factor and that of OSFI’s formula
03 - AM Best BCAR
- 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
Difference between the CDN BCAR and American BCAR.
03 - AM Best BCAR
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.
Discuss the reasons catastrophe loss is a primary threat to financial strength
05 - AM Best Catastrophe
- 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
Identify and brielfy explain AM Best’s three keys to strong catstrophe risk management
05 - AM Best Catastrophe
- Data Quality
o Proper coding of exposure; Geocoded properties; Timely information capture and auditing; Current Insurance-to-Value; Prevention of data manipulation - 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 - Controls
o Catastrophe management integrated with UW; Monitoring should be a continual process; Use of reinsurance; Specific aggregate limits are established
Discuss the baseline treatment of catastrophes in BCAR
05 - AM Best Catastrophe
• 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
In addition to requiring a company to maintain capitalization that can withstand the impact to surplus of a severe event, why does AM Best perform a further stress test
05 - AM Best Catastrophe
It is inteneded to be a reasonable reflection of the stressed risk profile. Insurers are not required to withstand two major events
Desribe the BCAR methodology for a natural catastrophe stress test
05 - AM Best Catastrophe
- Subtract net after-tax PML of the 1st event from surplus
- Reinsurance recoverables are increased by 40% of difference between gross and net pre-tax loss of the 1st event
- 40% of net pre-tax PML of 1st event is added to existing reserves - Captures potential for adverse development
- 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
What level of tolerance surrounds the stress tested BCAR? What are the key factors regarding this tolerance?
05 - AM Best Catastrophe
• 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 (+/-)
What are contingent commissions?
11 - CCIR
Commissions that are not exclusively attributable to premium volume and thus are non-deferable
What are non-deferrable commissions?
11 - CCIR
Commissions that cannot be readily identified as exclusively relating to and varying with the acquisition of premiums and are therefore not recoverable
What are policy acquisiton expenses?
11 - CCIR
Expenses incurred on the acquisition of new and renewal business
The P&C Return must be prepared on a consolidated or unconsolidated basis?
11 - CCIR
Consolidated
What is a premium deficiency?
11 - CCIR
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
10.60 Adjusted Equity
11 - CCIR
Total Equity – Non-controlling Interest – Capital required for catastrophes – Capital required for Unregistered reinsurance
Similar to MSA, if not the same
10.60 Net Investment Income From Insurance Operations
11 - CCIR
= 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
10.60 Agents and Brokers Balances and Amounts Due from Subsidiaries & Associates =
11 - CCIR
= (Receivables-unaffiliated agent and brokers + Receivables-subsidiaries, associates and joint ventures) / Adjusted Equity
10.60 Claims Development as a % of AE
11 - CCIR
=Excess or Deficiency Amount (Runoff) / Adjusted Equity
20.20 Liabilities and Equity: Notes to keep in mind
11 - CCIR
Unpaid Claims and LAE should be on GROSS basis
20.30 Notes Regarding Statement of Income
11 - CCIR
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
20.30 Net Income (before tax)
11 - CCIR
Net Income before Tax = Underwriting Income + Net Investment Income + Other Revenue & Expenses
20.30 Total Underwriting Revenue
11 - CCIR
= NPW + Decr. (incr.) in NUP + Service Charges
= NPE + Service Charges
20.30 Total Claims and Expenses
11 - CCIR
Total Claims and Expenses = Net Claims and Adjustment Expense + Acquisition Costs + General Expense + Taxes
20.30 Underwriting Income/ Net Operating Income
11 - CCIR
= Total Underwriting Revenue – Total Claims and Expense
= Net Premiums Earned x (1 – Claims Ratio – Expense Ratio) – Taxes
20.30 Net Investment Income
11 - CCIR
Net Investment Income = Income on Investments + Realized Gains on Investments – Investment Expense
20.30 Total Equity
11 - CCIR
Total Equity = Shares Issued and Paid + Contributed Surplus + Retained Earnings + Reserves + Accumulated Other Comprehensive Income
20.30 Change in Retained Earnings
11 - CCIR
Incr. (Decr.) in Retained Earnings = Net Income – Dividends Declared to Shareholders – Increase in Reserves Required
20.10/20.20 Total Equity
11 - CCIR
Total Equity = Total Assets - Total Liabilities + Net Income
20.10/20.20 Total Assets
11 - CCIR
Total Assets = Cash + Bonds & Debentures + Preferred Shares + DPAE + Recoverable from Reinsurers + Receivables
20.10/20.20 Total Liabilities
11 - CCIR
Total Liabilities = Unearned Premiums + Unpaid Claim and Adjustment Expenses
20.10/20.20 Total Comprehensive Income
11 - CCIR
Total Comprehensive Income = Net Income + Other Comprehensive Income
20.42 AOCI Notes
11 - CCIR
All amounts should be reported on an after tax basis
30.71 MCT Capital Required: Treatment of DPAE Commissions
11 - CCIR
=MAX[(Balance Sheet Value of Commissions – UEComm)*35%,0]
30.71 MCT Capital Required: Treatment of Other Assets and Equipment (Excluding Goodwill, Intangibles, & Computer Software)
11 - CCIR
=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.
60.30 Investment Income on Unpaid Claims of Prior Years: How are amounts reported in this column?
• (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)
60.40 Net Claims and AE – Run Off: Excess/Deficiency
11 - CCIR
= Opening Unpaid claim and AE & IBNR – Claims Paid for each Subsequent Year – Ending UCAE & IBNR
60.40 Net Claims and LAE – Run Off: Excess/Deficiency Ratio
11 - CCIR
= Amount of Excess/Def. / (Opening Unpaid claim and LAE & IBNR)
60.41 Net Claims and AE – Run Off - Discounted: Investment Income from unpaid claims and adjustment expense & INBR
11 - CCIR
Investment Income from UCAE & INBR = [Average Net UCAE & IBNR] x [Investment Yield Selected]
Under what condition is an SIR receivable admissible for statutory test purposes? Hhow can the regulator ensure the condition is met?
11 - CCIR
- 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
A P&C insurer would not be required to show the claim liability for structured settlements in its AR if certain conditions are applied. List the 4 conditions.
11 - CCIR
- The insurer owns an annuity with payments irrevocably directed at the claimant
• Non-commutable, non-assignable and non-transferable - It provides no current or future benefit to the insurer
- The insurer is released by the claimant from its obligation
- The insurer remains liable if required payments are not made
10.60 Return on Equity
11 - CCIR
ROE = 2 x (Net Income after Tax) / (Beg + End Equity)
10.60 Investment Yield
11 - CCIR
Yield = 2 x NII / (Vb + Ve -I)
where V = Cash + Investment Income Due and Accrued + Total Investments
70.38 Reinsurance Ceded to Unregistered Insurers: Margin Required for Reinsurance Ceded
11 - CCIR
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)
Reasons for 150% MCT supervisory target
56 - OSFI MCT
- Provides a cushion above the minimum requirement
- Facilitates OSFI’s early intervention process
Why should an insurer establish an internal target capital ratio sufficiently high?
56 - OSFI MCT
- 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
What is the formula for Minimum Capital Required of the MCT
56 - OSFI MCT
• 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
MCT: Define Insurance Risk
56 - OSFI MCT
- 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
What are the components of Insurance Risk in the MCT
56 - OSFI MCT
- Capital required for unpaid claims and premium laibilities (includes A&S business)
- Catastrophe Reserves (Earthquake and nuclear)
- Margin for reinsurance ceded to unregistered reinsurers
MCT: Margin for Unpaid Claims
56 - OSFI MCT
• Margin applied to the net amount at risk less PfAD
MCT: Margin for Premium Liabilities
56 - OSFI MCT
• Margin applied to the greater of net premium liabilities less PfAD and 30% of net premiums written for the past 12 months
A registered reinsurer is
56 - OSFI MCT
- Incorporated federally
- Incorporated provincially, but approved by the Superintendent
- Foreign insurer that is authorized by the Superintendent
MCT: Reduction to capital available from unregistered reinsurance
56 - OSFI MCT
Max( 0, Unearned Premiums Ceded + OS Losses Recoverable + Receivables - Payables - Non-Owned Deposits - Letters of Credit)
MCT: Margin for unregistered reinsurance
56 - OSFI MCT
- 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
What are the requirements for collateral for unregistered reinsurance?
56 - OSFI MCT
- 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
What is excess collateral and how does it affect a company’s MCT?
56 - OSFI MCT
- Non-owned deposits and letters of credit that are greater than the unregistered reinsurance requirements
- Reduces capital required
Compute excess collateral and the reduction in capital required
56 - OSFI MCT
- 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)
What is the requirement for an SIR to be admissible?
56 - OSFI MCT
OSFI must be satisfied with its collectability or may require collateral
What financial resources are available to cover earthquake risk exposure?
56 - OSFI MCT
- Capital & Surplus - Up to a maximum of 10% of capital and surplus
- Earthquake Premium Reserve - Voluntary accumulation of EQ premiums
- Reinsurance Coverage
- Capital Market Financing - requires supervisory approval
How are earthquake reserves handled in the MCT calculation?
56 - OSFI MCT
- 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
MCT: Nuclear Reserve
56 - OSFI MCT
- Additional provision of 100% of NPW, net of commissions, x1.25
- May reverse after 20 years
MCT: Accident & Sickness Business
56 - OSFI MCT
- 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
MCT: Define Market Risk
56 - OSFI MCT
Risk from changes in rates or prices in various markets
List and describe the components of Market Risk in the MCT
56 - OSFI MCT
- Interest Rate Risk - Risk of economic loss resulting from market changes in interest rates
- Foreign Exchange Risk - Risk of loss resulting in fluctiations in currency exchange rates
- Equity Risk - Risk of economic loss due to flucuations in the prices of common shares
- 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
- Other Market Risk - other assets exposed to asset value fluctuations
MCT: Interest rate risk margin
56 - OSFI MCT
- 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)
What are allowable interest rate derivatives that affect the interest rate risk
56 - OSFI MCT
• 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
Define Duration
56 - OSFI MCT
- 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
Modified Duration
56 - OSFI MCT
• Assumes intrest rate changes do not change expected cash flows
= [1/(1+yield)] x sum of [t x PVCF@t / Market value]
Effective Duration
56 - OSFI MCT
• Recognizes that interest rate changes may change expected cash flows
= [ V(-) - V(+) ] / [ 2 x V(0) x ?y ]
Dollar Duration
56 - OSFI MCT
• Change in dollar value of an asset or liability for a given change in interest rates
= duration x dollar fair value x ?y
Portfolio Duration
56 - OSFI MCT
• Weighted average of duration of assets or liabilities in a portfolio
= w1D1 + w2D2 + … + wkDk
Duration of allowable interest rate deriviates
56 - OSFI MCT
Should be using effective dollar duration because the insurer is hedgin the dollar interest rate exposure
MCT: Foreign Exchange Risk Margin
56 - OSFI MCT
- 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)
MCT: Equity Risk Margin
30% risk factor on investments in common shares and joint ventures (with less than 10% ownership)
MCT: Real Estate Risk Margin
56 - OSFI MCT
Risk factors applied to “held for own use” and “held for investment purposes” real estate
MCT: Margin on Other Market Risk Exposures
56 - OSFI MCT
10% risk factor applies to other assets (other assets exposed to asset value fluctuations)
MCT: Discuss the Credit Risk component of MCT capital required
56 - OSFI MCT
- 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
MCT: Capital requirement for Balance Sheet Assets
56 - OSFI MCT
- Risk factors depend on external credit rating and the remaining term to maturity
- Effective Maturity (M) = Sum ( t x CF@t) / Sum (CF@t)
MCT: Capital requirement for Off-Balance Sheet Exposure
56 - OSFI MCT
= ([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
MCT: Define Operational Risk
56 - OSFI MCT
- 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
MCT: Operational risk margin
56 - OSFI MCT
- 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
Discuss the four components of Operational Risk
56 - OSFI MCT
- 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
MCT: Diversification Credit
56 - OSFI MCT
- 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%)
What are the four primary considerations in measuring capital adequacy
56 - OSFI MCT
- Availability: extent to which capital is fully paid and available to absorb losses
- Permanence: when capital element is available
- Absence of encumbrances and mandatory servicing costs
- Subordination: is capital element subordinated to the rights of policyholders and creditors in an insolvency or winding-up
MCT: Capital Available =
56 - OSFI MCT
• 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
MCT: Deductions to capital available
56 - OSFI MCT
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
What are the limits to category B and C capital in capital available?
56 - OSFI MCT
- 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
Potential asset risks
56 - OSFI MCT
asset default; loss of market value
What is credit risk? What is actuarial risk?
56 - OSFI MCT
- 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.
MCT 2014: Capital Available =
56 - OSFI MCT
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
List and describe the 6 principle functions of reinsurance
10 - Blanchard & Klann
- Increase large line capacity
• Insurer wants to limit per policy exposure, but portions of the market demand greater coverage - Provide catastrophe protection
• Insurer desires to reduce its potential loss from a catastrophic event - Stabilize loss experience
• Annual loss experience fluctuations may be greater than management desires - Provide surplus relief
• Reinsurance reduces net leverage ratios - Facilitate withdrawal from a market segment
• Management desires to exit a market and do so quicker than through runoff - Provide underwriting guidance
• Insurer wishes to enter a new market, but does not feel comfortable with its own expertise
Effects of Using Reinsurance to Increase Large Line Capacity (Quota share)
10 - Blanchard & Klann
- 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
Effects of Using Reinsurance for Catastrophe Protection (XOL contract)
10 - Blanchard & Klann
- 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
Effects of Using Reinsurance to Stabilize Loss Experience (Aggregate XOL contract)
10 - Blanchard & Klann
- 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
Effects of Using Reinsurance for Surplus Relief (Flat quota share)
10 - Blanchard & Klann
- Surplus will only increase when ceded business is not profitable
- Leverage ratios improve
- Income is reduced
Effects of Using Reinsurance to Facilitate Withdrawal from a Market Segment (cede 100% of UEP and loss reserves)
10 - Blanchard & Klann
- 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
Effects of Using Reinsurance for Underwriting Guidance (quota share)
10 - Blanchard & Klann
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
List the four key principles to risk transfer
23 - CIA Reinsurance
- Several approaches can be used to assess the existence of risk transfer
- Professional judgment will be required when assessing the existence of risk transfer
- 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
- 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
List 6 Limitations of Risk Transfer (Terms set in advance)
23 - CIA Reinsurance
- Profit Sharing
- Adjustability of Reinsurance Premiums/Commissions
- Pre-Set Limits to timing of payments
- Expected Duration of Contract
- High-Front End Reinsurance Commissions
- Counter-parties
List 2 Limitations of Risk Transfer (Experience Based Renewals)
23 - CIA Reinsurance
- Future Terms based on past experience – try to recover past losses
- Forced Renewals – contract is in deficit and the cedant is obligated to cede future business to the reinsurer until losses are eliminated
What are the “Other Issues” listed in the CIA Reinsurance that may limit risk transfer?
23 - CIA Reinsurance
- Side Agreements – agreements not directly incorporated into the contract
- 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
- 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
- Reinsurance Counter-party Risk – credit risk from the reinsurer. Determine if a credit provision is needed.
Describe the qualitative assessment for the existence of risk transfer
23 - CIA Reinsurance
In order to determine if risk transfer exists:
- 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.
- 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
Standards for risk transfer, under both GAAP and SAP, require
36 - Freihaut & Vendetti
- Reinsurer assumes significant insurance risk under the reinsured portion of the contract
- It is reasonably possible that the reinsurer may realize a significant loss
List and describe the components of insurance risk
36 - Freihaut & Vendetti
- Underwriting Risk - Uncertainties around the ultimate amount of net cash flows
- Timing Risk - Timing of the receipt and payment of those cash flows
Expected Reinsurer Deficit (ERD)
36 - Freihaut & Vendetti
ERD = (probability of underwriting loss) x (NPV of average severity of underwriting loss)
What is the “substantially all” exemption for a reinsurance contract to be exempt from risk transfer requirements?
36 - Freihaut & Vendetti
• 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
When is documentation required for risk transfer?
36 - Freihaut & Vendetti
Required for every reinsurance contract for which risk transfer is not “reasonably self-evident”
What is the 10-10 rule?
36 - Freihaut & Vendetti
A reinsurance contract exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for the reinsurer
What is the ERD rule?
36 - Freihaut & Vendetti
Risk transfer exists if ERD is greater than 1%
Compare the 10-10 rule to the ERD rule
36 - Freihaut & Vendetti
• 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
List 6 methods to measuring if risk transfer exists
36 - Freihaut & Vendetti
- 10-10 Rule
- ERD rule
- Value at Risk (VaR)
- Tail Value at Risk (TVaR)
- Right tail deviation (RTD)
- Risk coverage ratio (RCR)
Steps to determine if risk transfer is present
36 - Freihaut & Vendetti
- Understand the contract’s terms and conditions, especially those affecting the amount of risk transfered
- Determine reporting dates and premium due dates
Treatment of profit commission in risk transfer analysis
36 - Freihaut & Vendetti
Not considered; may effect economic results and future premium amounts but do not explicitly effect risk transfer
Treatment of reinsurer expenses in risk transfer analysis
36 - Freihaut & Vendetti
Not included; should only consider cash flows between ceding company and reinsurer
Treatment of discount rate in risk transfer analysis
36 - Freihaut & Vendetti
Use a constant rate that only considers insurance risk (not investment, currency, or credit)
Treatment of premiums in risk transfer analysis
36 - Freihaut & Vendetti
Consider the present value of gross premiums
Treatment of evluation date in risk transfer analysis
36 - Freihaut & Vendetti
Used in selection of interest rate and in determining how much is known about potential losses
Treatment of commutation in risk transfer analysis
36 - Freihaut & Vendetti
Commutation clauses restrict the amount of risk transfer, but may meet risk transfer requirements
Treatment of timing risk in risk transfer analysis
36 - Freihaut & Vendetti
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
80.10 Net Commission for Period=
11 - CCIR
=Deferred Comm @BOY + Net Commission WP + UEComm @EOY – (UEComm @BOY + Deferred Comm @EOY)
80.10 Types of Commissions
11 - CCIR
- Deferred - Those paid on direct and assumed business
- Unearned - Those from reinsurance ceded
- Net - Split between commission expense and income
Surplus =
11 - CCIR
=Assets from Prior Year – Liabilities from Prior Year + Net Income Current Year
How do Type II Structured Settlements differ from Type I?
11 - CCIR
- There is some benefit to the insurer since the annuity is commutable
- A legal release is not needed from claimant
- Must recognize the liability on the balance sheet and recognize the annuity as an asset
80.10 Net Commission on Premiums Written (NCPW)
11 - CCIR
NCPW = Direct CPW + Assumed CPW - Ceded CPW
80.10 Net Commissions
11 - CCIR
Net Commission
= NCPW + (End Unearned - Beg UE Comm) - (End Deferred Comm - Beg Deferred Comm)
= Commission Expense - Commission Income
80.10 Commission Expense =
11 - CCIR
Commission Expense
= Direct + Assumed + (Deferred Commissions @ BOY – Deferred Commission @EOY)
= DCWP + ACWP + Decr Deferred Commissions
80.10 Commission Income =
11 - CCIR
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
80.10 Acquisition Expense: Commissions (20.30) =
11 - CCIR
Total Commissions = Net Commissions + Contingent Commission + Other Non-Deferrable Commissions
10.60 Gross Risk Ratio
11 - CCIR
Gross Risk Ratio = Gross WP / Adjusted Equity
What is the scope of Section 1620?
12 - CIA CSOP
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
What is the purpose of CSOP section 1630: CIA/CICA JPS
12 - CIA CSOP
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
In selecting the MfAD for claim liabilities, should tend toward a higher margin when
12 - CIA CSOP
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
What are the two requirements for an insurer’s financial condition to be satisfactory in the DCAT?
12 - CIA CSOP
- Insurer must be able to meet all of its future obligations under the base scenario and all plausible adverse scenarios throughout the forecast period
- Insurer must meet minimum regulatory capital requirements under the base scenario throughout the forecast period
When does Section 1630 of CSOP apply
12 - CIA CSOP
- 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
Describe the responsibilities of management, actuary, and the auditor w.r.t an insurer’s financial statements as described in JPS.
12 - CIA CSOP
- The financial statements are the responsibility of management;
- 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;
- 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.
According to the JPS, who is the Enquiring Professional? Who is the Responding Professional?
12 - CIA CSOP
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
Formula for Estimated Effect of Discounting the Asset for Future Income Taxes
14 - CIA Taxes
[Reported Reserve - .95 x min(Reported Reserve, Claims Liability)] x [Future Tax Rate] x [1-PV Factor]
Describe how a “future temporary tax difference” may arise
14 - CIA Taxes
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
How to calculate the PV Factor used to discount the asset for future income taxes
14 - CIA Taxes
PV Factor = (Discounted Estimate excluding PfADs + PfAD Investment Return) / Undiscounted Estimate
Give the 3 fundamental elements of discounting
15 - CIA Discounting
- Selecting payment patterns
- Selection of discount rates
- Application of MfAD
Give 4 considerations for which of gross, net, or ceded policy liabilities are estimated
15 - CIA Discounting
- Data availability
- Cash flow volatility
- Reinsurance program - Type and consistency
- Discount rate - Ceded may differ from net
Give six factors to consider in the selection of the rate of return on assets underlying the discounting of policy liabilities
15 - CIA Discounting
- Method of valuing assets and reporting investment income
- Allocation of income & assets among lines
- Return on assets at balance sheet date
- Yield on assets after balance sheet date
- Capital gains/losses on assets sold after balance sheet date
- Investment expenses & losses from default
What is the portfolio yield rate?
15 - CIA Discounting
Internal rate of return (IRR) which, when applied to the cash flows, produces the book value at a future date of the corresponding assets
What is the difference between Present Value and Actuarial Present Value
15 - CIA Discounting
• 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)
Give 4 considerations in selection of a discount rate for net present value
15 - CIA Discounting
- Assets selected to support liabilities
- Reinvestment risk - reinvestment of positive net cash flows
- Company’s investment strategy - Liquidation of assets
- Investment expenses
Discount rate options for ceded present values
15 - CIA Discounting
- 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
Assets supporting policy liabilities are sometimes segregated from assets supporting capital and surplus. Which assets are typically selected to match each of these segments?
15 - CIA Discounting
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
Ceded APV =
15 - CIA Discounting
=Ceded PV + PfAD Ceded Dev + PfAD Ceded IR – PfAD Ceded RR
Net APV =
15 - CIA Discounting
=Net PV + PfAD Net Dev + PfAD Net IR + PfAD Ceded RR
Gross APV =
15 - CIA Discounting
=Gross PV + PfAD Gross Dev + PfAD Gross IR
What method that an actuary would use to derive the payment patterns for discounting claim liabilities:
- Ultimate losses are strictly based on the paid loss development approach;
- Ultimate losses are based on approaches other than (1)
15 - CIA Discounting
- The claim payment pattern may be derived from selected paid development factors
- Different methods of selecting the payment pattern may be used such as historical ratios of paid losses to ultimate losses at various maturity dates.
What are 2 considerations an actuary should make in determining the cash flow of future reinsurance costs with respect to discounting premium liabilities?
15 - CIA Discounting
- The timing of the payment of applicable reinsurance premiums
- The earning period of the unexpired portion of in-force policies
Describe the steps in the Accident Year Runoff Model
17 - CIA Runoff
(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)
How to calculate discounted runoff
17 - CIA Runoff
- Discount paid and change in outstanding to beginning of year (from time t to t-1); or
- Subtract provision for investment income earned during the year on assets supporting liabilities
Calculate investment income on assets supporting policy liabilities for runoff
17 - CIA Runoff
- 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
What does excess/deficiency ratio say?
17 - CIA Runoff
Indicates the adequacy of reserves at time (t-x)
Define Book Value
18 - CIA Accounting Standards
Market value, amortized value, or any other value consistent with Canadian GAAP
Define financial instrument
18 - CIA Accounting Standards
Contract that creates an asset for one party and a liability or equity instrument for the other
Discuss the impact of CICA 3855 and 1530, having some assets supporting liabilities measured on a fair value basis
18 - CIA Accounting Standards
- 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
What are the advantages of fair value asset measurement?
18 - CIA Accounting Standards
- Most relevant basis for financial instruments (if it can be reliably measured)
- Reflects market risk preferences and expectations regarding the amounts, timing, and uncertainty of future cash flows
- Based on discounting at the risk-adjusted rate of return available in the market
How is the Investment Income component of Comprehensive Income calculated
18 - CIA Accounting Standards
= (Sum of all coupons during CY) + (Market - Amortized Value, of all “Held-for-Trading” Bonds)
Define Comprehensive Income and Other Comprehensive Income. How do they relate to each other?
18 - CIA Accounting Standards
- 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
Treatment of Held-to-Maturity assets
18 - CIA Accounting Standards
- Subsequent measurement is on an amortized cost basis
- Gains and losses are recognized in Net Income when the asset is derecognized
Why must a company be careful classifying assets as Held-to-Maturity?
18 - CIA Accounting Standards
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
Treatment of available-for-sale assets
18 - CIA Accounting Standards
- Subsequent measurement is at fair value
- Gains and losses are recognized in Other Comprehensive Income, transferred to Net Income when the asset is derecognized
Treatment of held-for-trading assets
18 - CIA Accounting Standards
- Subsequent measurement is at fair value
- Gains and losses are recognized immediately in Net Income
Acceptable reasons for using the fair value option (Held-for-Trading asset classification)
18 - CIA Accounting Standards
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
Measurement hierarchy for fair value
18 - CIA Accounting Standards
- Observable market prices - including market-based adjustments
- Accepted valuation models - inputs are consistent with the market
- Current cost or possibly historical cost
- Models which use entity inputs
How will CICA 3855 & 1530 impact Capital Tests (MCT, DCAT)?
18 - CIA Accounting Standards
MCT
- Adjust for excess market value over the current book value
- Capital required for assets will change
- 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
How will CICA 3855 & 1530 impact the valuation of Policy Liabilities?
18 - CIA Accounting Standards
- Selection of Discount Rate will depend on asset classification
- 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
- Future Income Tax – depending on how assets are classified may create tax timing differences
- 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
Which classification suffers from an income mismatch? Why?
18 - CIA Accounting Standards
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.
Situations in which materiality arises
21 - CIA Materiality
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
Define: Materiality (according to the Canadian Standards of Practice and the report on materiality)
21 - CIA Materiality
- 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.
What is materiality not?
21 - CIA Materiality
- The range of reasonable values in an actuarial estimate
- The inherent uncertainty associated with actuarial estimates
Considerations when evaluating the materiality threshold
21 - CIA Materiality
Consider the intended users, their knowledge, and their situations. The user’s perspective is key.
Materiality varies with entity characteristics
21 - CIA Materiality
- Size
- Type of business
- Access to capital
- Stage in the organizational life cycle
- Net retention
- ? Financial strength
Considerations when deciding to disclose materiality
21 - CIA Materiality
- Complexity of the concept
- Importance of the concept to users
- Sophistication of users
For the following, list the materiality level.
- Regulatory & Solvency Issues
- Appraisal Work
- DCAT Work
- General Financial Statement Work
21 - CIA Materiality
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)
What are the 2 Primary Implications of IFRS 4?
22 - CIA Disclosure
- Classification of Insurance Contracts
- Enhanced disclosures in financial statements
What are the disclosures?
22 - CIA Disclosure
An insurer shall
- Disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts
- Disclose information needed for users of the financial statements to evaluate the nature and extent of insurance risks
To comply with paragraph 36 - “Disclose information that identifies and explains the amounts in its financial statements arising from insurance contracts” - an insurer shall disclose:
22 - CIA Disclosure
- Accounting policies for contracts, assets, liabilities, income and expenses;
- Be able to identify the assets, liabilities, income and expense arising from insurance contracts. Cedants should also disclose gains or loss on buying reinsurance;
- Disclose the process used to determine assumptions
- Effect of changes in assumptions;
- Disclose movement in premium & claim liabilities since prior year end
To comply with paragraph 38 - “Disclose information needed for users of the financial statements to evaluate the nature and extent of insurance risks” - an insurer shall disclose:
22 - CIA Disclosure
- How the company manages risks (disclose objectives, methods, policies and processes);
- 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
- Information about credit, liquidity, and market risk; and
- Information about exposure to market risk arising from embedded derivatives (not applicable to P&C)
Describe the requirement regarding disclosure of concentrations of insurance risk. Give an eample that an insurer can use to respond to the requirement.
22 - CIA Disclosure
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
Identify three considerations in determining concentration risk
22 - CIA Disclosure
- Diversification
- Underwriting limits
- Reinsurance
Definition of MfAD
20 - CIA MfAD
• 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)
Desirable risk margin characteristics
20 - CIA MfAD
- 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)
Identify three PfADs mentioned in CIA MfAD
20 - CIA MfAD
- Claims development
- Recovery from Reinsurance Ceded
- Investment Return Rates
Reasons to select MfAD above range
20 - CIA MfAD
Unusually high uncertainty; MfAD expressed as a percentage unusually low
Reason claims MfAD increased to 20%
20 - CIA MfAD
20% is sometimes appropriate - ex: 2008 when economic crisis
Calculate investment return MfAD according to the “explicit quantification of three margins” approach
20 - CIA MfAD
Total Margin = Asset/Liability Mismatch Margin + Timing Risk Margin + Credit Risk Margin
Calculate asset/liability mismatch risk margin
20 - CIA MfAD
- 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
Calculate timing risk margin
20 - CIA MfAD
Reduce duration by 10% and see what discount rate is needed at full duration; L/(1+dhat)^D = L/(1+d)^0.9Dhat
Calculate the credit risk margin
20 - CIA MfAD
Extra yield on a corporate bond compated to a risk-free bond
Why is mandating stochastic assumptions is impractical?
20 - CIA MfAD
• Undermines the integrity of the AA • Time consuming testing required • Large number of assumptions ?•unique company circumstances ?•updating
MfAD disclosure considerations
20 - CIA MfAD
- Complexity of the concept
- Importance of the concept to users
- Sophistication of users
NOTE: These are same as AA disclosure considerations
Types of Quantile approaches
20 - CIA MfAD
Measures to select a MfAD
- Multiples of Standard Deviation - simple and practical
- Percentiles or Confidene Levels - most common
- Conditional Tail Expectation - better for more skewed distributions
Calculate investment return MfAD according to the “weighted formula” approach
20 - CIA MfAD
- 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
Define: Minimum capital
59 - OSFI Target Capital
Minimum level of capital necessary for an insurer to cover risks specified in the Capital Guidelines
Define: Supervisory target capital
59 - OSFI Target Capital
- 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
Define: Internal target capital
59 - OSFI Target Capital
• 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
Is it appropriate to consider capital injection when setting the internal target capital level?
59 - OSFI Target Capital
Only if the capital injection is planned and certain
Consequence of falling below target capital level
59 - OSFI Target Capital
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
What is Capital Management?
59 - OSFI Target Capital
- 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:
- maintain financial strength;
- absorb losses;
- allow for growth;
- meet other risk management and business objectives;
- provide sufficient assets to run-off obligations
What are the differences between Principle-Based Accounting and Rule-Based Accounting?
26 - CAS Financial Reporting
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.
What is the difference between Canada and the US regarding financial statements focus?
26 - CAS Financial Reporting
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)
Compare Statutory Accounting Principles with Generally Accepted Accounting Principles in terms of: • Objective • Intended Users • Asset recognition • Deferred income taxes
26 - CAS Financial Reporting
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
Income Statement: Revenue
26 - CAS Financial Reporting
Direct WP + Assumed WP - Ceded WP
Income Statement: Net Earned Premium
26 - CAS Financial Reporting
Net WP + Beg UEP - End UEP
Income Statement: Net UW Income
26 - CAS Financial Reporting
Net EP - Net Claims & Expense - Acquisition Expense - General Expense - Change in Premium Deficiency
Retained Earnings
26 - CAS Financial Reporting
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
Discuss Liquidation vs Going Concern accounting
26 - CAS Financial Reporting
Investors may prefer going concern while regulators prefer liquidation (to protect policyholders)
Describe Fair Value accounting and Historical Cost accounting
26 - CAS Financial Reporting
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.
What is the mandate of OSFI
26 - CAS Financial Reporting
- Supervise all federally regulated financial institutions
- Monitor federally regulated pension plans
- Contribute to public confidence
What is commutation? Describe this concept in terms of reinsurance.
26 - CAS Financial Reporting
- 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
Describe the two components of policy liabilities
26 - CAS Financial Reporting
- Claim Liabilities - for events prior to evaluation date, whether reported or not
- Premium Liabilities - for events after evaluation date on policies in force, i.e., liabilities associated with the unexpired portion of the contract
Commuted Value:
26 - CAS Financial Reporting
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]
What are the two types of ratings that rating agencies provide?
32 - Feldblum
- Credit rating for corporate, municipal & government bonds
- Financial strength ratings for insurers
What benefits do rating agencies provide to insurance policyholders?
32 - Feldblum
• 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
Consequences of being unrated
32 - Feldblum
- Agencies hesitate to use an unrated insurer (they may be financially distressed)
- Banks may not issue mortgages
- May receive public rating (less control over information reviewed and greater chance of errors)
Steps of interactive rating
32 - Feldblum
- Background research by ratings analyst and submission of proprietary data from insurer;
- Interactive meetings (between rating analysts and senior managers of insurer);
- Ratings proposal by lead analyst (preparation of ratings proposed by lead analyst and submission of additional data if needed from insurer);
- Decision by rating committee (lead analyst presents their proposal to rating committee);
- Publication of rating (on websites and analysis for fee-paying subscribers)
Most insurers have a rating from more than one agency. What are three reasons for this
32 - Feldblum
- The insurer seeks a debt rating from an agency with more experience
- A publicly traded insurer may want a rating from an agency better known to investors
- The insurer may be dissatisfied with its current rating and believes the second rating will be higher
Why is public data insufficient for rating analysis
32 - Feldblum
no reinsurance attachment points or limits; no derivative data; no segmented reserve data
High ratings are important for which lines of business
32 - Feldblum
- Reinsurance, surety, structured settlements, homeowners, specialty lines
- These are high risk lines which require good ratings to attract business and to meet regulatory conditions
Almost all insurers are rated and are rated for several reasons. What are the reasons?
32 - Feldblum
- Agents are wary of unrated insurers (they might be financially distressed)
- Relance by consumers and third parties (to evaluate financial strength)
- Efficiency (its time consuming, costly, and most consumers don’t have the expertise or reasources to perform this type of analysis on their own)
Capital standards are different among rating agencies. Identify the capital model used by:
- AM Best
- Moody’s
- Fitch
- Standard & Poor’s
32 - Feldblum
- AM Best uses Expected Policyholder Deficit (EPD) method
2/3. Moody’s and Fitch use stochastic cash flow models to asses capital requirements - S&P focuses on principles-based models, evaluating internal capital models and ERM practices
Which rating agency(ies) use EPD method? Fully describe this method.
32 - Feldblum
• 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
What is the formula for Net Required Capital in AM Best’s BCAR? What are the components of NRC?
32 - Feldblum
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
Which rating agency(ies) use Stochastic Cash Flow Models? Fully describe this method.
32 - Feldblum
- 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
Which rating agency(ies) use Principles-Based Models? Fully describe this method.
32 - Feldblum
• 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
MSA: MCT
50 - MSA
- Capital available / capital required
- Primary regulatory solvency test
- Minimum 150%
MSA: GAAP Return on Equity
50 - MSA
- Net Income / Equity
- Return to shareholders per unit of invested capital
- Minimum 5.4%
MSA: Return on Revenue
50 - MSA
- ROR = [UW Income + Investment Income (excl gains) + Income from Subsidiaries] / Gross Written Premiums
- Income relative to revenue generating capacity
- Minimum 6.2%
MSA: Return on Assets After Tax
50 - MSA
- ROA = Net Income after Tax / [Average Begin. and End. Year Assets]
- Measure of efficiency in generating income from assets
- Minimum 2.6%
MSA: Insurance Return on Net Premium Earned
50 - MSA
- IRNPE = [UW Income + Investment Income (excl. gains)] / Net Premiums Earned
- Measure core earning capacity
- Minimum 4%
MSA: Liabilities as Percentage of Liquid Assets
50 - MSA
- 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%
MSA: Net Loss Reserves to Equity
50 - MSA
- 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%
MSA: Cash flow from Operations to Net Premium Written
50 - MSA
DISCONTINUED!; ability to convert premium to positive cash flows; min 0%
MSA: One year Development to Equity
50 - MSA
- 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
MSA: Overall Net Leverage
50 - MSA
- 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%
MSA: Adjusted Investment Yield
50 - MSA
- 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
MSA: Change in NPW
50 - MSA
• Annual percentage change in net premiums written
MSA: Change in GPW
50 - MSA
• Annual percentage change in gross premiums written
MSA: Change in Equity
50 - MSA
- Annual percentage change in equity
- Declines in equity decrease the company’s cushion available to support premium writings and absorb losses
MSA: Accumulated Other Comprehensive Income to Equity
50 - MSA
- = AOCI / Equity
- Measures AOCI’s proportion to overall capital
MSA: Reinsurance Recoverables to Equity
50 - MSA
- 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
MSA: Net Underwriting Leverage
50 - MSA
- 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%
MSA: Two-year combined ratio
50 - MSA
- 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
MSA: Overall diversification score
50 - MSA
- 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
What is Statutory Surplus? What is Adjusted Equity?
50 - MSA
- SS = Assets – Liabilities – Required Reserves
- Adjusted Equity = Total Equity – Capital needed for catastrophes – Capital needed for reinsurance ceded to unregistered reinsurers
What aspects of financial strength are not caputred in the OSFI regulatory solvency tests?
50 - MSA
- 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
How to test earthquake exposure data for completeness and accuracy?
54 - OSFI Earthquake
score at time of underwriting; remediate sources of inadequate data; implement safeguards; invest in technology
What are the 5 key principles in developing prudent approaches to managing earthquake risk?
54 - OSFI Earthquake
- EQ Exposure Risk Management
- EQ Exposure Data
- EQ Models
- PML Estimates
- Financial Resources & Contingency Plans
Describe Principle 1 of EQ Exposures Sounds Practices.
54 - OSFI Earthquake
• Insurers should have a sound earthquake risk management policy subject to oversight by the BOD and implemented by senior management. Policy should include:
- Risk Appetite & Risk Tolerance
- Data Management Practices
- Exposure aggregation monitoring
- Appropriate models
- Adequacy of resources in relation to PML
- Contingency plans for claim handling
Describe Principle 2 of EQ Exposures Sounds Practices.
54 - OSFI Earthquake
• Exposure data needs to be appropriately captured and regularly tested for accuracy & completeness
- Data Integrity - data quality (accuracy, completeness, and consistency) can reduce model uncertainty
- Data Verification - data needs to be appropriately captured and regularly tested
- Data Limitation - management should be aware of data limitations and account for them
Describe Principle 3 of EQ Exposures Sounds Practices.
54 - OSFI Earthquake
Should be used with sound knowledge of their assumptions and methods as well as high degree of caution that reflects significant uncertainty in estimates
Describe Principle 4 of EQ Exposures Sounds Practices.
54 - OSFI Earthquake
Should properly reflect total expected ultimate cost to insurer, including considerations for data quality, non-modeled exposures, model uncertainty and exposures to multiple regions.
Describe Principle 5 of EQ Exposures Sounds Practices.
54 - OSFI Earthquake
- 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
Define: Probable Maximum Loss (PML)
54 - OSFI Earthquake
- 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
Define: Risk Appetite
54 - OSFI Earthquake
Total level and type of risk exposure that an insurer is willing to undertake, often a qualitative assessment
Define: Risk Tolerance
54 - OSFI Earthquake
Specific parameters and/or limits on the level and amount of risk an insurer is willing to accept/retain
Describe EQ Regulatory Reporting as outlined in Earthquake Exposure Sound Practices
54 - OSFI Earthquake
• 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.
What are the 3 major parts of the AAR?
57 - OSFI Memorandum for the AAR
- Opinion of the Appointed Actuary concerning the fairness and adequacy of the policy liabilities included in the insurer’s financial statements
- Detailed commentary
- Data exhibits and calculations supporting that opinion
What are the regulatory requirements of the AAR?
57 - OSFI Memorandum for the AAR
- Valuations to be done in accordance with generally accepted actuarial practice and other requirements of Super
- Discuss the differences between boked and estimated policy liabilities
- 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)
- 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
Special Lines of Business Considerations
57 - OSFI Memorandum for the AAR
Marine Insurance, Title Insurance, and Accident & Sickness Insurance
List the components of the AAR. Briefly describe each part of the report.
57 - OSFI Memorandum for the AAR
- Introduction - Company, author’s info, date of valuation
- Expression of Opinion - Opine on the AA’s estimate of policy liabilities; note any qualifications or limitations concerning any aspect of AAR
- Supplementary Information Supporting the Opinion - Reference exhibits and report sections where results of AAR are derived or summarized
- Executive Summary - Summary of key results and findings; Compare actual with expected experience; deviations from CIA standards; changes to methods or assumptions
- Description of Company - Ownership/management, business, reinsurance details, materiality standards
- Data - extent of data review and reliance on data prepared by others
- Claim Liabilities - gross, net & ceded discounted & undiscounted claim liabilities; claim expense; comparison of actual vs expected from previous years
- Premium Liabilities - Discounted/undiscounted with margins; comment on all components of premium liabilities
- Other Liabilities/Other Assets - Comment on adequacy of SIR reserves; Material amounts to recover (such as S&S)
- Compliance
- Exhibits & Appendices
What are the Specific Disclosure Requirements in the AAR?
57 - OSFI Memorandum for the AAR
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
In the Expression of Opinion, what happens when the Auditor’s Report is not complete?
57 - OSFI Memorandum for the AAR
• 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
In the “Description of Company” part of the AAR the AA must disclose Reinsurance details. Describe.
57 - OSFI Memorandum for the AAR
• 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
AAR Exhibit: Unpaid Claims and LR Analysis - Loss Ratio for Undiscounted and Discounted
57 - OSFI Memorandum for the AAR
- 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)
Key elements of DCAT
16 - CIA DCAT
- Development of a base scenario
- Analysis of the impact of adverse scenarios
- Identification and analysis of the effectiveness of various risk mitigation strategies
- Report on the results of the analysis and recommendations to the insurer’s management and the Board of Directors
- Opinion signed by actuary and included in report on the financial condition of insurer
Materiality considerations in the DCAT
16 - CIA DCAT
Size of company; financial position; nature of regulatory test
Define Ripple Effects. Give 3 examples
16 - CIA DCAT
Adverse scenario which triggers a change in one or more interdependent assumptions or risk factors
Examples:
- Adjustments to assumptions used in the base scenario
- Insurer’s expected response
- Policyholder actions
- Regulatory actions
- Rating agency actions
- Likelihood of changes in planned capital injections or distributions
What is a plausible adverse scenario?
• 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
How is reverse stress testing used in DCAT analysis?
16 - CIA DCAT
- 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
Primary Purposes of DCAT Report
16 - CIA DCAT
Identify possible threats to the financial condition of the insurer and appropriate risk management or corrective actins to address those threats
Briefly describe a typical approach to DCAT.
16 - CIA DCAT
- Review operations in recent years (at LEAST 3) and ending financial position
- Develop and model the base scenario for the forecast period
- Identify risk categories relevant to the insurer
- Select plausible adverse scenarios requiring further analysis
- Select at least 3 adverse scenarios with the greatest sensitivity to surplus
- Identify management actions and the impact of these on the insurer’s financial position
- Identify possible regulatory actions for each scenario that will lead to the insurers falling below the 150% target capital
- Report findings and disclosure
What is the base scenario in the DCAT
16 - CIA DCAT
A realistic set of assumptions, usually consistent with the insurer’s business plan
When is it ok to include capital injections in the base scenario?
16 - CIA DCAT
- 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
What is an integrated scenario
16 - CIA DCAT
An adverse scenario that combines two or more plausible adverse scenarios
In the DCAT, what are the derivative instrument risks?
16 - CIA DCAT
- 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 - 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
- Management Risk - Potential for incurring material, unexpected losses on derivatives due to inadequate supervision and understanding, systems, controls, procedures, accounting, and reporting
- Legal Risk - Derivative agreement is not binded as intended
What are the major DCAT risk categories? For each, give 3 adverse scenarios, give 3 ripple effects and 3 possible management actions.
16 - CIA DCAT
Major Risk Categories
- Claim Frequency and Severity Risk
- Policy Liabilities Risk
- Inflation Risk
- Premium Risk
- Reinsurance Risk/Counterparty Risk
- Investment Risk
- Political Risk
- Off-Balance Sheet Risk
- Related Company Risk
[See side note]
For Satisfactory Opinion, the insurer must:
16 - CIA DCAT
• Insurer, throughout the forecast period, is
- Able to meet its future obligations under the base scenario and all plausible adverse scenarios, i.e., must have positive surplus under all scenarios
- Under the base scenario it meets the supervisory target capital requirement, i.e., MCT over 100%
What are the purposes of Stress Testing?
60 - OSFI Stress Testing
- Risk Identification & Control - considers concentrations and interactions
- 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 - Supporting Capital Management – can identify severe events
- Improving Liquidity Management - assess liquidity profile and adequacy of buffers
What is stress testing
60 - OSFI Stress Testing
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
Describe and contrast “scenario testing” and “sensitivity testing”
60 - OSFI Stress Testing
- 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.
Who is responsible for the stress testing program in companies?
60 - OSFI Stress Testing
- 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
List the considerations for Stress Testing Programs.
60 - OSFI Stress Testing
- 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
List and describe five specific area of focus of a stress testing program
60 - OSFI Stress Testing
- Risk Mitigation
o Stress testing should facilitate risk mitigation or contingency plans - 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) - Risks to Reputation
o Should have an approach to mitigate reputational risks and maintain market confidence - Counterparty Credit Risk
o Assess large exposures to leveraged counterparties (banks, funds, etc.) that may be particularly exposed to market movements - Risk Concentrations
o By region, industry, risk factor, and off-balance or contingent exposures
Intents of Solvency II
44 - KPMG Solvency II
- 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
In Solvency II, what are the Three Pillars?
44 - KPMG Solvency II
- 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
Describe each of the Three Pillars of Solvency II
44 - KPMG Solvency II
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
What are the three general levels of capital
44 - KPMG Solvency II
- Technical provisions to match insurer liabilities (best estimate)
- Regulatory capital requirements
- Surplus capital
What is the purpose of ORSA?
58 - OSFI ORSA
- 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
List and describe the 5 key elements of ORSA
58 - OSFI ORSA
- 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
- Relating Risk to Capital - Internal targets based on own capital needs
- Board Oversight & Senior Management Responsibility - board is responsible for overseeing ORSA, may delegate some tasks to Senior Management for design and implementation
- Monitoring & Reporting - performed and reported to the board at least annually
- Internal Controls & Objective Review - should review ORSA process for integrity, accuracy, and reasonableness
How to relate risk to capital in a company’s ORSA?
58 - OSFI ORSA
- Nature, Scale and Complexity - more sophisticated methods for more complex risks;
- Determine Own Company Needs - each risk must have capital requirement and this needs to be quantified individually and on an aggregate level;
- Set Internal Targets - use DCAT results and compare with external sources;
- Integration with other Business Processes - Forward looking and consistent with strategic and business plans
List 4 supplementary risk considerations of the ORSA?
58 - OSFI ORSA
- Emerging/Evolving Risks – risks that were once immaterial may become material as the insurer’s environment changes
- Risk Transfer/Mitigation Activities – how risks behave with respect to risk transfer and mitigation
- Cross-border activities
- Aggregation/Diversification Adjustment
- Concentrations, Dependencies and Interactions of Risks
Define: Subsequent Event
13 - CIA Subsequent Events
An event which an actuary first becomes aware after a calculation date but before the corresponding report date
According to SOP, when should a subsequent event be taken into account?
13 - CIA Subsequent Events
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
According to the CICA handbook, what are the two types of susequent events?
13 - CIA Subsequent Events
- Adjusting Events - Events that provide evidence of conditions that existed at the end of the reporting period and need to be taken into account
- Non-Adjusting Events - Events that indicate conditions that arose after the reporting period. If material, require disclosue
Describe how the actuary should respond to the following events
- Knowledge of event on or before the calculation date
- Knowledge of event between the calculation date and report date
- Knowledge of event after the report date
13 - CIA Subsequent Events
- Not a subsequent event - reflect in the analysis
- 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 - 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
What are the disclosure requirements of subsequent events?
13 - CIA Subsequent Events
- 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 )
Who can an insurer appoint as Appointed Actuary?
52 - OSFI AA
- 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
What happens when the Appointed Actuary is revoked or resigns?
52 - OSFI AA
- 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)
What are the duties of the Appointed Actuary?
52 - OSFI AA
- 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
Qualifications required for Appointed Actuary
52 - OSFI AA
- 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
What are the objectives of AA peer review?
52 - OSFI AA
- Assist OSFI in assessment of insurer’s safety and soundness
- Benefit AA by providing source of independent consultation advice and additional source of professional education
- Maintain and strengthen confidence in the work of the AA by the public & others
Contrast the roles of the Peer Reviewer of the AA’s work and the role of the External Auditor
52 - OSFI AA
- 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
How often should the Appointed Actuary’s work be peer reviewed?
52 - OSFI AA
At least every 3 years; material changes should be reviewed and reported annually
What is required when selected a Peer Reviewer of the Appointed Actuary’s work?
52 - OSFI AA
• 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)
Peer review of Appointed Actuary’s work should review:
52 - OSFI AA
- 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 - Adequacy of procedures, systems and work (including data) relied on by AA
- Appointed Actuary’s Report (AAR) sufficiently describes valuation assumptions and methods
- Assumptions, methodology and scenarios used for future financial conditions reporting (DCAT Report)
Five factors to be taken into account determinging the proper provision for liabilities in connection with unearned premiums
57 - OSFI Memorandum for the AAR
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
AAR Exhibit: Net unpaid claims and adjustment expense
57 - OSFI Memorandum for the AAR
Net = Direct + Assumed - Ceded - Oter Amounts to Recover + Other Net Liabilities
In the Appointed Actuary’s Report, what specific reserves require comment in the opinion
57 - OSFI Memorandum for the AAR
- 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
What is IFRS 4?
38 - IFRS 4
- 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
Describe the IFRS 4 Feature: Liability Adequacy Test
38 - IFRS 4
- 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
How is prudence handled under IFRS 4?
38 - IFRS 4
- An insurer need not change its accounting policies to eliminate excessive prudence
- An insurer should not introduce additional prudence if already sufficient
What are the required disclosures under IFRS 4?
38 - IFRS 4
- Explanation of recognised amounts in the financial statement arising from insurance contracts
- Nature and extent of risks arising from insurance contracts
Under IFRS 4, what practices can an insurer continue, but not implement?
38 - IFRS 4
- 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
Under IFRS 4, when can an insurer change its accounting policies?
38 - IFRS 4
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
