SSAPs Flashcards
Formal Def of Liabilites
“Certain or probable future sacrifices of economic benefits arising from present
obligations of a particular entity to transfer assets or to provide services to other
entities in the future as a result of a past transaction(s) or event(s)”
3 Essential Components of a liability
1) Present responsibility to transfer/use assets at specified date based on occurrence of specified event or demand
2) Entity has little/no discretion to avoid the responsibility
3) The transaction/event that obligates the entity has already occurred
SSAP 5
Liabilites/Contingencies
SSAP 9
Subsequent Events
Loss Contigencies / Asset Impairment Def
“An existing condition, situation or set of circumstances involving uncertainty as to possible loss to an enterprise that will ultimately be resolved when one or more future event(s) occur or fail to occur”
Conditions to Recognize Loss as Contingency/Impairment
1 Info prior to issuance of financial statements indicate assets have been impaired / liability incurred at date of the
financial statements
2 Amount of loss can be reasonably estimated (If multiple estimates, best possible estimate should be used)
Joint & Several Liability Arrangements
Definition: Agreements where multiple parties share liability
Fixed Total Obligation Formula
Amount insurer agreed to pay based on
agreements with co-obligors
+
Any additional amount insurer expects to pay on
behalf of co-obligors
3 levels of loss contingency / asset impairment
- probable (likely to occur)
- reasonably possible (between probably and remote)
- remote (slight chance of occurring)
Type 1 subsequent event (recognized)
provide evidence with respect to : Conditions that DID exist at date of balance sheet, but new info arose after
Financial statements need to be adjusted to
reflect the impact of material Type 1 events
(disclosure optional)
Subsequent Event def
“Events or transactions that occur subsequent to the balance sheet date, but before
the issuance of the statutory financial statements and before the date the audited
financial statements are issued, or available to be issued”
Type 2 subsequent event (unrecognized)
provide evidence with respect to : Conditions that DID NOT exist at date of balance sheet,but arose after
Notes should disclose both the nature of the event and
an estimate of financial impact
SSAP 53
P&C Contracts - Premiums
Additional
Premium
Charges
Charges for endorsements
and changes in coverage
Recorded on effective date of endorsement or change; must be reflected in
UEPR
Flat Fees
Flat service charges on
installment premiums
Usually recorded as “Other Income”, but can be recorded as WP if:
● Policy can be cancelled for non-payment of fee, OR
● Fee is refundable in event that policy is cancelled
Earned but
Unbilled
Premium
(EBUB)
Arises from policies with
audited exposures (e.g. WC)
● EBUB is est. prior to audit → reflected in premium revenue
● EBUB is adjusted after audit
- Must recognize all liabilities too such as premium taxes
● Collateral may be held for credit risk
- 10% of EBUB excess of collateral held is non-admitted
Earned but
Uncollected
Premium
Arises from policies which
have been cancelled but have
a longer cancellation period
Must establish Earned but Uncollected Premium as direct and assumed
written premium → if determined uncollectible, should be charged to
expenses as Net Gain (Loss) from Balances Charged Off
Advance
Premiums
Premiums paid prior to
effective date of policy
Recorded as liability → Should not be considered income or WP until due
SSAP 55
Unpaid Claims
Recognizing Losses
o When insured event occurs:
▪ Loss & LAE must be recognized as expense
▪ Liabilities must be established for unpaid losses and expenses (loss & LAE
reserves)
▪ Insurer must recognize corresponding change in income
DCC
All costs associated with litigation, defense,
and medical cost containment
A&O
Remaining LAE (for adjusters, pool
participation expenses, etc.)
SSAP 63
Underwriting pools
Involuntary Pool (residual market plans)
Method for states to provide
coverage to parties with higher-than average losses who would otherwise
be unable to obtain coverage
Voluntary Pool
-Not state mandated
Focused on providing more capacity for risks with exceptionally
high insurable values (e.g. aircrafts)
Intercompany Pooling
● Establishment of quota share reinsurance agreement where all
business ceded to lead entity → retroceded to other participants
● Participants able to use different assumptions for recording
transactions, but timing of recording must be consistent
Pool Participation
o Participation may be on Joint & Several Basis:
▪ In addition to normal share of liability, participants responsible for portion of unrecoverable obligations
uw results on a gross basis
Disclosures of Intercompany Pools
Lead Insurer and all affiliated entites
descriptions of basic terms, cessions to non-affiliated reinsurers,
explanation of discrepancies between entities, amounts due to lead insurer from all affiliates
SSAP65
P&C Contracts
Main types of P&C Contracts
Occurrence
Claims-Made
Extended Reporting (Tail Coverage)
Exceptions to no reserve discounting
fixed and reasonably determinable payment patterns (e.g. tabular
discounts)
▪ If tabular discounts are used, they do not apply to LAE reserve
o A change in discount is classified as “Change in Estimate” → Impact of change must be included in income statement
Interest Accretion
Increase in discounted value due to reduction in discount
Structured Settlement Accounting Treatment
when the insurer purchases an annuity to on behalf of claimant to settle a claim (WC / GL claims)
- if insurer is the payee ==> no reduction to reserve
- if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments
High Deductible Policies
This is when the insurer pays all claims up front and then seeks reimbursement from the
insured for the portion under the deductible
Reserves should be established for all losses, not just those above deductible
▪ Losses under the deductible may eventually breach the deductible
book reserves net of the deductible
High Deductible Policies if insurers does not hold collateral
● Deductible Recoveries > 90 Days
Overdue are Nonadmitted
● Aging should be based on contractual
date (or billing date if no contractual date)
High Deductible Policies if insurers DOES hold collateral
10% of Deductible Recoverable in Excess of Collateral is Nonadmitted
- Any amounts XS of this 10% deemed uncollectible should also be
classified as Nonadmitted
Sometimes collateral secures amount owed for multiple policies
Long Duration Contract
Criteria for contracts
▪ ≥ 13 months in duration
▪ Cannot be cancelled or subject to premium increases
o Revenue usually not received in proportion with exposures → Adequate UEPR needs to
be established, which can be challenging
▪ SSAP outlines three tests that can be applied
Test 1 Long-Duration Contracts
management’s best estimate of the amounts refundable to the contract-holders at the reporting date
Test 2 Long-Duration Contracts
(gross premium) x [ (projected future loss) / (projected total loss) ]
projected future loss relates to the unexpired term of the contract
Test 3 Long-Duration Contracts
(projected future loss) – (investment income) – (PV of premiums)
Calculating UEP for Long-Duration Contract
for current and 2 prior years, tax max of all three test amount
for years before then, aggregate them and then take the max of the aggregated amounts
Retrospectively Rated Contract
Contract in which final premium is based on insureds loss experience
▪ Contract generates additional or return premium at expiration depending on
experience
o Future adjustments to premium should be estimated
SSAP 66
Retrospectively Rated Contracts
2 ways to estimate adjustments to premium
actuarial accepted - historical ratios of development to EP
review each contract individually : compare known to anticipated loss development (including IBNR) to estimate return or additional premium earned at that point in time
briefly describe the accounting treatment of “accrued additional” & “accrued return” retrospective premium
accrued additional retrospective premium
→ record as a receivable
→ with a corresponding entry in written premium or an adjustment to earned premium
accrued return retrospective premium
→ record as a liability (as a change in unearned premium)
→ with a corresponding entry in written premium or an adjustment to earned premium (same as for accr ed additional premium)
identify required financial statement disclosures regarding retrospectively rated poli
-estimation method for premium adjustments (recall from above that there are 2 methods for doing this)
-accounting method for premium adjustments (whether through written premium or an adjustment to earned premium)
-amount & proportion of net premiums subject to retrospective
-adjustments (a high proportion increases uncertainty of final costs)
calculation of non-admitted retrospective premium
