CAS Exam 6

Briefly describe the Robinson-Patman Act (1936):

Amendment to Clayton Act; required price differences to be justified by reduced operating costs

What is the formula for direct and indirect tax impact of incurred losses on underwriting income:

Direct: -1 * (Paid loss + change in discounted reserves) Indirect: Statutory income + change in reserve discount

Equation to derive RTI from bond income according to direct & indirect methods.

Direct: 15% * municipal bond income Indirect: Statutory income - 85% * municipal bond income

Equation to derive RTI from dividends according to direct & indirect methods.

Direct: 40.5% of unaffiliated common stock dividends Indirect: Statutory income - 59.5% of dividends

Equation to derive RTI from revenue offset according to direct & indirect methods.

Direct: WP - 80% * chang in UEPR Indirect: Statutory EP + 20% * change in UEPR

Formula to calculate loss reserve discount factor:

Discounted unpaid losses as % of incurred losses / Undiscounted unpaid losses as % of incurred losses

Briefly describe a "Receiver":

Disinterested person/ business appointed to receive, protect and account of money or other property due

How is the charge from replication transactions & mandatorily convertible securities allocated:

Distributed to both R1 and R2 (50% each)

1 question regarding federal disaster assistance and moral hazard:

Does the presence of federal disaster assistance introduce moral hazard in flood management in a way that inappropriately shift risks to taxpayers?

Briefly describe a domestic insurer, foreign insurer, and alien insurer:

Domestic: incorporated in the state writing insurance business Foreign: licensed to operate in a state but incorporated in another state Alien: licensed in a US state but incorporated in another country

Why does the 10% charge for reinsurance recoverables remain in force, despite the heavy criticism

Due to the need to be conservative when reinsurance is involved: 1. Uncollectible balances have historically been responsible for several insurance failures 2. Reinsurance has been used to overstate surplus

Purpose of the trend test:

Early warning of companies that may incur RBC ratios below 200%. All companies that meet these criteria need to comply with the requirements of the company action level

Underwriting Income formula:

Earned Premium - L&LAE Incurred - Other Underwriting Expense Incurred

Economic income equation:

Economic income = PV (future premiums) - PV (future losses)

When are the additional premium for endorsements and changes in coverage recorded?

Effective date of change

Equation and normal range for Investment Yield:

Equation: 2 x (net investment income earned / case & invested assets between current & prior years) Where cash & invested assets between current & prior years = current yr cash & invested assets + prior yr cash & invested assets + current yr investment income due & accrued + prior yr investment income due & accrued - current yr borrowed money - prior yr borrowed money - net investment income earned Normal range: between 3% and 6.5%

Equation and normal range for 2 yr overall operating ratio

Equation: 2yr loss ratio + 2yr expense ratio - 2yr investment ratio Where 2yr loss ratio = loss, LAE, policyholder dividends over 2 yrs / net premiums earned in 2yrs, 2yr expense ratio = (2yr other underwriting expense & write-ins - 2yr other income) / net premiums written in 2 yrs 2yr investment income ratio = net investment income earned over 2yrs / net premiums earned in 2yrs Normal range: < 100%

Equation and normal range for Gross Change in PHS

Equation: Change in PHS / Prior PHS Normal range: between -10% and 50%

Equation and normal range for NWP:PHS

Equation: NWP / PHS Normal range: < 300%

List factors that would require higher risk margins:

1. Less is known about the estimate 2. Low frequency/ high severity 3. Longer duration 4. Wide probability distribution 5. Emerging experience increases uncertainty

Analyst team categorizes insurers into three levels to prioritize companies that require attention

1. Level A: requires immediate attention & financial analysis 2. Level B: does not require immediate attention, but may possibly have poor results 3. Reviewed, no level

List potential grounds for rehabilitation:

1. Liabilities exceed assets 2. Insurance company refused to submit books, records, accounts or affairs to insurance department 3. Insurer willfully violates its charter or any other state law

List the components of "Requisite authority":

1. Legal basis 2. Independence & accountability 3. Adequate powers 4. Financial resources 5. Human resources 6. Legal protection 7. Confidentiality

List some transactions or activities that affect the policyholders' interest that require regulatory approval:

1. Licensing requirements 2. Change in control 3. Dividends 4. Transactions with affiliated 5. Reinsurance

Critics McCarty had about the FTC Report:

1. Not an objective independent analysis 2. No premium data used 3. Narrative appeared one-sided in support of the predictive power while downplaying negative impacts

List some of the most common reasons for rate or coverage disapproval:

1. Not in the public interest 2. Illegal 3. Unfairly discriminatory 4. Other - excessive, inadequate or not meeting minimum standards

Disadvantages of the multiple peril HO policy that covers flood approach:

1. Not necessarily fair 2. Potential new liabilities for tax payers 3. Institutional & practical issues surrounding the way that private and social risks are managed & financed (e.g. Rate setting processes, data quality, coverage for catastrophic losses, oversight, etc.)

When is a disclosure for reinsurance recoverables in disputed required:

1. amount in dispute from any entity > 5% of the ceding entity's surplus 2. aggregate from all entities > 10% of the surplus

Briefly describe deposit accounting for the ceding company:

1. amount paid -> deposit 2. deposit is admitted asset if: - assuming entity is licensed/ accredited/ or otherwise qualified - funds held by the ceding company 3. cannot reduce the reserves 4. at each reporting date, amount of deposit is adjusted to reflect both the payments made to date, and expected future payments. If total losses are valued upwards: - increase the deposit - increase the outstanding loss liability - increase the interest income - increase the incurred losses

Why are regulators interested in the motives of these arrangements

It is possible that the insurer is acting as a fronting carrier for another company (the "reinsurer"), in a state where the reinsurer is not licensed to do business. Regulators may be concerned that the reinsurer is exploiting this structure to avoid regulatory oversight.

Which factor precedes nearly all of the major failures and why?

Rapid premium growth 1. Reduces the margin for error in the operation of insurers 2. Usually indication of bargain rates and lax u/w standards

Bond face value

amount to be paid in the final single payment

What does ratio 6 measure:

It indicates the general quality of the investment portfolio

How is the DTL arising out of the unrealized capital gains treated

It is a direct charge to surplus

Define intercompany pooling

It is an arrangement among a group of companies where each member fully cedes all business to a pool leader, which then retrocedes a portion to each member company.

How is unrealized capital gains treated in BS and IS

It is direct credit to surplus, as there is no impact on the income statement.

How is investment gain treated in Part 3 Interrogatories

It is excluded from the profit, as it is earned on the actual assets held by the insurer

Define net investment income earned

It is mainly from interest & dividends; net of investment income expenses; gross of taxes; accrual basis

Briefly explain the political theory of regulation:

Regulatory attention can be greatest for issues that attract substantial voter interest and are easy for policy makers to understand

How is the Company RBC% derived:

Taking the straight average of: - Industry reserve RBC% - Industry reserve RBC% adjusted for company experience

How are the materiality standards compared based on tasks and practices:

Tasks: relatively consistent Practices: vary

Accounting treatment for reinsurance premium that is adjusted

accrue a liability for the additional premium due during the period of the loss event that generated the additional premium

Sources of state insurance law:

1. Legislative branch (state legislature): statutory law 2. Executive branch (DOI & attorney general): administrative law; criminal law 3. Judicial branch (state court system): case law 4. State insurance regulatory systems

Accounting treatment of advance premium:

1. Recorded as liability 2. Not considered income until due

List 2 concerns that the NAIC has about using IFRS as the basis for SAP:

1. Transition costs 2. Complexity of reserve calculations

Why is the cost of insurance important to consumers:

1. Want rates affordable and fair 2. Want the insurer to remain solvent

Portion of tax exempt income that is taxed due to proration provision:

15%

Give an example of different dates:

"This unpaid claim estimates as of December 31, 2005 was based on data evaluated as of November 30, 2005 and additional information provided to me through January 17, 2006"

Define finite reinsurance

"reinsurance" that does not transfer underwriting or timing risk

List some potential obstacles to offering wind coverage, as stated by GAO:

1. Adverse selection 2. Communities have to adopt wind hazard prevention standards 3. Uncertainty about adoption of programs to accommodate wind coverage 4. Difficulties in establishing a new rate setting process 5. Enforcement of new building codes 6. Administration & oversight of the program

How are reinsureds grouped in Part 1:

1. Affiliated insurers: US intercompany pooling/ US non pool/ other (non US) 2. Other US unaffiliated insurers 3. Pools & association: mandatory pools/ voluntary pools 4. Other non-US insurers

3 reasons most insurers are rated:

1. Agents cautious of unrated insurers 2. Third-party rely on outside assessments of insurer solvency 3. Rating agencies are efficient at assessing financial strength

Factors that could be considered when choosing a materiality standard:

1. % of surplus 2. % of reserves 3. Amount of adverse deviation that would cause a drop in financial strength ratings 4. Amount of adverse deviation that would cause surplus to fall below minimum capital requirements 5. Amount of deviation that would cause RBC to fall to the next action level 6. Multiples of retained risk 7. The upper limit of the insurer's reinsurance protection on reserve development (if any)

Licensing producers:

1. Pass exam and pay fees 2. Continue education and conflict of interest standards

List 2 things that the claim count data from Schedule P can be used to identify/ analyze

1. changes in losses 2. changes in claims settlement or reserving philosophy

Define syndicated letter of credit:

A LOC from several different banks. An agent bank issues a LOC to the ceding company, on behalf of a group of banks

Define derivative

A contract between two parties where the value depends on the value of a particular asset of variable

How is goodwill treated under P-GAAP

A goodwill asset is created, equal to the difference between the purchase price, and the implied capital (fair value of asses in us fair value of liabilities). If the implied capital exceeds the purchase price, the difference is immediately recognized as income (operating gain).

Why might be easier for the government to quickly establish a program:

A government program may already have been set up to provide services needed by the insurance program

What is ACL

ACL is essentially the point at which the insurance commissioner is authorized to take control over the insurer

Alternate Minimum Income Tax (AMIT) equation:

AMIT = AMTI * 20%

What does IFRS apply to:

Almost all insurance contracts

Briefly describe the current definition of the "business of insurance":

Any activity that has one or more of the following characteristics: 1. Insurer spreads or underwrites the policyholder's risk 2. Insurer and the insured have a direct contractual agreement 3. Activity unique to entities within the insurance industry

What actuary needs to disclose for methods & assumptions:

Any significant changes in assumptions or methods, unless it's not likely to have a material effect

In GAAP, under what circumstances can an insurer change its accounting principles:

As long as they can justify that they are preferable to the current

What topics does Interrogatory 4 cover:

Asks for disclosure about whether the reserves are net of non-tabular discounts

Deferred premiums

Balances due after the financial statement date

Uncollected premiums & agents' balances

Balances due before the financial statement date

Briefly describe a "Liquidation":

Bankruptcy proceeding in which a bankrupt organization does not have enough assets to pay all creditors, and the creditors are prioritized and paid according to the types of their claims

Briefly describe why the indictments against SEUA were initially dismissed:

Based on US Supreme Court's decision in Paul v. Virginia

Why are all numbers being averaged (i.e. "mean")

Because values are taken from BS, so take average of the beginning and ending numbers.

Compare the GAAP to the IFRS treatment of offsetting:

Both do not allow offsetting: - offsetting insurance liabilities against related insurance assets - offsetting income/ expenses from a reinsurance contract against expense/ income from a related insurance contract

What approach did regulators determine is the best way to achieve this Regulatory Mission:

Combining Financial Regulation and Market Regulation

Briefly define "captive":

Company that self-insures the risks of its owners

Briefly describe Surplus Lines insurance:

Coverage from nonadmitted insurers when protection not available in admitted market. Coverage for risks that are unique, require high limits, or have difficult underwriting characteristics

What does TRIA cover and list some exceptions:

Covers commercial insurance. Exceptions: 1. Federal crop insurance 2. Private crop or livestock insurance 3. Private mortgage insurance 4. Title insurance 5. Financial guaranty insurance 6. Medical malpractice 7. Flood insurance 8. Reinsurance 9. All life insurance

Equation to derive RTI from incurred losses according to direct & indirect methods.

Direct: Paid loss + change in discounted reserves Indirect: Statutory incurred loss - change in reserve discount

How is discounting reflected in Parts 2-4:

Data is gross of all discounting

How is the data treated in Parts 2-4 of Schedule P:

Data is net of reinsurance and net of S&S

Describe the concerns of Peripheral Asbestos Defendants:

Defendants who are accused of having asbestos encapsulated in their products, or on their premises 1. They should not be held liable since the asbestos in their product was encapsulated 2. Be responsible for liability that were borne by the now bankrupt manufacturers of asbestos containing products 3. Unfair to hold them accountable for the same knowledge of health risks as the major defendants 4. Court does not use objective evidence to evaluate the credibility of claims or injury 5. May be held responsible for liability that should be borne by non US companies 6. Defense costs considerably higher 7. Wants closure

Schedule E of A.S. describes:

Detail about cash and cash equivalents

Actuary's action if reviewing the information for a portion of the business and immaterial to the overall reserves:

Disclosure is optional and no need to give a Qualified opinion

Explain tax deferral benefit:

E = f (Y, T, L) where E = pre-tax equivalent yield, Y = pre-tax stated yield, T = tax rate, L = length of the deferral period, An increase in the value of any of the variables will result in an increase in E

Formula for Expected Reinsurer Deficit (ERD):

ERD = Probability (NPV U/W loss to reinsurer) x Avg Severity (U/W loss)

Criteria for a risk transfer based on ERD:

ERD > 1% of premium

What does the GLB Financial Services Modernization Act conclude about the issue of state vs federal regulation:

Each segment of financial services business is regulated separately: states continue to have primary authority over isnruance

Main purpose of Interrogatory 1:

Ensure that the ERE coverage has been reserved for

Equation and normal range for Change in NWP

Equation: (current NWP - prior NWP) / prior NWP Normal range: between -33% and 33%

Equation and normal range for 1yr Reserve Development to PHS

Equation: 1yr reserve development / prior PHS Normal range: < 20%

Equation and normal range for GWP:PHS

Equation: GWP / PHS Normal range: < 900%

Briefly explain why grouping of multiple plaintiffs and defendants has increased costs & complexity:

Forced them to make settlements on claims that were not necessarily deserved, in order to avoid the possibility of having to pay substantial punitive damages

Reason that the consumers with low credit scores file more claims:

Frequency is the same across population, but those with higher scores are less likely to file a claim (so history not impacted)

Define deferred tax asset (DTA)

Future tax benefits that arise due to temporary differences in income recognition between tax and statutory accounting

Explain why the IASB standard of significant insurance risk is weaker than the GAAP standard:

GAAP requires that it is reasonable possible that the reinsurer may realize a significant loss.

Advantage of the multiple peril HO policy that covers flood approach:

Greater pooling & diversification of flood risk

How does intercompany pooling works

Gross and net losses are combined, and then distributed to each company based on the pooling percentage

Define reciprocal insurers or insurance exchanges:

Groups similarly engaged in business that agree to indemnify one another for certain kinds of losses by way of the change of insurance contracts

What is the most common cause for regulator intervention in the operation of the insurer:

Hazardous financial condition

Role of the actuary in the preparation of the balance sheet

Help value the reserves - uncertainty associated with the reserves

Reason it is important to disclose retroactive reinsurance:

Helps verify that the insurer is appropriately accounting for the retroactive reinsurance, and to better understand its impact

Briefly describe the Federal Trade Commission (FTC) Act (1914):

Identified and made illegal unfair methods of competition and unfair or deceptive trade practices

What were the concerns about how the economic crisis would affect overall insurance costs and prices:

If insurance scores worsen, it will lead to unwarranted premium increases

How can the accident year loss & LAE ratios help regulators assess the adequacy of unearned premium reserves

If ratios exceed 100%, it is possible that the unearned premium is insufficient to cover future losses that will emerge.

One exception to the significant loss criteria:

If substantially all of the insurance risk related to the reinsured portion has been assumed by the reinsurer

Why did regulators begin to oversee and restrict insurer investments:

In the 90s, several insolvencies were caused by high risk investments.

What do the Notes need to disclose about reinsurance accounted for as a deposit:

Include a schedule that shows the historical change to the deposit/ liability balance since the inception each contract

Accounting treatment of flat fees:

Included in "Other Income"

Schedule Y of A.S. describes:

Information about activities of insurer members of a holding company group

Schedule BA of A.S. describes:

Information about other long term assets owned by the insurer

Define initial free surplus requirement and minimum required basic surplus:

Initial free surplus requirement: amount of surplus a new stock insurer must provide above the minimum capital required Minimum required basic surplus: amount of surplus existing insurers must hold to continue writing insurance

Briefly describe the doctrine of reasonable expectations:

Insured's reasonable expectation of coverage will be honored even if that involves reading the policy provisions in ways not intended by the insurer

Distortions that commutation results to the loss triangles for insurer and reinsurer:

Insurer: 1. Downward development of paid losses 2. Ceded reserves fall to 0 3. Net ultimate losses increase/ decrease, despite a constant gross ultimate Reinsure: 1. Jump in paid loss 2. Ultimate loss decrease/ increase purely due to the commutation price being lower/ higher than the reserve 3. Jump in claims closure count

Explain the impact of the fact that in Crop Insurance, the losses have not been shared proportionately between the government and private market:

Insurers made underwriting profits Federal government realized underwriting losses

In what cases can the regulators perform exams more often than every 5 years:

Insurers who are subject to a higher level of financial risk. Additional exams may focus on a specific risk

Non admitted portion of Interest Due & Accrued:

Interest Due & Accrued over 90 days overdue is a non admitted asset

What type of risk does R1 charge reflect

Interest rate & default risk

Needed margin as a percentage of capital

Investment yield x corporate tax rate / (1 - corporate tax rate)] / [(1 + investment yield)^0.5]

Equation for the cost of double taxation (after tax):

Investment yield x corporate tax rate x (1 - personal tax rate)

Primary users of Generally Accepted Accounting Principles (GAAP):

Investors

Define premium deficiency

It arises when the unearned premium is insufficient to cover the sum of losses, LAE and maintenance expenses

What does ratio 7 measure:

It is the ultimate measure of the change in financial condition

What is Solvency II used for

It is used to link the required capital to the specific risk profile

What is Schedule B

It lists the mortgage loans (secured by real estate) owned by the insurer

What does ratio 13 measure

It measures the adequacy of current reserves

What does ratio 1 measure

It measures the adequacy of surplus on a direct & assumed basis, excluding the effects of ceded premium

What does ratio 2 measure

It measures the adequacy of surplus on a net basis.

What does ratio 8 measure:

It measures the change in financial condition, based on operational results

What does ratio 5 measure:

It measures the profitability of the insurer.

What does R0 charge include

It only includes charges for investments in subsidiaries that are subject to RBC requirements

What is Schedule A

It provides details about real estate directly owned by the insurer

How is commutation contributed to the risk transfer

It reduced the amount of risk transferred

What should the insurer do if it believes that it is necessary to book a higher amount than what is being indicated by the Provision formula

It should hold an additional reserve. It should record this additional amount on the Income Statement by reversing the accounts that had been used to establish the reinsurance recoverable

Briefly describe the "Administrative Supervision" stage:

Legal condition under which an insurer may be required to obtain the commissioner's permission before: 1. Selling or transferring assets or in force business of using them as collateral 2. Withdrawing, lending, or investing funds 3. Incurring debt 4. Accepting new premiums 5. Renewing policies that are not guaranteed for renewal 6. Merging with another insurer 7. Entering into a reinsurance agreement 8. Paying specified policy or account values 9. Making any management change 10. Increasing officer or director compensation

Disadvantage of technological innovation in financing large-scale natural disasters:

Legislation would encourage coastal development in environmentally sensitive areas by lowering costs.

What is reinsurance payable on losses & LAE

Liabilities for amounts owed to reinsured, for losses that they have already paid

How is the Provision for Reinsurance treated in the Annual Statement

Liability (in the balance sheet)

List a party that would take a "liquidation" view of insurer & one that would take a "going concern" view:

Liquidation: Regulators Going concern: Investors

Describe the Capital & Surplus exhibit

Lists those transactions that impact surplus, but which are not included in the income statement

Does captive insurer have higher or lower requirements:

Lower requirements

How are derivatives that do not qualify for hedge accounting treated:

Market-to-market accounting (any changes in fair value are recorded as unrealized gains)

List an additional requirement if seeking to be licensed in state where an affiliate already writing:

May require u/w guidelines to ensure parent insurer does not shift business back and forth between affiliated insurers

What is surplus allocated proportional to:

Mean net loss & LAE reserves + Mean UEPR + EP for the year

Average growth rate factor formula:

Min (Max [Avg growth over 3 yrs, 0.1], 0.4) - 0.1

What does Dodd-Frank allow in terms of charging premium tax on the insurance from a non admitted insurer:

Only the home state of the insured to charge premium tax

To what extent can the FIO preempt state law:

Only to the extent that it conflicts with the subject matter of the relevant international agreement

List an argument for expanding the NFIP to offer optional wind coverage

Necessary because of difficulties of property owners obtaining affordable private wind coverage along the Gulf and Atlantic coasts

Compare the GAAP to the IFRS treatment of catastrophe reserves:

Neither allow insurers to maintain reserves for a future unknown catastrophe

Are loss reserves for high deductible policies net or gross of deductible?

Net (unless the deductible is deemed to be uncollectible)

Average case outstanding severity formula:

Net case outstanding loss & DCC (Part 2 - 3 - 4) / direct & assumed open counts(Part 5, section 2)

What is seasoning requirement:

Only experienced insurers are acceptable candidates

When would an insurer populate Part 7:

Only if it is using the loss sensitive adjustment to RBC

Describe how the FAIR plan operates:

Operate as a policy issuing syndicate: 1. For a % of premium, servicing carriers provide u/w, service, and settle claims 2. Servicing carrier: staff of the FAIR plan, or a contracted insurer 3. Insurers share risk in proportion to market share

Reason asset risk charge in the P&C industry is a lot smaller portion of the total risk charge compared to the portion in the life industry

P&C companies typically invest in short-term, relatively liquid investments because of the relatively short duration of the liabilities

Define common capital stock

Par value of the insurers stock that is issued & outstanding

Describe background of Paul v. Virginia:

Paul applied to become licenses insurer in home state of VA for NY insurers. VA denied because insurers had not deposited required foreign insurer bond. Paul sold policies anyway and was arrested.

Why may the apparent savings of having the government provide the insurance be overstated:

Possibly other government departments are performing the services on behalf of the government insurance entity

Define redeemable preferred stock:

Preferred stock that is redeemable at the option of the issuer at a specified maturity date, or after a specified period of notice, for a specified price

Define perpetual preferred stock:

Preferred stock with no maturity date (i.e. can not be redeemed by the issuer)

Portion of agents balances that is nonadmitted

Premium that is over 90 days overdue is nonadmitted

List some factors that can be used to allocated expenses:

Premium, claim count or headcount

Main objective of GAAP:

Present results that closely measure the financial performance during a period (by matching revenues and expenses)

Describe the inactive dockets reform:

Preserve the right of those who do not currently meet the specific criteria to pursue litigation in the future. - more individualize process - involve single plaintiff claims - by the most severely injured claimants

What does a deteriorating loss ratio indicate:

Price increases are not sufficient enough to keep up with the increase in losses

Compare principles to rules, including their respective advantages:

Principle: a general accounting approach that the users need to interpret Rule: specific guidance that users need to follow The rules are easier to interpret, but the principles are more adaptable to changes

Describe the structure of Crop Insurance:

Private insurers sell & service the policies. The federal government reinsures the losses

Define probable, reasonably possible and remote:

Probable: likely to occur Reasonably possible: chance is more than remote, but less than probable Remote: chance is low

Define pure captive and group captive:

Pure captive: cover risks of parent which is one company Group captive: cover risks of a group of companies

Describe Notes to the Financial Statements

Quantitative & qualitative disclosures elaborating on elements from the statements

Base NWP RBC formula:

RBC = Current yr NWP x (Company RBC loss ratio x Adjustment for investment income + Underwriting expense ratio - 1)

Covariance adjustment (square root rule) formula:

RBC = R0 + (R1^2 + R2^2 + R3^2 + R4^2 + R5^2)^0.5

Base loss & LAE reserve RBC charge

RBC = [(Company RBC% + 1) x Adjustment for investment income - 1] x (Net loss & LAE reserve + Other discounts not in reserves) Where the net loss & LAE reserves are taken from Schedule P, Part 1 (and are gross of non-tabular discounts, but net of tabular)

RBC charge for a directly owned alien insurance affiliate

RBC charge = Book/ adjusted carrying value x 0.5

RBC charge for an indirectly owned alien insurance affiliate

RBC charge = Carrying value x 0.5

Formula for RBC ratio:

RBC ratio = Total adjusted capital / ACL Where the ACL = RBC after covariance x 50%

Common metric to compare companies' investment performance

Ratio of income to average invested assets (does not reflect risk)

Accounting treatment of prepaid legal expenses plans

Recognized as income when due, but not prior to the effective date of the policy

When determining the age of reinsurance recoverables, what should be done if no dates have been mentioned or if the recoverable is under $50K:

Record the amount as "currently due"

Reason the square root is used to derive RBC need:

Reflects diversification among the risks: RBC makes the assumption that they are independent

Briefly explain the information collection requirements that the FIO may impose on the insurers:

Require any insurer or an affiliate to submit specific data/ information to the FIO

Briefly explain why high ratings are important for Surety:

Require construction firms obtain surety contracts from A rated insurers

Describe interest paid for accrued interest on dividends

Required whenever an insurer purchases a bond between coupon payments. It needs to pay the seller for the coupons that were earned while they owned the bond

How are reserves treated in the Balance Sheet

Reserves are shown as net of all discounts

Describe the securities lending process

Securities lending is when a company lends certain securities that is not actively trading to another party for a fee. The borrower will usually short sell the asset, hoping to repurchase it later for a lower prices, before returning it to the lender. This exposes the lender to credit risk, so the borrower needs to post collateral. The lender can invest this collateral, but needs to have it available to return to the borrower when they return the securities.

Describe Mandatory Convertible Securities

Securities which are mandatorily convertible at specified prices

Briefly describe the Schedule P Interrogatories:

Series of seven questions that the insurer needs to answer, that add insight to the other information reported in Schedule P

Define a commutation:

Settlement between an insurer and reinsurer to discharge all remaining (present & future) obligations

How is the RBC charge for reinsurance recoverables treated in the RBC formula:

Split equally between R3 & R4, unless the reserve RBC is less than the sum of credit risk RBC for non-invested assets and one half of reinsurance recoverables, in which case the total is allocated to R3.

How is the capital standards derived by rating agencies:

Started as RBC modification: 1. Added other risks (e.g. Interest rate risk, catastrophe risk, asbestos and pollution loss reserves) 2. Changed from worst case year to VaR, TVaR, or EPD 3. Capital formulas differ significantly among agencies 4. Market their product stressing accuracy and flexibility of model

How does the government act as a partner with private insurers:

State laws prescribe benefits for which employers are responsible

Accounting principles prescribed by the State Regulators

Statutory Accounting Principles (SAP)

Definition of incurred losses between statutory & tax accounting:

Statutory accounting: incurred losses = paid losses + change in full value reserves Tax accounting: incurred losses = paid loss + change in discounted reserves

Describe SAP treatment of goodwill:

Statutory purchase: goodwill equals the difference between the purchase price and the statutory surplus. Capped at 10% of the acquiring firms capital & surplus. Amortized to unrealized capital gains over the period in which the acquiring firm benefits economically (up to 10 years)

How is the company average loss & LAE ratio calculated:

Straight average of net loss & LAE ratios from Schedule P, Part 1, Col 31; over 10 AYs. Ratios for each accident year are capped at 300% before averaging. Adjustment for company experience = Company avg loss & LAE ratio / Industry avg loss & LAE ratio

Briefly describe why credit scores are a statistically reliable tool for segmenting risks with different expected costs:

Strong correlation between insurance scores and expected costs associated with the risk

How is surplus adjusted in Part 8 of Schedule F

Surplus is not adjusted. Adjustment is recorded as "XXX"

Requirement of the "financial hardship" exemption:

The projected reasonable cost of the actuarial opinion would exceed the lesser of: - 1% of the insurer's capital & surplus - 3% of the direct & assumed premiums written during the year)

Briefly describe the Solvency Capital Requirement (SCR):

The SCR is the required capital to limit the probability of ruin over the year to 0.5% (protect against 99.5% VaR). Companies with lower capital are subject to regulatory intervention.

Why does assumed business have a lower Loss sensitive discount factor:

The benefit is often partially offset by the fact that the commissions are loss sensitive as well

How should management book the reserve if there is no range:

The best estimate should be booked

Why is amortization or accretion of bonds required

The coupon rate is different to the market interest rate at the time the bond is purchased. The amortization produces an amortized cost equal to the face value at maturity.

Define retroactive date:

The date at which coverage begins

Define hedge accounting treatment

The derivative receives the same accounting treatment as the hedged asset

Schedule DB of A.S. describes:

The derivatives owned by the insurer

Define double taxation

The difference between the indirect amount of tax paid (via investing through the insurer) and the direct amount of tax paid (investing directly) is the cost of double taxation

What does losses on investments/ change in mix of invested assets/ declining yield on investment assets indicate

The insurer has changed its investment strategy, or lacks controls of the investment strategy

Define Surety coverage

The insurer is responsible for the debt/ obligation of another party. The insurer will make the payment in the event that the other party is unable to pay.

What may large growth in written premium during a soft market (underwriting cycle), as indicated by the Five-Year Historical Data exhibit suggest:

The insurer may be making concessions on rate or commission

What should the transfer of special surplus to unassigned surplus be limited to:

The lesser of: 1. actual amount recovered in excess of the consideration paid 2. initial surplus gain resulting from the retroactive contract

How should reserves be booked if management has a range of estimates, and no point within the range is more likely

The midpoint should be booked

Define par value

The minimum amount set by the insurer at which the stock can trade at its initial offering

Non admitted portion of Real Estate:

The permanent excess of book over the market value is a nonadmitted asset

Define financial risk

The risk of change in one or more of the following: 1. Specified interest rate 2. Financial instrument price 3. Commodity price 4. Foreign exchange rate 5. Index of prices or rates 6. Credit rating 7. Credit index

Define Actuarial Report:

The set of actuarial documents that the actuary determines to be relevant to specific actuarial findings that is available to the intended user

Briefly describe Pillar 3 (Supervisory Reporting/ Public Disclosure):

This focuses on increasing the transparency of the insurer's risks & capital position. It provides the means by which the capital & regulatory position derived from Pillars 1 & 2 are reported to the supervisor & financial markets.

Describe 10-10 rule:

There needs to be at least 10% chance of a 10% or greater loss

How should Type 1 Events be accounted for:

These events should already be reflected int he financial statements, as the statements are meant to include all known information about the conditions that existed at the accounting date, as of the dates the statements are issued. Disclosure will only be needed in the event that it would prevent the statements from being misleading.

Define gross pad in & contributed surplus

This is generated when the insurer issues stock. It equals the excess of the sale price of stock over its par value

Expected impact to ultimate loss projection if a slow down in settlement rates is not reflected:

This will result in an understated projection

List 4 concerns of seriously injured claimants:

Those with detectable & indisputable injuries 1. Resolve quickly due to short life expectancy 2. High transaction costs -> reduce funds available for their needs 3. Develop serious illnesses in future years -> risk that the companies responsible go bankrupt 4. Awards used to pay nonmalignancy claims leave less to pay more serious diseases

When should reserves for losses under high deductible policies be established:

Throughout the whole period, not the point at which the deductible levels are breached

What is Atkinson & Dallas Formulae

To reflect the additional cost that arises because of the investment constraints of insurers

Describe the licensing differences between traditional insurers and RRGs:

Traditional insurers and non-RRG captives: 1. Subject to licensing requirements and oversight of each nondomiciliary state in which they operate RRGs: 1. Required only to register with regulator of state 2. Still expected to comply with other laws and pay applicable premium and other taxes

Define retrocession:

Transaction where the reinsurer cedes all or part of the business that it has assumed.

Describe a run-off agreement:

Transfer almost all the risk of a line of business that is no longer actively marketed by the insurer

Define portfolio reinsurance:

Transfer of entire segments of business. Treated as retroactive reinsurance

Define portfolio reinsurance

Transfer of policies in force or liabilities remaining on a block of the insurance company's business

Define run-off agreement

Transfer to a third party of a risk from a line or market segment that is no longer actively marketed by the insurer

Which events should already be reflected in the financial statements

Type 1

Briefly describe a "Receivership":

Type of bankruptcy an insurer enters into when a receiver is appointed to manage the insurer and its property

Briefly describe "receivership":

Type of bankruptcy an insurer enters when commissioner becomes receiver: formulates plan to distribute insurer's assets to settle obligations to customers

What actuary needs to disclose for long duration contract:

UEPR

Formula for Value of the Business in Force (VBIF):

Unearned premium reserves - fair value of the liabilities expected to be incurred

List 1 difference between a RRG and a Group Captive:

Unlike RRGs, group captives do not have to insure similar risks

Rules to determine the due date of the reinsurance recoverables (to populate Part 4):

Use the following hierarchy: 1. Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified; or 2. Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified; or 3. The date at which the amount recoverable from a certain reinsurer exceeds $50K, and is entered into the insurers account as a paid recoverables

One and two year loss development section of the Five-Year Historical Data Exhibit

Users may be concerned if the development is significant relevant to surplus IRS and investors may be concerned if there is a favorable development

Reason that insurer ratings should not deteriorate after IFRS is implemented, despite the higher volatility of results:

Users should benefit from the increased transparency

List an example where the government acts as a competitor to private insurer:

WC

What is premium deficiency reserve:

When the anticipated losses, loss adjustment expenses, commissions & other acquisition costs and maintenance costs exceed the UEPR

Define structured settlements

When the insurer purchases an annuity on behalf of the claimant to settle the claim.

When do dividends to policyholders become liabilities:

When they are declared

What topics does Interrogatory 6 cover:

Whether the insurer reports claim counts per claim or per claimant

According to Kucera, what is the effect on premiums of not using credit-based insurance scores?

Will not lower overall insurance premium, but redistribute charges: 1. Risks with lower expected costs will pay more than actuarially fair 2. Risks with greater expected costs will pay less than actuarially fair

Accounting treatment of premium deficiency reserve

Write in liability => reduction to income

Accounting treatment of uncollectible reinsurance:

Written off from the schedules in which they were originally recorded

Accounting treatment for disputed balances with an affiliate:

cannot take credit for recoverable

Accounting treatment of ceded premium payable:

record as a liability net of ceding commission

Accounting treatment if assuming insurer receives premium after the effective date but prior to the due date:

record as a reduction to the deferred but not yet due asset (EBUB)

Preferred stocks are valued:

similar to bonds (i.e. NAIC 1-6)

Upon purchase of the bond, record:

the bond at actual cost

Upon purchase of the common stocks, record:

the bond at cost + brokerage fees

After purchase of the common stocks, record:

the bond at fair value

Define novation reinsurance:

the original insurer's obligations are completely extinguished, where there is no more exposure to loss from the novated business

2 components of LAE:

1. Defense & Cost Containment (DCC) 2. Adjusting and Others (A&O)

Schedule D of A.S. describes:

Details about stocks and bonds

List 4 types of residual auto plans:

1. Assigned risk plans/ automobile insurance plan 2. Reinsurance facilities 3. JUAs 4. Maryland automobile fund

Reinsurer's accounting treatment of commutations:

1. Eliminate the reserves 2. Payment made to the ceding 3. Gain/ loss -> underwriting income

Reasons that high yields are not necessarily a good thing:

1. Investing in high risk instruments 2. Extraordinary dividend payments from the subsidiary to the parent

What categories does the IEE divide the investment gain into:

1. Investment gain on funds attributable to insurance transactions 2. Investment gain attributable to capital & surplus

Examples of material transactions that will require approval from the commissioner:

1. Large investments 2. Reinsurance transactions 3. Extraordinary dividends

3 categories of off-balance sheet items included in the R0 charge:

1. Non-controlled assets 2. Contingent liabilities 3. Guarantees for the benefit of affiliates

3 sources of R3 charge:

1. Non-invested assets 2. Reinsurance recoverable 3. Health credit risk

What should policies that do not transfer significant insurance risk be accounted for:

Financial instruments

5 ways that government participates in State WC programs:

1. Partnership with private insurers 2. State funds 3. Competitive state funds 4. Exclusive state funds 5. Residual markets

Initial primary purpose of rate regulation:

Financial stability of the insurer

What may increase in underwriting or other expense ratio suggest:

1. The insurer is making concessions on commissions 2. Less of the premium can be used towards paying losses

Briefly explain why high ratings are important for Structured Settlements:

Protect claimants, courts may require A rated insurers

2 methods to calculate UEPR:

1. Daily pro rata method: based on the number of days of the policy that have expired 2. Monthly pro rata method: assumes that premiums are written evenly through each month

Accounting treatment of retroactive reinsurance agreements between affiliates:

1. consideration paid -> deposit: non admitted asset 2. no deduction to loss & LAE reserves

Types of commissions that insurer needs to accrue:

1. contingent/ straight profit 2. sliding scale

Illustrative working for the actuary's disclosure regarding the presence of risk of material adverse deviation:

"I believe there are significant risks and uncertainties associated with the Company's net loss & LAE reserves that could result in material adverse deviation. I have identified those factors as ____, _____, and ____. These risk factors are described in greater detail in the following paragraph and in the report supporting this Opinion. The absence of other risk factors from this list does not imply that additional factors cannot be identified in the future as having been a significant influence on the Company's reserves."

Sample wording for Scope paragraph:

"I have examined the actuarial assumptions and methods...as prepared for filing as of December 31, 20xx,....AND in forming my opinion on the loss and LAE reserves, I relied upon data prepared by _____. I evaluated that data for reasonableness and consistency. I also reconciled that data to Schedule P - Part 1..."

Illustrative wordings for a reasonable opinion:

"In my opinion, the amounts carried in Exhibit A on account of the items identified: A. Meet the requirements of the insurance laws of ST B. Are computed in accordance with accepted actuarial standards and principles C. Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements"

Illustrative wordings for a qualified opinion:

"In my opinion, with the qualification that it does not include the {items related to qualification}, the amounts arrived in Exhibit A... The Company's management has informed me that the reserves listed in Exhibit A include $X (x.x%) on a net of reinsurance basis, and $Y (y.y%) on a direct and assumed basis, for {items related to qualification}. I did not include in my review an evaluation of the reserves related to {items related to qualification} because there was not sufficient information available for me to session the reasonableness of those reserves. Thus, this is a qualified statement of actuarial opinion."

Accounting treatment of amounts withheld by the ceding company:

"funds held by the entity under reinsurance treaties" interest due or payable -> aggregate write in for miscellaneous income

Accounting treatment for amount of coverage that is adjusted under reinsurance contract:

- An asset or liability is established by adjusting the initial premium for the change in the amount of coverage. - Recognize during the period of the loss event that caused the change. - Liability should be amortized over the period

Briefly describe "liquidation":

- Bankruptcy proceeding in which a bankrupt organization does not have enough assets to pay all creditors. - Creditors are prioritized and paid according to the types of their claims

Describe the degree of rate regulation and rationale for Workers Compensation:

- Close regulation, prior approval of rates and classification system - Legally required of most employers - Costly, widespread business - Complex rating and classification system

Action required by DOI & Insurer for Company Action Level

- DOI: None - Insurer: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or reduce its risks

Action required by DOI & Insurer for Authorized Control Level

- DOI: commissioner is authorized to take control of the insurer - Insurer: None initially

Action required by DOI & Insurer for Mandatory Control Level

- DOI: commissioner of domiciliary state must rehabilitate or liquidate the insurer - Insurer: None initially

Action required by DOI & Insurer for Regulatory Action Level

- DOI: right to take corrective action - Insurer: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or reduce its risks

Describe the degree of rate regulation and rationale for Ocean Marine:

- Very little regulation - Highly individualized risks - No statistical info to justify rates - Knowledgeable buyers and seller

List some problems that may arise if expenses are not accurately allocated:

1. distorted profitability measures 2. inefficient allocation of resources 3. anti-selection

Describe the degree of rate regulation and rationale for Commercial General Liability:

- General regulation, except during tight markets - Sophisticated buyers

Briefly describe "rehabilitation":

- Impaired insurer continues to exist after the receivership - Use rehabilitation period to assess insurer's financial situation by comparing its assets and liabitlies

Describe the degree of rate regulation and rationale for Inland Marine:

- Informational filings only - Highly individualized risks - No statistical info to justify rates - Diverse coverages and classifications

Define an Insurance "cooperative":

- Members pool funds to spread and assume their own commercial liability risk. - Members with similar or related risks

Describe the two parts in Schedule Y

- Part 1: Organizational chart (relationship between each entity and the parent/subsidiaries/affiliates; lists controlling entity) - Part 2: Summary of the transactions

Describe the degree of rate regulation and rationale for Surety

- Rate manuals filed, little regulatory review - Less detailed stat plan and Ratemaking data - Fewer statistically based rating factors - Subjective risk evaluation - Less credible loss experience

Describe the degree of rate regulation and rationale for Title:

- Rate manuals filed, little regulatory review - No stat plan or Ratemaking data - Few rating or risk evaluation factors - Underwriting and exposure identification key to controlling losses - Driven more by business expense than by insured losses

Describe the degree of rate regulation and rationale for Private Passenger Auto:

- Regulatory review of overall rates and details of rating plan - Legally required or socially desirable for consumers to purchase - Uniformed consumers - Highly uniform stat plan with credible rate data - Complex rates and classification system

What is the admitted portion of DTA under SAP equal to

- The amount of DTA expected to reverse in the upcoming year, that can be applied to taxes paid on profits in the prior three years (loss carrybacks) - The amount of DTA expected to reverse in years following the upcoming year, limited to a percentage of surplus (where the percentage is based on the ratio of authorized capital to the ACL) - The amount of DTA beyond that calculated above that can be offset against the existing DTLs

Tax strategy if the ratio is not at optimal

- if AMTI / RTI > 150%, shift from tax exempt to taxable bonds => RTI increase at a faster rate than AMTI - if AMTI / RTI < 150%, shift from taxable to tax exempt bonds => AMTI increase at a faster rate than RTI

Equation to derive total amount of capital which is subject to the cost of holding capital:

- surplus - equity in the unearned premium reserves - equity in the undiscounted reserves - deferred tax asset (from UEPR and discount) should be subtracted from this amount

3 objectives of Reinsurance Facility:

1. Achieve more equitable pricing 2. Improve service 3. Avoid stigma associated with being in assigned risk plan

List the components of the Balance Sheet that are populated from Schedule F data:

1. Assets: amounts recoverable from reinsurers 2. Liabilities: reinsurance payable on paid losses & LAE/ funds held by the company under reinsurance agreements/ provision for reinsurance

RBC charge for non-government money market funds:

0.003 x book/ adjusted carrying value of stock

Aggregate write-ins for invested assets RBC factor:

0.05

Derivatives RBC factor:

0.05

Receivables for securities RBC factor:

0.05

RBC charge for Mortgage loans:

0.05 x book/ adjusted carrying value of loans

RBC Charge for non-invested assets:

0.05 x net admitted value (Except for investment income due & accrued, which is 0.01)

Real estate RBC factor:

0.1

RBC charge for reinsurance recoverables:

0.1 x reinsurance recoverable (Where the recoverables have been reduced by the provision for reinsurance)

RBC charge for Unaffiliated Common Stocks:

0.15 x book/ adjusted carrying value of stock

Other long-term invested assets other than collateral loans RBC factor:

0.2

RBC charge for holding company

0.225 x (holding company value - carrying value of the indirectly owned insurance companies)

RBC charge for bond investment in insurance subsidiary not subject to RBC

0.225 x book/ adjusted carrying value of bonds

RBC charge for bond investment in other non-insurance subsidiaries

0.225 x book/ adjusted carrying value of bonds

RBC charge for bond investment in a parent company

0.225 x carrying value of bonds

Premium concentration factor formula:

0.3 x (NWP in largest line) / (NWP for all lines) + 0.7

Equation for Loss Concentration factor:

0.3 x (Net is & LAE reserves in largest line) / (Net loss & LAE for all lines) + 0.7

RBC factor applied to off-balance sheet items:

1% (except to the securities lending program, which receive 0.2%)

What areas do the Investment interrogatories question:

1. Assets & investment decisions 2. Security lending programs & associated collateral 3. Hedging programs 4. Mandatory convertible stocks or bonds 5. Compliance with NAIC Purposes & Procedures Manual

If there is no specific contract with a due date for reinsurance premiums, when are they considered due:

1. 30 days after date at which notice of premium is provided to the ceding company 2. 30 days after date at which the assuming entity books the premium

List 4 inherent weakness in the credit reporting system:

1. 50% of credit reports contained errors (Consumer Reports) 2. Identity theft 3. Excessive access to credit evidenced by problems in mortgage industry 4. Credit reports disproportionately negatively effect certain parties

Criteria to make a disclosure about loss contingency/ asset impairment

1. A contingency/ asset impairment is not recorded because only one of the two conditions is met 2. There is an exposure to loss higher than the amount accrued

What must be included in the Actuarial Report

1. A description of the actuary's relationship to the company, including a clear description of the actuary's role in advising management about reserves. 2. An exhibit that ties to the Annual Statement and compares the actuary's conclusions to the carried amounts 3. An exhibit that reconciles & maps the data to Schedule P 4. An exhibit that indicates the changes in estimates from the prior report, including an explanation of the factors driving the change. 5. More extensive comments on trends that indicate the presence/ absence of risks & uncertainties that may result in material adverse deviation 6. More extensive comments on factors that caused unusual IRIS ratios, in addition to how these factors were addressed in the prior and current analyses

What does actuary need to include if the insurer participates in an intercompany pooling arrangement (SAO):

1. A description of the pool 2. Identification of the lead company 3. Listing of all companies in the pool/ state of domicile/ pooling percentages

3 components of liabilities:

1. A present responsibility to transfer/ use assets at a specified/ determinable date based on the occurrence of a specified event/ on demand 2. The entity has little/ no discretion to avoid the responsibility 3. The transaction/ event that obligates the entity has already occurred

Provide 4 statement of principles of P&C Ratemaking:

1. A rate is an estimate of the expected value of future costs 2. A rate provides for all costs associated with the transfer of risk 3. A rate provides for the costs associated with an individual risk transfer 4. A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer

Reasons for large decrease in premium (ratio 3):

1. A sign of financial distress 2. Pulling out of a line of business 3. Reducing writings due to large losses in certain lines 4. Loss of market share 5. Higher amounts of reinsurance

What needs to be disclosed in Regulation S-K:

1. A tabular analysis of the changes in aggregate reserves for unpaid claims & claim adjustment expenses for each of the latest 3 one year period 2. 10yr loss reserve development table (rearrange Schedule P data to be CY rows and AY columns) 3. Method to estimate the effects of inflation 4. Reconciliation between SAP & GAAP reserves for unpaid claims and claim adjustment expenses 5. The amount of discount of the GAAP loss reserves

List some perils covered under Beach and Windstorm Plans:

1. AL, LA, NC offer fire, lightning, windstorm or hail, explosion, riot, aircraft, vehicles, smoke, and vandalism or malicious mischief 2. All other states: only windstorm and hail

How was LAE historically segmented:

1. ALAE: expenses that can be allocated to a specific claim 2. UALE: expenses that cannot be allocated to individual claims

Reasons for large increase in premium (ratio 3):

1. Abrupt entry into new business or territories 2. Insurer may be attempting to increase cash flow to meet loss payments Insurer should investigate source of insurer's expansion and whether it maintained adequate pricing terms and conditions

List some factors that may lead a regulator to believe that a company is in hazardous financial condition:

1. Adverse findings in financial analysis or exams/ audit/ actuarial opinion/ cash flow & liquidity analyses 2. Insolvency of the insurer's reinsurer, or within the insurer's insurance holding company system 3. Finding of incompetent or unfit management 4. Failure to provide information 5. Any other finding determined to be hazardous to policyholder's, creditors, or general public

CAS Working Party recommendation about criteria that qualify to be a reasonably self evident risk transfer:

1. Aggregate limits no leads than one per occurrence limit or twice premium 2. No ceding commissions 3. Rate on line (reinsurance premium/ reinsurance limit) is under 500%

List activities for which the SEUA received criminal indictments:

1. Agreement and concert of action to take control of 90% of the fire & allied lines market 2. Fixing premium rates and agents' commissions 3. Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply 4. Withdrawing rights of agents to represent SEUA members if they also represented to non-SEUA companies 5. Threatening insurance consumers with boycott and loss of patronage if they didn't purchase insurance form SEUA members

Actions that the actuary should take if they realize between submitting the opinion, and the date of the balance sheet for which the next opinion shall be issued, that there is an error in the data that would have materially impacted the opinion.

1. Alert the audit committee within five business days 2. This notification needs to include an amended opinion 3. The insurer needs to forward this amended opinion to the insurance commissioner within the next five days, and also copy the actuary 4. If the actuary does not receive this copy, he should notify commissioner

Explain how Guaranty funds are operated:

1. All insurers selling lines covered by fund automatically become members 2. Assessments are commonly made on basis of premiums written divided along lines of insurance 3. Post insolvency assessment approach: claims estimated and assessments issued after the insolvency 4. Insurers may pass on assessment costs to policyholder's in their rates

Following the McCarran-Ferguson Act, the NAIC and state legislatures began developing and implementing various insurance laws. Briefly describe what these laws were designed to do:

1. Allow cooperation in setting rates 2. Keep Congress from controlling competition

List an argument against expanding the NFIP to offer optional wind coverage

1. Already adequate coverage via private market 2. Increase financial exposure to taxpayers 3. NFIP may not be able to determine actuarially sound rates 4. Even actuarial rates will not be sufficient to cover administration costs and losses in the event of a catastrophic event

Items that the insurer needs to disclose if there is a change in the key discount assumptions:

1. Amount of discounted reserves at current rates and assumptions 2. Amount of discounted reserves at the prior rates and assumptions 3. Change in discounted liabilities due to change in rates and assumptions 4. Amount of non tabular discout

Disclosure necessary when entering into a structured settlement:

1. Amount of reserves no longer needs to carry 2. Extent to which it is continently liable 3. If aggregate value of annuities from a given life insurer exceeds 1% of the surplus, it must disclose the name, location of the insurer and aggregate value of annuities

What does the Change in Incurred Loss & LAE note disclose:

1. Amount of the change 2. Segments/ lines that lead to change 3. Reason for the change

Briefly describe the accounting treatment of prospective reinsurance:

1. Amounts paid for reinsurance -> reduction to written and earned premium 2. Reinstatement premiums -> earned over the period 3. Changes in reinsurance recoverable -> change in losses incurred 4. Reinsurance recoverable on loss payments -> admitted asset 5. Reinsurance recoverable on unpaid loss -> reduce reserve

How does the residual market of WC work?

1. Applicants assigned to carrier based on their WC market share 2. Carriers reinsure undesirable applicant with a reinsurance pool 3. State authorizes a JUA to serve the residual market

Explain how the JUA works:

1. Applicants unacceptable to voluntary market -> forward to JUA servicing carrier (Limited number of servicing insurers to handle all residual auto insurance business -> they get fee for handling policies) 2. Servicing insurer issues policy, collect premium, provides service, pays claims (Have greater control of results of a JUA than insurer in insurance plan or reinsurance facility) 3. Results of business in pool shared by all insurers based on voluntary market share 4. Rates are based on experience of the pool; uniform for all servicing insurers

What additional requirements does an alien insurer have when filing for a license:

1. Appointment of US manager 2. Provide a Trust agreement - contract in which one party transfers ownership of property to another party that will administer the property for a third party's benefit 3. Certificate of alien funds on deposit

Factors to look into if Change in NWP ratio is unstable:

1. Are the assets properly valued & liquid enough to meet cash demands 2. Are the reserves adequate?

Examples of factors that can cause material adverse deviation:

1. Asbestos & environmental losses 2. Construction defect 3. Other mass torts 4. High excess layers 5. Large deductible Worker's Compensation 6. Med Mal legislative issues 7. Rapid growth 8. Lack of data

3 sources to determine reinsurance collectability:

1. Ask management about any collectability problems 2. Review reinsurer ratings 3. Examine Schedule F for evidence of regulatory action or paid losses over 90 days past due

List 3 reasons why Financial Strength Ratings are important to insurers:

1. Assess ability to pay claims 2. Reinsurers desire investment grade ratings to retain business 3. Independent agents use to place customers with higher rated insurers

What type of information is included in the public exam report:

1. Assessment of financial condition 2. Details about any of the material adverse findings from the exam 3. May include required corrective actions/ improvements/ recommendations

The components P&C RBC formula consists of:

1. Asset risk 2. Underwriting risk 3. Covariance adjustment

List the 8 parts of Schedule F:

1. Assumed Reinsurance 2. Portfolio Reinsurance 3. Ceded Reinsurance 4. Aging of Ceded Reinsurance 5. Unauthorized Reinsurance 6. Overdue Authorized Reinsurance 7. Slowpaying Authorized Reinsurance 8. Restatement of Balance Sheet

List some items that were introduced in the Flood Insurance Reform Act of 2012:

1. Authorized several regulatory changes to improve the accuracy of flood maps 2. Established a process to allow communities to request remapping 3. Authorized the creation of an independent "scientific resolution panel"to address the mapping related concerns from communities that appeal for remapping

GAAP valuation rules of various types of investment assets:

1. Available for sale (AFS) - purchased with the intention to sell before maturity, but after a year: fair value (changes in fair value is recorded as "other comprehensive income") 2. Held to maturity (HTM) - intent & ability to hold till maturity: amortized cost 3. Held for Trading (HFT) - purchased with the intention of selling within hours or days: fair value (changes in fair value recorded as income)

List some metrics that can be calculated from the Part 5 of Schedule P data to perform reasonableness checks on the unpaid claim estimates (by comparing actual to expected)

1. Average claim frequency = Ultimate claim count by AY / Corresponding EP 2. Average ultimate severity = Ultimate loss & DCC by AY / Ultimate claim counts 3. Average unpaid claim severity = Unpaid loss & DCC b AY / Unpaid claims

5 steps of an interactive rating:

1. Background research by rating analyst; proprietary data submitted by insurer 2. Interactive meetings between rating analyst and senior managers of the insurer 3. Preparation of ratings proposed by lead analyst and additional data submitted by insurer 4. Decision by the ratings committee after lead analyst presents proposal 5. Rating published

2 definitions of surplus

1. Balance sheet definition: surplus = assets - liabilities 2. Income statement definition: surplus = prior years surplus + current year's income

What 2 views of financial health of the insurer does the statutory financial statements provide

1. Balance sheet strength: ensure that the insurer can pay its claims 2. Earnings potential

List areas of Legislative Influence Through Noninsurance Laws:

1. Banking 2. Contracts 3. Premiums (e.g. Premium financing) 4. Fraud 5. Investments 6. Lobbying

Describe the concerns of Employees/ Retirees of firms with asbestos liabilities:

1. Bankruptcies lead to loss of 52K-60K jobs 2. Average worker lost over $8K on average in pension losses

2 reasons that LOCs are expensive to the reinusrer

1. Banks charge a fee, which will be higher during uncertain economic times 2. The LOC is a reduction to reinsurers line of credit

Briefly explain why high ratings are important for Homeowners:

1. Banks require property insurance to issue mortgages 2. Due to risk of catastrophes in property, banks may require insurer has investment grade rating

List some properties of rates in the JUA:

1. Based on experience of the pool 2. Uniform for all servicing insurers 3. Like auto insurance plans, higher than voluntary market

If there is an error in the AOS, the revised AOS should:

1. Be submitted to the regulator within 10 business days 2. Clearly state that it is an amended document 3. Contain or accompany an explanation for the change 4. Include the revised date

How is EBUB recorded, both before and after the exposure is audited:

1. Before: estimate EBUB => premium modified by the level of exposure 2. After: EBUB adjusted to reflect the actual exposures => adjustment recognized as revenue immdediatley

Briefly describe the notion of conditional payment:

1. Begin incurring medical costs before eligibility to collect insurance is determined 2. Medicare will make conditional payments before it's determined 3. If insurer is primary, it will reimburse Medicare

List some P&C actuarial implications of the recent changes to Medicare/ MSAs:

1. Between 2008 and 2010, before the reporting deadline, increase in - claims closing - lump-sum payments => distort paid and reported losses 2. Slowdown in claim settlement rates since then 3. A portion of the increasing WC medical trends may be due to the new MSA requirements 4. Risk that injured workers who are currently receiving Medicare may have the payments reclassified as WC

How is the Black Lung Benefits Act program financed:

1. Black Lung Trust Fund 2. Federal general revenues

Surplus lines laws:

1. Broker accountable for placing business with eligible nonadmitted/ unauthorized companies 2. Set forth financial and other eligibility requirements for nonadmitted/ unauthorized companies 3. Domiciliary jurisdictions also reviews nonadmitted/unauthorized insurers for solvency 4. Licensing only available to producers who already have P/C licenses 5. Licensee place business with insurer with adequate capital and surplus 6. "Diligent search" of licensed market (file affidavit)

Situations where federal regulation under McCarran-Ferguson:

1. Business of insurance is regulated by the states 2. No boycott, coercion, or intimidation has occurred

Risks that are excluded from RBC formula

1. Business plan & strategy 2. Management 3. Internal controls 4. Systems 5. Reserve adequacy 6. Ability to access capital

List some examples of high level requests that the agencies may make during the interactive meetings:

1. Business strategy 2. Risk concentration guidelines 3. How information travels from management to employees

What type of information do regulators use in the off-site monitoring (in addition to the regulatory financial reports and financial tools):

1. CPA audit report 2. Results of most recent on-site regulatory financial exam 3. SEC filings 4. Corporate reports 5. Financial statements of controlling companies 6. Market conduct reports 7. Rate and form filings 8. Consumer complaints 9. Independent rating agency reports 10. Correspondence from agents & insurers

2 methods to uniformly earn premium throughout the year

1. Daily pro rata: number of days which have elapsed to number remaining 2. Monthly pro rata: same amount of business written throughout the month

3 steps to determine liabilities according to IFRS:

1. Calculation of unbiased probability weighted expected cash flows 2. Application of discounting: risk free rate with adjustments to reflect currency, liquidity, cash flow timing 3. Application of margins

Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels:

1. Callability: most municipal bonds are callable 2. Liquidity: municipal bonds are less liquid 3. Tax legislation: the proration provision reduced the tax advantage of municipal bonds

Explain why the defense costs for peripheral defendants may be considerably higher:

1. Can be named in suits at little/ no cost to plaintiff 2. Discovery often takes place just before trial -> difficult to get dismissed from the case without incurring significant costs 3. Settle suits they may not be liable -> risk of being subject to adverse judgment when other parties have settled is quite high

What is RBC designed to provide:

1. Capital adequacy standard that is based on risk 2. Safety net for insurers 3. Uniformity among the states 4. Regulatory authority for timely action

Liabilities that need to be adjusted to 0 in Part 8 of Schedule F

1. Ceded reinsurance premiums payable 2. Funds held by the company under reinsurance treaties 3. Provision for reinsurance

List the exceptions to the RBC charge for reinsurance recoverables:

1. Cessions to US parents, subsidiaries & affiliates 2. State-mandated involuntary pools & associations 3. Federal insurance programs

2 causes of regulatory forbearance:

1. Chance the insurer will survive 2. Shutting down an insurer is difficult

Reasons for increasing claims filing rate in the Manville Personal Injury Trust case:

1. Change in TDP (Trust Distribution Process) 2. Greater medical awareness & more frequent diagnosis of mesothelioma cases 3. Greater propensity of claimants to sue 4. Recent asbestos related bankruptcies 5. Expedited action of claimants unsure of the future legal climate

What does Other Surplus Changes consist of in the current year's surplus calculation

1. Change in unrealized capital gains (+) 2. Change in net unrealized foreign exchange capital gains (+) 3. Change in net deferred income tax (+) 4. Change in nonadmitted assets (-) 5. Change in provision for reinsurance (-) 6. Cumulative effect of changes in accounting principles (+) 7. Capital changes & surplus adjustments - changes in capital due to issuance of stock (+) - changes due to return of capital (+) - transfers from surplus to capital when stock dividends issued (just reallocation of surplus, total surplus remains constant)

Reasons the Change in Incurred Loss & LAE note is important:

1. Changes can distort the current years underwriting income 2. Recurring material changes may indicate that there are issues with the reserving process

What factors should the regulators consider regarding the investable assets when considering the balance sheet strength

1. Changes in investable asset values and yields on invested assets should be monitored 2. If the insurer generally invests in riskier assets than the industry average, the regulators should assess the effectiveness of their hedging practices

List some differences in the licensing application between a foreign and domestic insurer:

1. Charter and bylaws: evaluate terms of operations as a legal entity 2. Annual statements: reviews for previous 2-3 years 3. Examination report: recent report of financial examination 4. Financial statements: SAP and sometimes GAAP 5. Certificates of compliance: evidence that in compliance with domiciliary state 6. Holding insurer registration statement: if applicant is member of an insurer holding system

List some metrics that can be derived from the claim count data (in addition to other data from the Annual Statement)

1. Claim closure rates 2. CWP ratios 3. Claim frequency 4. Average claim severity

What type of MSAs will be reviewed by CMS:

1. Claimant is already a Medicare beneficiary and the settlement exceeds $25K 2. Claimant is expected to be Medicare eligible within 30 months, and the settlement of expected future medical costs & lost wages exceeds $250K

3 responsibilities of the FIO:

1. Collecting information 2. Monitoring the insurance industry 3. Making recommendations on improving/ modernizing insurance regulations

What's included in underwriting & investment expenses:

1. Commission & brokerage expenses 2. Taxes, licenses & fees 3. General & administrative expenses 4. Investment expenses

4 levels of actions permitted/ required based on RBC ratio, as well as the respective ratio:

1. Company action level (150%-200%) 2. Regulatory action level (100%-150%) 3. Authorized control level (70%-100%) 4. Mandatory control level (<70%)

Factors to consider if Ratio 1 is unusual:

1. Compare to Ratio 2 - If large variance between the two: may rely too heavily on reinsurance - If small difference: may ban a sign that reinsurance protection is insufficient 2. Line of business: long tail lines should maintain lower ratios 3. Profitability: more profitable insurers can sustain a higher ratio 4. Direct vs assumed business: less control over the assumed business

What details does the General section disclose about the latest financial exam:

1. Date of the latest exam 2. Date through which the statements were evaluated 3. Release date for the examiner's report 4. Name of the department performing the exam 5. Whether the insurer has complied with all adjustments & recommendations from the examination report

The actuary of the insurer who participates in a pool where another actuary has performed an opinion on behalf of the pool can respond in one of the three ways:

1. Conclude that the reserves associated with the pool are immaterial. There will be no need to qualify the opinion 2. Use the word of the pool actuary, and make the necessary disclosures. Again, there will be no need to qualify the opinion 3. Qualify the opinion to exclude this business

What powers do regulators in the nondomiciliary states have after the insurer (Traditional or Non-RRG captive) becomes licensed?

1. Conduct financial examinations 2. Issue an administrative cease and desist order to stop insurer from operating in state 3. Withdraw company's license to sell insurance in the state

Actions that the actuary can take if the data cannot be reconciled to Schedule P:

1. Confirm that the person responsible for the data is aware of the differences 2. Recommend that the company inform the auditors about the difference 3. Discuss the issue in the SAO, and elaborate on it in the AOS

State regulators and insurance industry believed some forms of cooperation necessary. As a result, a subcommittee on Federal Legislation was established. List some of its recommendations:

1. Congress enact legislation under Commerce Clause which allows states to continue to regulate insurance 2. Sherman and Clayton amended to allow cooperative arrangements to establish adequate rates and coverages 3. FTC and Robinson-Patman to exclude insurance

List & briefly describe 3 types of receivership:

1. Conservation: safeguard insurer's assets while regulator determines the best course of action 2. Rehabilitation: a tool to fix the problems, protect the assets, run off the liabilities or prepare for liquidation 3. Liquidation: identify the creditors & distribute the assets

Recommendations regarding risk margins application under IFRS:

1. Consistent methodology over the life of the contract 2. Consistent assumptions as liabilities 3. Consistent with insurance pricing 4. Vary by product

Effects of guaranty funds on consumers:

1. Consumers with claims benefit (e.g. High risk drivers at standard rates from insurer seeking to expand) 2. Indirect cost of funds on consumers is hidden (higher rates) 3. Remove incentive for consumers to "shop the market" for financially sound insurers

What choice do policyholder's of a liquidated insurer usually have once the insurer is liquidated:

1. Continue coverage, subject to specified maximum amounts, and be credited with a specified percentage of the account value with a new carrier 2. Discontinue coverage and receive a specified smaller percentage of the account value in cash

Briefly describe a contract of adhesion:

1. Contract drawn up by only one party 2. Ambiguous language will be interpreted in favor of the insured

Functions of Federal Insurance Office (FIO)

1. Coordinate federal efforts and develop federal policy on the prudential aspect of international insurance markets 2. Determine whether state insurance measures are preempted by covered agreements 3. Consult with the states regarding insurance matters of national importance

List some items that are evaluated during the onsite exams:

1. Corporate governance 2. Management oversight 3. Financial strength 4. Risk identification & mitigation 5. Assessing the financial results

List the usual priority classes of asset distribution when they are liquidated:

1. Cost and expenses of administering the liquidation 2. Partial payment of debts to employees for service rendered within one year of the order for liquidation 3. All claims for policy losses incurred 4. Claims for unearned premiums and claims of general creditors

List some factors that influence the "optimum level of regulation":

1. Costs & benefits of regulation 2. Fair & equitable treatment of insurance consumers 3. Financial stability & reliability of insurance institution

List other parties that have influence on insurance regulation:

1. Courts 2. Insurance industry trade association 3. Insurance advisory organizations 4. Insurance companies

Factors that the actuary should understand about the nature of the unpaid claim being estimated:

1. Coverage 2. Circumstances that can make the frequency or severity ore or less severe 3. Claim adjustment process 4. Potential recoverables

What considerations actuaries need to take when calculating the reserves:

1. Coverage provisions 2. Changing conditions 3. External conditions 4. Data 5. Assumptions 6. Changes in assumptions, procedures, or methods

List 4 priorities of SMI:

1. Create a document that articulates the US insurance regulatory system 2. Examine international developments for potential use in the US 3. Comply with International Association of Insurance Supervisors (IAIS) & Insurance Core Principles (ICP) 4. Apply lessons from the global financial crisis

3 goals of TRIA:

1. Create a temporary federal program of shared public & private compensation for terrorism losses, which the private market stabilizes after 9/11 2. Protect consumers, by ensuring availability and affordability 3. Preserve state regulation of insurance

Describe bankruptcy protection process some defendants take:

1. Create a trust from which asbestos claims paid 2. Able to resolve asbestos claims in an equitable manner and eventually emerge from bankruptcy asbestos free

2 reasons that regulators would prefer that insurer maintain an office in the state:

1. Create jobs 2. Give regulator easier access

List 2 examples of programs where government has subsidized losses:

1. Crop insurance 2. Flood insurance 3. Federal crime insurance program (expired in 1995 as private market could profitably insure)

List 5 requirements for system to benefit most from peer review process:

1. Culture of free flowing info 2. Willingness to challenge and be challenged 3. Accreditation system ensures that supervisors sharing information 4. FAD helps ensure that potentially troubled insurers are identified 5. FAWG serves as a forum to challenge the domestic regulators

3 sections of Part 5:

1. Cumulative number of claims closed with loss payment 2. Number of claims outstanding 3. Cumulative number of claims reported

Provide statistics to demonstrate that asbestos litigation has been inefficient:

1. Defense costs made up about 31% of the payments 2. 27% was expended on plaintiffs attorney fees and other legal costs 3. Only 42% was paid to the claimants as net compensation

Compare the "defined limits approach" to the "defined standards approach"

1. Defined limits approach: limits on the amount that can be invested in different assets 2. Insurers need to follow a "prudent person" approach, where they are given more flexibility, as long as they follow a sound investment plan

Describe the basic purposes of a financial examination:

1. Detect as early as possible those insurers in financial trouble and/or engaging in unlawful and improper activities 2. Develop the information needed for timely, appropriate regulatory action

Briefly describe 2 schools of thought about insurance compacts:

1. Deter open and free competition 2. In public's best interests if it prevented insolvencies

Describe how insurers use credit-based insurance scores:

1. Determine whether to accept or reject a risk 2. Segment risks into homogeneous groups for rating

2 key questions considered by the court when making the decision on SEUA:

1. Did congress intend the Sherman Act to prohibit insurer's conduct of restraining/ monopolizing businesses? 2. Do insurance transactions across state lines constitute "commerce among several states", which will subject them to Congressional regulation?

Reasons for asymmetry in the tax impact:

1. Difference in reserves 2. Difference in discounting

Provide some reasons why the actuaries should become familiar with the Discounting note:

1. Different companies use different discounting practices, and the actuary will therefore need to know the details in order to make comparisons 2. The use of non-tabular discounts is a sign that the regulator possibly may have solvency concerns about the insurer 3. The actuary has to disclose & describe discounting in the SAO

Causes of differences in laws between states:

1. Different regulatory philosophy 2. Market issues 3. Other state specific factors 4. Laws were independently created

Briefly describe 2 ways in which credit scores can be used to segment risks into homogenous groups for rating:

1. Directly as a rating a factor 2. Assign risk to the appropriate tier

2 methods in which government has the capacity to subsidize losses:

1. Directly taxing taxpayers 2. Indirectly, by using a government-provided fund to subsidize any losses

Actuary's action if reviewing a material portion and concludes that the analysis is reasonable:

1. Disclose if she reviewed the analysis, and if so, the extent of the review 2. No need to give a Qualified opinion

Actuary's action if there is insufficient information to conduct an analysis/ determine the materiality:

1. Disclosure is necessary 2. Must give a Qualified opinion

What are some entries that are not part of Other Income, but do impact the overall income

1. Dividends to policyholders 2. Federal & foreign income taxes

List some examples of questions that policymakers ask when deciding whether to intervene in private insurance markets:

1. Do economic markets provide a sufficient amount of insurance against flood hazards? 2. Are the insuring firm (that cover flood) sufficiently capitalized so that widespread insolvency would not occur? 3. Would federal disaster insurance crowd out the private market and create unintended liabilities for taxpayers? 4. Would insurers cherry pick the most appealing risks, leaving the unprofitable business for the government?

List some questions raised by the fact that Guarantee funds shift liability to other insurers, policyholder's, and taxpayers:

1. Does guaranty fund protection make consumers too unconcerned about selecting financially strong insurers? 2. Do guaranty funds diminish the pressure on regulators to shut down weak insurers? 3. How much of the cost for guaranty fund protection is shifted to policyholder's and taxpayers? 4. How effective is the record of state regulation?

3 types of checks and balances in US regulation:

1. Duplication 2. Peer pressure 3. Diversity of perspective

Why are insolvencies involving insurers writing in multiple states difficult (guaranty funds):

1. Each state guaranty fund must decide how much to assess for the policyholder's living in its state 2. State of domicile has primary authority, but each state involved must approve 3. Differing guaranty fund coverages and laws -> establish a single settlement plan for an insolvency involving many states can be complex

Limitations of measurement tools

1. Each tool only provides one piece of evidence 2. The tools should not replace an audit 3. The tools will not uncover fraud

List some activities of the National Conference of Insurance Legislators (NCOIL):

1. Educating legislators on insurance issues 2. Helping communications between state legislators on insurance issues 3. Improving insurance regulation 4. Asserting legislators' prerogative in making state insurance policy 5. Speaking about Congressional initiatives that might affect state insurance regulation

When is written premium recorded for most contracts; and what is the exception to this rule:

1. Effective date 2. Exception of WC, which can be recorded on an installment basis

Areas that policymaker pay more attention to since Hurricane Sandy:

1. Effectiveness of the existing national program in reducing losses from weather related coastal Harland's 2. Aging coastal protection infrastructure & increasing vulnerability to storm impacts 3. Low participation in the NFIP 4. Increasing cost of flooding to the taxpayers

In what situations should the insurer not make the company adjustment:

1. Either the initial or current loss values are negative for any year 2. Current value is 0 for any year 3. Sum of initial values is 0 across all years

Ceding company's accounting treatment of commutations:

1. Eliminate the reinsurance recoverable 2. Cash received -> negative paid loss 3. Gian/ loss -> underwriting income

List 4 requirements of Phase 1 of IFRS:

1. Elimination of catastrophe & equalization provisions 2. Adequacy test of insurance liabilities & impairment test of reinsurance assets 3. Prohibition of offsetting insurance liabilities with reinsurance recoverables 4. Certain disclosure

Following the McCarran-Ferguson Act, the NACI approved two model rate regulation bills. List 2 purposes:

1. Ensure rates not excessive, unfairly discriminatory, and were adequate 2. Allow cooperation in setting rates, as long as it didn't hinder competition

What does the "compliance" functional area require that the insurer do:

1. Ensure that the internal control system is effective to comply with all applicable laws & regulation 2. Promptly report any compliance issues to the board

What does the "actuarial" functional area require that the insurer do:

1. Ensure that the methods and assumptions used to derive the technical provisions are reasonable 2. Perform a retrospective analysis of best estimates vs expected 3. Opine on the overall underwriting policy and adequacy of reinsurance arrangements

2 reasons that the agencies are reluctant to change ratings too quickly:

1. Erroneous downgrades anger clients 2. Erroneous upgrades ruin agency's reputation

2 ways to account for premium deficiency

1. Establish a write-in liability 2. Reflect as part of the UEPR

How to price a commutation:

1. Estimate the future claim payments from the reinsurer to the ceding 2. Estimate the timing of the payment 3. Apply a discount factor 4. Adjust the price to reflect tax treatment 5. Reflect the motives for entering into commutation

Purpose of a onsite exam:

1. Evaluate the solvency of the insurer's 2. Develop a prospective view of the insurer's risks and risk management practices

3 levels of government participation in insurance:

1. Exclusive insurer 2. Partner with private insurer 3. Competitor to private insurer

6 benefits of reinsurance:

1. Expands capacity 2. Share large risks 3. Spread the risk of catastrophes and stabilize underwriting results 4. Finance expanding volume 5. Aid withdrawing from a line 6. Reduce the net liability to amounts appropriate to its financial resources

3 components of the fair value of reserves, according to the mark-to-model approach:

1. Expected value of nominal future cash flows 2. A reduction to reflect the time value of money at the risk free rate, plus a load to reflect the illiquid nature 3. A risk adjustment to compensate the investor for the risk associated with the liabilities

The amended opinion needs to contain/ be accompanied by:

1. Explanation of the change 2. Revised date

List 2 unique features of US insurance regulation:

1. Extensive system of peer review, communication & collaborative effort: commissioners can question the actions of another DOI and pressure that DOI to act. 2. Diversity of perspectives results in centrist solutions: over regulation harms consumers, whereas under-regulation harms consumes & taxpayers

What are some external controls the board or audit committee is interested in during the governance processes:

1. External audit 2. Attestations 3. Financial examinations 4. Replacement of Appointed Actuary

Purpose or use of the unpaid claim estimate:

1. External financial reporting 2. Internal management reporting 3. Special purposes (e.g. Appraisal work, scenario analyses)

The success of the NFIP will be judged based on how it handles what challenges:

1. Extreme weather events and coastal flooding: experts believe that storm impacts will intensify as sea levels rise 2. Accurate flood risk maps 3. Financial sustainability of the NFIP: charging full actuarial rates will make the policies less affordable 4. Residual flood risk from levees: existing regulatory framework for residual risk behind a certified 100 year levee has created a perceived safety zone that encourages development behind the levee system, although risk still exists 5. Distributional effects of the NFIP: there is a perception of inequitable distribution of NFIP's costs and benefits across income groups and geographic regions

After McCarran, briefly describe three ways regulators have addressed unavailable or unaffordable insurance coverages:

1. FAIR plans - availability 2. Captive insurance organizations - availability 3. Buyer's guide - explaining standard policies and options - help find available and affordable choices 4. 1968 NFIA - flood 5. 2002 TRIA - terrorism 6. 1981 Risk Retention Act - affordability of commercial insurance

The Florida Legislature limited use of credit-based scores in 2003 for PPA and HO. List 4 legal challenges that insurers used to oppose these limits:

1. FL Office of Regulation does not have authority to prevent use of credit score as underwriting/rating tool. 2. Office did not have authority to define the term "unfairly discriminatory" 3. Insurers didn't have necessary data to demonstrate effect of credit scoring on protected classes 4. Definition of "disproportionate impact" was too vague

2 steps of regulatory intervention procedure following an insolvency:

1. Fact finding 2. Implementation of regulatory action to control financial difficulties facing insurers

List 3 federal Workers Compensation programs:

1. Federal Employee Compensation Act (FECA) 2. Longshore and Harbor Workers' Compensation Act of 1927 3. Black Lung Benefits Act

Critique the performance of Crop Insurance:

1. Federal government has periodically had to pass disaster bills to cover uninsured losses 2. Farmers: not sufficient coverage 3. Insurance encouraged overproduction

5 reasons for Government participation in insurance

1. Filing insurance needs unmet be private insurance 2. Compulsory purchase of insurance 3. Convenience 4. Greater efficiency 5. Social purposes

List some services of "Insurance Advisory Organizations":

1. Filing rates or prospective loss costs and forms 2. Develop rating systems 3. Collect and tabulate statistics 4. Research topics important to members and the industry 5. Provide a forum for discussion of issues important to members 6. Educate members, industry, insurance regulators, and the public about particular issues 7. Monitor regulatory issues of concern to members

3 components of the risk focused surveillance by regulators:

1. Financial analysis 2. Financial examination 3. Supervisory plan development

List 3 exclusions from the definition of long duration contracts:

1. Financial guaranty 2. Mortgage guaranty 3. Surety

List some criteria that reinsurer need to meet to be eligible for/ maintain certification:

1. Financial strength 2. Timely claims payment history 3. Requirement that insurer is domiciled & licensed in a "qualified jurisdiction"

Procedure to determine bond size adjustment factor:

1. First 50 issuers, weight is 250% 2. Next 50 issuers, weight is 130% 3. Between 101 and 400, weight is 100% 4. Above 400, weight is 90% Factor = weighted issuers / issuers - 1 If the portfolio has more than 1300 bonds, the adjustment is 0

List conditions that need to be addressed by the insurer's governance structure:

1. Fitness and propriety 2. Outsourcing 3. Internal control

List some financial statements that can be used to assess loss reserve adequacy:

1. Five year historical data exhibit: how losses have developed over time 2. Notes to the financial statements: management's discussion about changes in the incurred losses 3. Schedule P, Parts 2-4: provides data to perform a tests of reserve adequacy 4. Schedule F, Part 3 (& Notes): loss reserves are net of reinsurance, so the reinsurance collectability does have an impact on reserve adequacy

Where can a user of the financial statements see deteriorating loss ratios

1. Five-Year Historical Data exhibit (CY) 2. Schedule P (AY)

2 ways that the government became a de facto regulator of economic activity in flood prone areas under NFIP:

1. Flood insurance may be required as a condition of obtaining a federally secured mortgage loan, for buildings located in SFHAs 2. Managerial regulation: the government provided subsidized flood insurance in communities that took steps to regulate the flood plain through land-use zoning ordinances and building standards

2 tasks of the special deputy liquidator:

1. Freeze and quantify the insurer's liabilities 2. Marshal the assets and convert them to cash

List some factors that we can consider when assessing the level of regulatory success:

1. Frequency & extent regulation helped by identifying and correcting insurer's problems before they caused harm to policyholder's and claimants 2. Frequency of insolvencies, and payments to policyholders in those insolvencies 3. Effective & efficient rehabilitation actions 4. Market health 5. Levels of competition 6. Perceived and actual cost-benefit of regulation

Compare the GAAP & SAP treatment of DAC:

1. GAAP creates a DAC asset to defer the recognition of acquisition expenses, to match the recognition of earned premium 2. SAP does not allow deferring the expenses. Instead, all costs are expensed as incurred

Compare the GAAP to the IFRS treatment of revenue recognition

1. GAAP records the revenue associated with the insurance premium over the duration of the contract 2. IFRS recognizes the present value of all premium and expenses as soon as the contract is signed

Compare the GAAP & SAP treatment of DTA

1. GAAP: fully recognizes the DTA, but creates a valuation allowance if it is ore likely than not that the DTAs will no be recognized 2. SAP: there is a strict admissibility test to recognize DTA, in addition to the valuation allowance

Difference between SAP and GAAP treatment of structured settlements when the claimant is the owner and payee, but has not released the insurer:

1. GAAP: the gain from the purchase of the annuity needs to be deferred 2. SAP: recognizes gain immediately

Sections in the Common Interrogatories section:

1. General 2. Board of Directors 3. Financial 4. Investment 5. Other

List some activities that need to take place during the first few months of the liquidation:

1. Give notices of liquidation to creditors and policyholder's and inform them of their right to file claims 2. Cancel policy coverage 3. Notify agents of their duties in the liquidation 4. Identify, sell, and collect assets 5. Recover any improperly transferred assets 6. Establish a procedure for receiving and adjudicating claims 7. Make personnel decisions regarding the insurer's staff and hire outside help, if needed

Requirements of legal provisions pertaining to notification and transparency of credit scoring:

1. Giving regulators access to scoring model 2. Notifying consumers about its use 3. Restricting insurance decisions based solely on the model

If the surplus aid ratio lies outside the normal range, what ratios should be recalculated with the surplus adjusted to completely remove the surplus aid:

1. Gross & Net WP:PHS (Ratios 1 & 2) 2. Gross Change in PHS (Ratio 7) 3. Gross Agent's Balances:PHS (Ratio 10) 4. Estimated Current Reserve Deficiency to PHS (Ratio 13)

List some NAIC programs (after McCarran) to address insurer insolvencies:

1. Guaranty Association Model Act in 1969 2. 1971 NAIC implemented Early Warning Tests program (1977 IRIS) 3. 1989 NAIC adopted accreditation program

List some examples of insurer specific based on business written:

1. Handling of asbestos claims 2. Reinsurance for wind exposures

What categories must investment assets of insurers be grouped into under IFRS:

1. Held to maturity: historic cost less amortization 2. Available for sale: "marked to market". Changes in market value are recorded in reserves 3. Held for trading: "marked to market". Changes in market value are recorded as income

Tasks insurance regulators strive to do for their constituents:

1. Help with claims, complaints, and inquiries from the general public 2. Offer educational programs to inform policyholder's about insurance and loss prevention and reduction 3. Publishing guides for the purchase of insurance

2 broad categories of requests that agencies may make during the interactive meetings between ratings analysts and senior managers of the insurer:

1. High level request 2. Insurer specific based on business written

Concerns that a system that fully replaces the formula based method with internal models:

1. Higher costs 2. Less comparability 3. Possible misuse 4. Potential competitive advantages

Items discussed in General section of Common Interrogatories:

1. Holding company relationships 2. Latest regulatory financial exams 3. Excessive sales commission levels 4. Merger activity 5. Suspension of licenses 6. Foreign control 7. Exemptions from required regulations 8. Whether senior management is subject to a code of ethics

Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgement. State two key issues to consider:

1. How accurate are loss reserves? 2. If assets were liquidated quickly to meet creditor demands, what would proceeds be? 3. Has management enacted tough enough measures to stem the operating losses? 4. Is company's reinsurance adequate and collectable?

List some issues that regulators consider when to take over supervision of the insurer:

1. How accurate are loss reserves? 2. If assets were liquidated quickly to meet current creditor demands, what would proceeds be? 3. Has management enacted measures that are stringent enough to stem the operating losses? 4. Is the insurer's reinsurance adequate and collectible

List some questions raised by the conflicting policymaker objectives:

1. How can FEMA balance actuarial rates and affordability? 2. How to reduce the escalating cost of flooding? 3. How to motivate property owners to purchase insurance protection, and encourage the local government to make land use adjustments to restrict development in high risk flood zones? 4. How can the private sector's role be expanded in assuming NFIP flood risk?

List some examples of areas of debate about the trust fund approach:

1. How many claims will be filed? 2. Will appropriately identify victims of asbestos related diseases? 3. Are the proposed awards appropriate? 4. Is the proposed funding adequate? 5. Will the proportion of funding from various classes of contributors be viable & fair; will this provide final release from future claims? 6. Will the fund be operated efficiently? 7. Will any proposed statute withstand constitutional challenges?

List some possible complications during the rehabilitation stage:

1. How will loss reserves develop 2. Can expenses be trimmed, and how fast 3. How far are rates from being actuarially adequate to meet costs 4. Can rates be raised without destroying the company's ability to market to its desired market segment

What are some differences between Part 1 of IEE and Part 3 of U&IE:

1. IEE Part 1 has 3 columns under "Other Underwriting Expenses", as opposed to 1 2. The IEE does not include amounts unpaid, amounts relating to uninsured plans, or total expenses paid (lines 26-30 of U&IE, Part 3) 3. Amounts in the IEE are in thousands of dollars, as opposed to whole dollars

List 2 reasons that the volatility of results after IFRS is used should increase:

1. IFRS does not allow an unearned premium reserve, so the incoming revenue will not be smoothed over time 2. IFRS also does not recognize deferred acquisition costs

Parts of the SAO:

1. Identification paragraph 2. Scope 3. Opinion 4. Relevant comments

List some functions of Schedule F (in addition to assessing the net reserves)

1. Identifies the portion of the gross losses that are from assumed reinsurance transactions 2. Helps estimate the significance of the assumed and ceded transactions to the surplus balance 3. Allows further investigation into the financial strength of the insurers and reinsurers 4. Identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated

List 2 uses of the Disputed balances note:

1. Identify credit risk 2. Identify insurers that try to over recover form reinsurers

3 goals of assessing the financial condition of an insurer:

1. Identify potential adverse financial indicators as quickly as possible 2. Evaluate & understand the problems more effectively 3. Develop corrective action plans sooner, in order to decrease the frequency & severity of insolvencies

Reasons that users would be interested in the Reinsurance Assumed & Ceded note:

1. Identify situations where the insurer is engaging in reinsurance contracts with commissions designed to manipulate its surplus 2. Helps derive the impact to surplus if the policy(s) are cancelled

3 responsibilities of FEMA regarding hazard maps:

1. Identifying areas of special flood, mudslide or flood related erosion hazards 2. Completing a Flood Insurance Study (FIS) 3. Issuing a Flood Insurance Risk Map (FIRM) that indicates risk premium rate zones

How should management book the reserve if there is a range:

1. If a particular amount within the rang appears to be a better estimate, that amount should be booked 2. If no amount in the range appears to be better than the others, the midpoint should be booked

2 advantages that foreign insurers have when applying for a license:

1. If a strong performer with solid financial record, more likely to receive approval 2. Already gone through rigors of the domiciliary jurisdiction's review

Actuary's action if does not review a portion of a business that is outside the scope of his review:

1. If has information about this materiality, disclose it 2. Must give a Qualified opinion

List some examples of insight that users can get from the General section of the Common Interrogatories:

1. If it has suspended licenses or does not comply with regulations, perhaps it lacks internal discipline 2. If it has high commission levels, maybe it is sacrificing its commission in order to maintain or grow business

2 ways to account for the risk load in risk transfer analysis::

1. If it's already included in the expected losses, adjust for the risk load when using it 2. If it's explicitly stated, used to help derive the variance of the loss distribution

Factors to consider if Ratio 2 is unusual:

1. If member of group of affiliates, what is the aggregate ratio? A high ratio in the affiliated companies as well is more concerning. 2. Profitability: more profitable insurers can sustain a higher ratio 3. Line of business: long tail lines should maintain lower ratios 4. Adequacy of reinsurance protection

Situations where FIO can preempt state law:

1. If state law measures results in less favorable treatment of a non-US insurer domiciled in a foreign jurisdiction 2. If the state law is inconsistent with a covered agreement

What are the requirements for the Dodd-Frank provision where other states cannot deny credit for reinsurance if the home state has recognized credit:

1. If the home state of the ceding insurer is NAIC accredited or 2. Has financial solvency standards similar to those mandated by the NAIC

Rules to determine nonadmitted balances of recoverables from high deductible policies

1. If the insurer does not hold collateral, deductible recoveries that are over 90 days overdue are nonadmitted 2. If the insurer holds collateral, 10% of the deductible recoverable in excess of collateral is nonadmitted. If amounts in excess of this 10% are deemed uncollectible, they should be nonadmitted as well.

Purpose of Financial interrogatories

1. If the insurer has financial obligations that were not reported in the Annual Statement 2. If the insurer has been providing significant financial support to its stakeholders/ affiliates

Purpose of Securities Act of 1934:

1. Implement market system so investors could gain ready access to material information on publicly-traded securities 2. Prevent abuses of fraud, deceit, and misrepresentation in sale

2 ways to reflect parameter risk in the risk transfer analysis:

1. Implicitly: slightly higher expected loss input, or increased expected volatility 2. Explicitly: parameter should be variable -> more scientific but more judgment

What type of properties are not eligible for Beach and Windstorm Plans:

1. In poor physical condition or with unprepared previous damage 2. Subject to poor housekeeping 3. In violation of law or public policy

Describe the effect on the market of RRGs:

1. Increase availability and affordability -> important for groups with limited access to insurance 2. State regulators believe RRGs have filled a void in the market

2 advantages of RRGs during hard markets:

1. Increase availability of commercial liability insurance 2. Reduce premiums

6 principal functions of reinsurance:

1. Increase large line capacity 2. Provide catastrophe protection 3. Stabilize loss experience 4. Provide surplus relief 5. Facilitate withdrawal from a market segment 6. Provide underwriting guidance

2 changes made to the NFIP by the Biggert-Waters Flood Insurance Reform Act of 2012:

1. Increase the premiums 2. Reduce incentives to rebuild in flood risk zones

2 changes made to the Crop Insurance program in 2000 to address the concerns:

1. Increased portion of premium paid by government 2. Level of coverage improved

List some issues that still remain for future congressional consideration, following the Flood Insurance Reform Act of 2012:

1. Increasing flood risk vulnerability -> due to frequent extreme weather events & population growth in flood prone areas 2. Affordability of insurance coverage in era of actuarial premium pricing 3. Debt forgiveness 4. Accuracy of flood hazard maps and risk assessment methods 5. Movement toward a comprehensive integrated watershed management framework of risk perception, risk management, and disaster response strategy 6. Feasibility of catastrophe disaster insurance 7. Federal disaster assistance and moral hazard

2 reasons that unrate insurers can be at disadvantage:

1. Independent agents may hesitate to use them 2. Banks require property insurance from rated insurer for mortgages

List 2 things that the actuary can refer to when opining on the collectability of reinsurance recoverables

1. Indications of regulatory actions or reinsurance recoverable over 90 days overdue 2. Listing of reinsurers/ liability amounts ceded to each reinsurer/ the collateral held by the insurer

2 parties that can own a RRG:

1. Individuals or businesses that are insured by the RRG 2. Organization that is owned solely by insureds of the RRG

Explain why historically the major criticism of insurance regulation has been the cost of dealing with multiple states:

1. Inefficient 2. Single regulator would reduce cost, increase uniformity & provide a national voice

Factors that may cause loss trends:

1. Inflation 2. Law changes 3. One time catastrophic claims 4. Changes in deductibles/ retentions 5. Internal factors

2 things that the Director of the FIO must make a written finding about before issuing a subpoena to obtain information:

1. Information is required 2. Already coordinated with relevant agencies

2 necessary criteria to charge a loss contingency/ asset impairment to operations:

1. Information prior to the issuance of the financial statements indicate that the assets have been impaired/ liability incurred at the date of the financial statements 2. The mount of the loss can be reasonably estimated

How should premium be treated in the risk transfer analysis when it is dependent on future events:

1. Initial deposit premium: intuitive and simple, but does not include future payments, therefore easily manipulated 2. Expected premium: intuitive, but may over detect risk transfer 3. Actual premium: based on losses simulated -> best option

Describe Supreme Court verdict for Paul v. Virginia:

1. Insurance is a contract delivered locally -> insurance contract not interstate commerce 2. State continue to regulate own insurance market

List some factors considered when determining whether insurance transactions across state lines constitutes "commerce among several states":

1. Insurance is not a business that is distinct in each of the states 2. Only 18 out of 200 SEUA members were domiciled in 1 of the SEUA states 3. Intangible products were subject to Congressional regulation 4. Other businesses make sale contracts in states where they do not have headquarters -> they are subject to commerce clause 5. Not a single business conducting business across state lines is beyond the regulatory powers of congress. Insurers should not be an exception

List some explanations for the low market penetration of NFIP:

1. Insurance is seen as not being worth the cost 2. People have misperceptions about low probability risks and lack information about the NFIP 3. Private insurance agents do not market the NFIP 4. Lack of compliance with the mandatory purchase requirement; the owners do not maintain the coverage for the life of the loan 5. Homeowners in the risky areas may not have a mortgage, or have a mortgage from a lender that does not enforce the requirement

Why are insurers subject to "market discipline":

1. Insurance reporting is very transparent: consumers can access the annual & quarterly statements 2. Analysis by the industry, financial markets and public

2 compliance responsibilities of insurers regarding the Guaranty Funds:

1. Insurer cannot use the fact that the guaranty fund exists to help sell business 2. Needs to provide new policyholders with a guaranty fund disclaimer

Briefly describe two purposes of rate regulation:

1. Insurer financial stability which results in consumer protection 2. Pricing insurance so that it is fair, equitable, and affordable

Some regulators require that the insurer be seasoned to obtain a license. List some exceptions to this requirement:

1. Insurer has substantial capital 2. Owned by an insurer with lengthy history 3. Department is satisfied with the application for other reasons

Upon what areas is regulation focused on after McCarran-Ferguson:

1. Insurer insolvencies 2. Unavailable and unaffordable insurance coverages 3. inequitable treatment of insurance consumers

3 reasons that the Insurer should not withhold damaging data that is not requested:

1. Insurer losses credibility 2. Makes agency look bad to investors 3. May place insurer on ratings watch or lead to ratings downgrades

4 reasons that it is difficult to shut down a troubled insurer:

1. Insurer may be major player in market 2. Insurer possibly politically connected 3. Adverse impacts on regulator's reputation 4. May result in a dispute with company if regulator orders it to take corrective action

Describe three ways in which the insurance product is unique:

1. Insurer set rates before the actual costs are known 2. Regulatory environment different by state 3. Insurance industry has many information-sharing and joint product-development mechanisms

2 disadvantages of Guaranty Funds to insurers:

1. Insurers are directly assessed for the operation of guaranty funds 2. Competition is distorted: insurers that can aggressively market or loosely underwrite can gain a greater share of market

List 2 elements of the structure of the US regulatory system that allows other states to question a state, encourage improvement, and possibly pressure a domestic regulator to act:

1. Insurers of the regulator's state will be required to obtain licenses in order to be able to do business in other states 2. Other regulators can examine the insurers and take action

Why is judging qualitative times in capital requirements difficult for rating agencies:

1. Insurers paint a bright picture 2. Agencies must subjectively evaluate

Items regarding the unpaid claim estimate that need to be identified by the actuary:

1. Intended measure of the unpaid claim estimate, in addition to whether it is discounted 2. Whether their reserve is gross or net of specified recoverables 3. Extent of reinsurance collectability risk 4. Types of unpaid claim adjustment expenses included in the unpaid claim estimate 5. The claims covered by the estimate

Items that need to be disclosed when deriving the unpaid claim estimate:

1. Intended purpose of the estimate 2. Significant limitations 3. Scope 4. Accounting date, valuation date & review date 5. Specific significant risks & uncertainties 6. Significant events, assumptions or reliance that have a material impact on the estimate 7. Basis for the range 8. If the estimate is an update of a prior estimate, changes of assumptions, procedures or methods that had a material impact

Transactions that are exempt from disclosure in Part 3 (whether the contract cedes 75% or more of the Direct Premium Written):

1. Intercompany cessions with affiliates 2. Cessions to a pool/ group/ association/ organization of insurers that underwrite jointly, which: - is subject to examination by any state regulatory authority or - operates pursuant to any state or federal statutory or administrative authorization (such as Workers Compensation, or auto assigned risk pool) 3. Those where under 5% of the gross annual premium is ceded 4. Cession to captive insurers that are regulated in their domiciliary state

The Exhibit of Net Investment Income divides the investment income from bonds into:

1. Interest received during the year 2. Interest due & accrued 3. Current year's amortization/accretion 4. Interest paid for accrued interest on dividends

List 4 functional areas that need to be addressed by the insurer's governance structure

1. Internal audit 2. Actuarial 3. Risk management 4. Compliance

List some qualitative disclosures contained in the standardized financial reports provided to regulators:

1. Interrogatories 2. Notes to the Financial Statements 3. Management's discussion & analysis 4. SAO 5. Annual Audit Opinion

What does the NAIC review of a state seeking accreditation involve:

1. Interviewing department personnel 2. Reviewing laws and regulations 3. Reviewing prior examination reports 4. Inspecting regulatory files for selected companies 5. Reviewing organizational and personnel policies 6. Gain understanding of document and communication flows 7. Discussing comments and findings from the review 8. Conducting closing conference with the state to discuss findings and prepare a report

SAP valuation rules of various types of investment assets:

1. Investment grade bonds and higher rated redeemable preferred stocks: amortized cost 2. Lower rated bonds & preferred stocks: min(amortized cost, fair value) 3. Common stocks & higher rated non redeemable preferred stock: fair value Changes in the carrying value due to changes in fair value are direct changes to surplus

List some examples of non-invested asset that receive a R3 charge:

1. Investment income due & accrued 2. Amounts receivable relating to uninsured plans 3. Federal income tax recoverable 4. Guaranty funds receivable or on deposit 5. Recoverable from parent, subsidiaries and affiliates 6. Aggregate write in for other than invested assets

3 reasons that Public data insufficient for the Rating Agency analysis:

1. Investment schedules have little detail on derivatives 2. Reserve schedules may not show the same segmentation that the insurer uses 3. Reinsurance data doesn't show attachment points/ limits

List some investments that generate a R0 charge:

1. Investments (common stock, preferred stock & bonds) in an insurance subsidiaries 2. Investments in alien insurance company affiliates 3. Off-balance sheet items

Examples of nonadmitted assets:

1. Investments in bonds, stocks, mortgage loans or real estate that exceed any state limitations 2. Investments in electronic data processing equipment & software that exceed the set limits 3. Furniture, equipment & supplies 4. Balances from agent from sale of a security, overdue by over 15 days 5. Funds held at a reinsured company that exceed the associated liabilities 6. 10% of deductibles recoverable in excess of collateral

Policy questions/ concerns raised by the fact that storms of Sandy's strengths are expected to occur more frequently:

1. Is federal flood insurance stall an appropriate method to manage flood risk? Does it distribute the burden effectively between the insured and the general public 2. Is flood risk possible for the private market to underwrite 3. Could flood risk be effectively transferred to the private sector or the capital markets 4. Should the NFIP debt to the Treasury be forgiven 5. Are the consequences of flood risk and the level of protection offered by hurricane protection systems effectively communicated to the public?

List 3 questions that should be asked when evaluating government insurance programs:

1. Is it necessary for government to supply insurance? 2. Is it insurance or social welfare program? 3. Is the program efficient and accepted by the public?

2 questions regarding the accuracy of flood hazard maps and risk assessment methods:

1. Is there need for a common definition of flood protection between the US Army Corps of Engineers and FEMA levee certification? 2. What resources will be necessary to produce both flood risk and coastal hazard vulnerability maps?

What does the FIO need to do before it preempt state law:

1. Issue a notice of potential inconsistency to the state regulator 2. Notify and consult with USTR 3. Advise the House Financial Services Committee (HFSC) and Senate Committee on Banking, Housing & Urban Affairs (SBC) 4. Issue a notice in the Federal Register 5. Give interested parties an opportunity to comment 6. Establish a reasonable time for the notice to become effective

What happens if the insurer refuses an interactive meeting:

1. Issue a public rating using public information 2. Issue a public rating to inform others that past rating is no longer valid

Certain accounting rules can impact many aspects of the actuary's work:

1. Issuing a SAO 2. Pricing/Designing insurance products 3. Determining capital requirements 4. Evaluating risk transfer of reinsurance contracts 5. Assessing the reserve adequacy of non-insurers 6. Assisting in the calculation of taxable income 7. Valuing insurers in M&A transactions

2 changes that the NAIC made to Schedule F in 2012:

1. It added a new part 6, and 2. It shifted the original Parts 6-8 to 7-9 respectively

What are some reasons that reinsurer may dispute a recoverable:

1. It is unwilling to pay because of a disagreement about whether the loss is covered 2. It is unable to pay 3. Attempts by a financially troubled insurer to over-recover from reinsurers

Issues related to a high Surplus Aid ratio:

1. It may indicate that management believes that surplus is inadequate 2. Surplus aid may improve the results of the other ratios to such a degree that it conceals important areas of concern

List 4 state reforms:

1. Judicial & legislative reforms -> improve tort claims process 2. Inactive dockets -> those who do not currently meet the specific medical criteria to pursue litigation in the future 3. Medical criteria statutes -> requires asbestos claimants to satisfy specific medical criteria to make a claim 4. Restriction of case consolidation & venue rules

Items that regulators consider when determining whether to certify a reinsurer:

1. Jurisdiction 2. Financial position 3. Capital & surplus 4. Regulatory history 5. Financial strength ratings

The rating process focuses on quality of insurer's managers and business strategy. List a few factors that it considers:

1. Knowledge of industry trends 2. Experience with adverse scenarios 3. Handling of current problems 4. Does not cover underwriting or investment decisions, as both can be distorted by random fluctuations

List some "active status" of the insurer in each state

1. L: Licensed 2. R: Registered 3. Q: Qualified 4. E: Eligible 5. N: None of the above

Describe how the Beach and Windstorm plan operates:

1. LA & MS use single servicing carrier for u/w, services, and claims 2. Other states, the plan issues and services policies 3. Property insurers share in plan losses according to premium written

What categories are expenses divided into in Part 1 of the IEE:

1. LAE 2. Other Underwriting Expenses - Acquisition, Field Supervision & Collection Expenses - General Expenses - Taxes, Licenses & Fees 3. Investment Expenses

In the U&IE, each category of expenses is broken into:

1. LAE 2. Other underwriting expenses 3. Investment expenses

Two main categories of expenses

1. LAE 2. Underwriting & investment expense

List 3 standards of Financial Regulation that need to be met to be accredited:

1. Laws and regulations used by the state must meet certain basic standards of NAIC models 2. Regulatory methods of the state must be acceptable 3. Department practices must be adequate

List 4 features of a typical State Insurance Regulatory System:

1. Licensing requirements 2. Reporting and filing requirements 3. Periodic examinations 4. Power to impose sanctions

Example of indicators that there may not qualify as risk transfer:

1. Limit the amount of reinsurance risk insurer is subject: - experience refund - cancellation provisions - adjustable features - additions of profitable LOB to the contract 2. Delay the timely reimbursement

Limitations on Guaranty fund coverage:

1. Lines covered - excl. title, credit, mortgage, ocean marine, reinsurance, and surplus line 2. Refunds of UEP, with stated limit 3. Maximum covered claim, WC unlimited 4. Claim deductible in addition to policy deductible 5. Large net worth deductible 6. Trigger of coverage - only after a court has found it to be insolvent and placed in liquidation

What does the insurer need to disclose about the asbestos/ environmental exposure in the Notes:

1. Lines of business affected 2. Nature of the exposures 3. Reserving methodology 4. A table that contains the following information for asbestos and environmental separately, and also separately for direct, assumed and net for each of the past 5 years: - Beginning loss & LAE reserves - Incurred loss & LAE - Calendar year payments for losses & LAE - Ending loss & LAE reserves 5. IBNR

Provide some examples of poor decision making that have lead to insolvencies

1. Little or no reinsurance 2. Insufficient reinsurance for the amount of risk 3. Very rapid premium growth 4. Significant adverse development 5. Inadequate pricing 6. Serious data problems

2 criteria that DOIs look at when insurers are seeking a license:

1. Location of books and records - usually seeks assurance the insurer will retain books and records in the state 2. Principal office - many DOIs require insurer to maintain an office in the state

Describe the 6 parts in schedule D

1. Long term bonds and certificates of deposits owned as of 12/31 2. Stocks owned as of 12/31 3. Bonds and stocks acquired during the year and are still owned as of 12/31 4. Bonds and stocks that were owned at the start of the year, but sold (or redeemed) during the year 5. Bonds and stocks acquired and also sold during the year 6. Preferred and common stocks in affiliates (used in R0 calculation)

6 policy options to address the projected increase in flood losses, due to population growth & mitigation changes in climate and degradation of water-based resources:

1. Long term flood insurance contracts (LTFIC): 5, 10, 20 year flood insurance contracts combined with long term mitigation loans 2. Privatization of flood risk: include a multi-peril insurance approach, and a reinsurance pool approach 3. Multi-peril homeowners policies covering flood peril: multiple-peril policies that cover flood, and transferring all of the flood risk to the federal government via reinsurance transaction 4. Community-based flood insurance policy contacts: group flood insurance for the entire community/ identified floodplain area/ residual risk areas behind the levees 5. Integrated watershed-based risk management strategy: combines floodplain management with natural resources (water resources and waste water) management 6. Technological innovation in financing large-scale natural disasters

Two common sources of DTAs:

1. Loss reserves are discounted in tax accounting 2. Carryforward net operating losses

Accounting treatment of structured settlements in which the claimant is the owner and payee:

1. Loss reserves can be reduced 2. Cost of the annuity is recorded as paid loss

Liabilities that need to be adjusted to values other than 0 in Part 8 of Schedule F

1. Losses & LAE 2. Unearned premiums

Increased NWP does not necessarily mean there is a greater chance of insolvency, if it is accompanies by:

1. Low NWP:PHS ratio (ratio 2) 2. Adequate reserving (ratios 11, 12, 13) 3. Profitable operations (ratio 5) 4. Stable product mix

List 2 benchmarks of regulatory performance:

1. Low insolvency rate 2. Extent to which regulation increases expenses and restricts products

2 classes of people adversely impacted by the use of credit scores in insurance:

1. Lower income individuals 2. Protected classes of people

List 4 alternatives to the insolvency that regulators will consider:

1. M&A 2. Reinsurance 3. Non-renewal of part/ all of the business 4. Run-off

How did the 1994 Omnibus Crime Control and Safe Streets Act address insurance fraud:

1. Made it illegal to defraud, loot, or plunder an insurer 2. Established a multi-state approach to anti fraud activity

UEPR for a Long Term contract is the maximum of what 3 tests:

1. Management's best estimate of the amounts refundable to contract holders 2. Gross premium * (projected future gross losses & expenses from the unexpired term/ projected total gross losses & expenses) 3. Projected future gross losses & expenses to be incurred during the unexpired term - present value of future guaranteed gross premiums

3 levels regulatory action to control financial difficulties:

1. Mandatory corrective action 2. Administrative supervision 3. Receiverships, rehabilitation, and liquidation

Describe the concerns of Major Asbestos Defendants:

1. Manufactured asbestos containing products 2. State that they cannot get a fair trial in state court 3. May have had to pay inflated awards due to injury consolidation 4. Believes part of the awards should be funded by other parties 5. Uninsured plaintiffs are being compensated 6. Current compensation system is prohibitively expensive 7. Wants closure

2 reasons that premium deficiencies are rare:

1. Most policies charge sufficient premium to cover the expected losses & expenses 2. A particular segment within a group that has a deficiency may be offset by the surplus of another segment

Issues with the current NFIP:

1. Many do not purchase food insurance even though it's mandatory 2. Many individuals misunderstand flood risk -> a 100 year flood does not mean no more floods for the next 100 years 3. Many individuals misunderstand the risk spreading function of insurance -> too optimistic about the chance of damage to their property 4. NFIP rates may not adequately reflect the flood risk 5. FEMA's new digital maps may not meet appropriate flood hazard data quality standards 6. The public cost of post disaster recovery financing is increasing 7. Hazard mitigation is not always incorporated into the risk management decision making of the government and private sector

Briefly explain why high ratings are important for Reinsurance:

1. Many reinsurers not licensed in the US 2. Cover long-tailed, catastrophe, or other large claim risks Therefore, primary insurers need financially strong reinsurers 4. Strongly capitalized reinsurers can charge higher premiums 5. Reinsurance treaties may specifically link ratings and security

How are claim adjusters regulated:

1. Market conduct exam 2. Commissioner to examine accounts or records pertaining to an independent adjuster 3. Require adjuster to be licensed by passing a test and pay a fee

2 accounting methods used to record investments in subsidiaries

1. Market valuation approach: based on the market value, adjusted for the ownership percentage 2. Equity method: based on the statutory equity, adjusted for any unamortized goodwill, and adjusted for the ownership percentage

2 implications to the government in markets where insurance purchase is mandatory:

1. May feel obliged to provide insurance 2. May believe that the private market should only be able to make limited profits

Consequence for a rating downgrade of credit rating:

1. May lower bond's market value 2. Debt held by bank may be recalled if falls below investment grade

3 reasons that an insurer with a rating from AM Best may request another rating from S&P, Moody's or Fitch:

1. May want to issue debt through a holding company and want rating from agency with more experience in debt ratings 2. Public company may want rating from agency better known to the investors 3. May not like current rating and believes second will be better

2 things that Pillar 2 (Supervisory Review) provides supervisors with

1. Means of identifying firms with a higher risk profile 2. Power to intervene

What does ratio 9 measure

1. Measures the insurer's ability to meet the financial demands 2. Provides rough indication of the possible implications for policyholders if liquidation is necessary

2 problems of the implementation of MSAs:

1. Medicare administrators did not know if Medicare eligible parties were collecting workers compensation or liability payments 2. Parties had little incentive to agree to MSAs

List the implicit threats from CMS establishing guidelines for the review & approval of MSAs:

1. Medicare would refuse payments if MSAs were not submitted or not approved 2. Medicare would become more aggressive about seeking reimbursement for past conditional payments

Requirements to be a "qualified actuary":

1. Member in good standing with the CAS; or 2. A member in good standing with the AAA, and who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the AAA

What does the Notes disclose about intercompany pools

1. Members of the pool 2. Lead company 3. Pooling percentage of each participant

2 accounting methods for nonadmitted assets:

1. Method 1: write off the nonadmitted assets as an expense (in the income statement) 2. Method 2: classify the asset as nonadmitted & charge surplus directly

2 advantages of closing claims early:

1. Minimize chance that the claim will develop adversely 2. Allow the insured to receive medical treatment/ repair property damage/ recover from loss

List some activities deemed to be unfair and deceptive by the NAIC Act Relating to Unfair Methods of Competition:

1. Misrepresentation and false advertising of policies 2. False information and false advertising in general 3. Defamation 4. Boycott, coercion, and intimidation 5. False financial statements 6. Unfair discrimination 7. Rebating

3 stages of Financial Regulation:

1. Mitigate/ eliminate risks via restrictions on insurer's activities 2. Use financial tools and oversight to work with insurers to implement corrective actions 3. Provide a backup of financial protection in the event of a receivership

What types of changes should actuaries look out for, when analyzing trends:

1. Mix of business (type of exposure, geography) 2. Policy limits 3. Reinsurance attachment points & limits 4. The way that the company counts its claims

3 advantages of Model Laws, Regulations, and Guidelines:

1. Model laws help legislative bodies streamline their legislative development process 2. NAIC model laws help guide sates in adopting the same or similar insurance laws, regulations, and guidelines 3. Insurers can benefit from legal uniformity among the states

What does the "risk management" functional area require that the insurer do:

1. Monitor the risk management function & maintaining an aggregate view 2. Ensure that the internal model has been integrated with the risk management function

List 4 reasons that defense costs may increase going forward:

1. More defendants now involved in the litigation 2. Many defendants have abandoned settlement strategies 3. Newer defendants are insuring significant discovery costs, because they need to understand their exposure & potential defenses 4. Coverage disputes between defendants & insurers; and insurers & reinsurers may increase

State two notable changes since 2002 not included in the RAND report:

1. More efforts to direct scarce resources to the sickest claimants 2. Includes changes to the Manville Trust Distribution Process (TDP) and state reforms imposing medical criteria to make a claim 3. Decrease in claim filings during 2004-2005 for less severe medical conditions 4. Continued federal and state reform efforts 5. Heightened scrutiny of potentially fraudulent claims

4 criteria that the reinsurance agreement must meet in order to qualify as having risk transfer:

1. Must contain an insolvency clause 2. Recoveries due to ceding company must be available without delay 3. No guarantee of profit 4. Reporting of premiums & losses at least quarterly

3 ways to allocate Other Underwriting Expenses

1. NAIC operating expense classification (24 types) 2. Expense categories (LAE; Other Underwriting Expenses; Investment Expenses) 3. Line of business

Necessary disclosure if the premium written through MGAs or TPAs exceed 5% of surplus:

1. Name & address 2. Federal employer identification number 3. Whether the party holds an exclusive contract 4. Type of business written 5. Type of authority granted 6. Total premium written

What does the insurer need to provide to the Commissioner within 5 days of the appointment of the actuary:

1. Name & title 2. Manner of appointment of the actuary 3. Statement that the person meets the requirements to be a qualified actuary

What does Exhibit B: DISCLOSURE include:

1. Name of the Appointed Actuary 2. The Appointed Actuary's relationship to the Company 3. The Appointed Actuary is a Qualified Actuary based upon what qualification? 4. Type of Opinion, as identified in the OPINION 5. Materiality standard expressed in $US 6. Are there significant risks that will result in material adverse deviation 7. Statutory Surplus 8. Anticipated net Salvage & Subrogation, included as a reduction to loss reserves as reported in Schedule P 9. Discounts included as a reduction to loss reserves and loss expense reserves as reported in Schedule P - non-tabular - tabular 10. Net reserves for losses and expenses for the company's share of voluntary and involuntary underwriting pool's and association's unpaid loses and expenses 11. Net reserves for losses and expenses the company carries: - Asbestos - Environmental 12. The total claims made extended loss and expense reserve: - Amount reported as loss reserves - Amount reported as unearned premium reserves 13. Other items on which the Appointed Actuary is providing Relevant Comments

What should the notice of approval of permitted accounting practices include:

1. Nature & clear description of the permitted accounting practice request 2. Quantitative impact of the permitted accounting practice 3. The effect of the request on a legal entity basis, and on all parent & affiliated US insurers, if applicable 4. Any potential effects to each financial statement line item affected by the request

Disclosures that need to be made for each joint & several liability agreement

1. Nature of the agreement 2. Total outstanding amount under the arrangement 3. Carrying amount of the insurers liability, and carrying amount of the receivable recognized 4. Nature of any recourse provisions that would enable recovery from other entities of the amounts paid, including any limitations on the amounts that may be recovered 5. In the period where the liability was initially recognized & measured, or the period in which the measurement changes significantly: - The corresponding entry - Where the entry was recorded in the financials

2 disclosures that need to be made regarding loss contingency/ asset impairment:

1. Nature of the contingency 2. Estimate of the possible loss/ range of loss; or a statement that such an estimate cannot be made

Disclosures about Type 2 events in the financial statements:

1. Nature of the event 2. Estimates of its financial impact, or a statement that the estimate can not be made

List 2 types of actions that many defendants have decided to take rather than waiting for federal and state reforms:

1. Negotiate settlements 2. Sought bankruptcy protection

List some components of Other Income

1. Net gain from agent's or premium balances charged off 2. Finance & service charges not included in premiums 3. Aggregate write-ins for miscellaneous income (gain on sale of equipment, retroactive reinsurance gain, gain on foreign exchange, corporate expenses, fines & penalties)

Factors affecting change in surplus:

1. Net gain or loss 2. Unrealized capital gains or losses 3. Change in surplus notes, capital paid in, and surplus paid in 4. Dividends to stockholders 5. Changes in no admitted assets: review the Exhibit of Nonadmitted Assets 6. Changes in surplus aid for reinsurance 7. Accounting changes and corrections of errors 8. Change in DTA 9. Change in ownership

Two components of investment income in the IS

1. Net investment income earned 2. Net realized capital gain

How are tabular & non tabular discounts treated in Part 1:

1. Net of tabular discount 2. Gross of non tabular discounts (until columns 32 & 33) and Net (in columns 35&36)

What items are allocated to lines in Part 2 of IEE:

1. Net premiums written 2. Net premiums earned 3. Dividends to policyholders 4. Incurred Loss/ DCC/ A&O 5. Unpaid Loss/ DCC/ A&O 6. UEPR 7. Agents' balances 8. Other underwriting expenses: - Commission & brokerage expenses incurred - Taxes, licenses & fees incurred - Other acquisitions, field supervision and collection expenses incurred - General expenses incurred 9. Other income less other expenses 10. Pre-tax profit or loss excluding all investment gain 11. Investment gain on funds attributable to insurance transactions 12. Profit or loss excluding investment gain attributable to capital and surplus 13. Investment gain attributable to capital and surplus

Reason that rating agencies do not respond as quickly as the bond and stock markets:

1. New information about a company's operations results in quick stock market changes 2. Rating agencies prefer to wait and verify information

Accounting treatment of structured settlements in which the insurer is the owner and payee:

1. No reduction to loss reserves 2. Annuity is recorded as an "other than invested assets" at its present value 3. Income from the annuity is recorded as miscellaneous income

What must the CEO/ CFO confirm in the reinsurance attest action supplement:

1. No separate written or oral agreements 2. Documentation for every reinsurance contract where risk transfer is not self evident: - economic purpose of the transaction - documentation proving risk transfer 3. Compiles with all requirements of SSAP 62 4. Controls implemented to monitor use of reinsurance

Reasons that parameter risk does not need to be explicitly included:

1. No widely accepted methods available to incorporate it 2. Resources expended may exceed the profit

3 exceptions to the rule that Cancellation for Beach and Windstorm Plans are subject to 30-day statutory notice:

1. Nonpayment of premiums 2. Material misrepresentation 3. Evidence of arson at direction of or by owner/ occupant

What does the insurer need to do if the actuary is replaced:

1. Notify the Insurance department within five days 2. Within ten days, provide an additional letter to the Commissioner stating whether in the 24 months prior to the actuary being replaced, were there any disagreements with the actuary regarding the risk of material adverse deviation; required disclosures; scopes; procedures or data quality 3. Request in writing to the former actuary whether he/she agrees with the statements in the aforementioned letter. This letter from the actuary should be forwarded to the Commissioner together with the insurer's letter

Actions the actuary must take if constraints apply to the analysis which. May potentially materially impact the results:

1. Notify the principal of the risk 2. Communicate the constraints to the principal

State two findings from RAND Corporation's May 2005 comprehensive study of asbestos litigation:

1. Number of claims led annually increased sharply beginning in mid-to-late 1990s 2. Nonmalignant injuries account for most of growth 3. Some evidence suggest most nonmalignant claimants are currently unimpaired 4. Concerns regarding depletion of funds available to pay future claimants and burdens placed on courts

How are losses in Part 1 of Schedule P grouped:

1. Occurrence policies: AY 2. Claims made policies: RY 3. Tail policies: PY 4. Fidelity & Surety: Discovery Year

How do State Legislatures influence insurance regulation

1. Often directly control DOI budgets 2. Pass the insurance laws that insurance commissioners must enforce

List the IRIS ratios that the actuary will have to discuss if the ratios have exceptional values:

1. One yr reserve development to surplus 2. Two yr reserve development to surplus 3. Estimated current reserve deficiency to surplus

Describe the structure of the TRIA program:

1. Only applies to commercial lines 2. A single terrorist act must be certified by: - Secretary of Treasury - Secretary of State - Attorney General Loss must be >$5M to be eligible for TRIA coverage 3. Aggregate industry certified losses must be > $100M for government coverage to begin 4. Each insurer has a deductible equal to 20% of its annual premium 5. After above threshold are passed, government will cover 85% of insured losses. - If aggregate industry losses do not exceed $27.5B, the Secretary of Treasury will recoup 133% of coverage via surcharges 6. If aggregate industry looses do exceed $27.5B, it has the discretion to apply surcharges to recoup the money paid 7. The government will only cover up to $100B of losses. After that point, there is no federal coverage, nor is there a requirement that the private market provide coverage

What type of properties are eligible for Beach and Windstorm Plans:

1. Only in designated coastal areas 2. Requires buildings constructed or rebuilt after certain date to conform to applicable building code

4 reasons that Flood insurance is considered to be uninsurable in the private market:

1. Only people with highest risk levels tend to purchase coverage 2. Possibility of catastrophic losses 3. Difficult to accurately price the risk due to limitations in hazard assessment 4. Risk of losses among the insureds are not independent -> very high risk load is required

List some common characteristics of Surplus Lines insurance:

1. Only specially licensed producers to place business 2. Licensee must make placement with unauthorized/ nonadmitted insurers that meet requirements 3. "Diligent search" of admitted insurance market 4. Freedom from state-imposed rate and form requirements

What does ORSA need to contain at a minimum:

1. Overall solvency need ( based on the specific risk profile, approved risk tolerance limits, business strategy) 2. Compliance with capital requirements & the requirements of the technical provision 3. Extent to which the risk profile deviates significantly from the assumptions underlying the SCR

Explain why state funds are self-supporting:

1. Overhead expense ratios lower -> absence of some admin costs (e.g. Agency commissions, market costs) 2. Able to return dividends or safety refunds to policyholders

Explain why there is a need to balance regulatory costs vs benefits:

1. Overregulation imposes unnecessary costs 2. Insufficient regulation causes unnecessary harm to consumers & taxpayers

2 similarities between RRG/Captive Insurers and to Mutual Fund Companies:

1. Owned by shareholders and permit shareholders to invest in an array of securities 2. Employ the services of a management company to administer operations

The data that should be reconciled against Schedule P:

1. Paid losses 2. Case incurred losses 3. Paid DCC 4. Case incurred DCC 5. Paid A&O 6. Salvage & subrogation received 7. Earned premiums

How are S&S expenses recorded:

1. Paid losses are recorded net of S&S received 2. Unpaid losses can be net or gross of anticipated S&S

List the 3 parts of the IEE

1. Part 1: Allocation of other underwriting expenses 2. Part 2: Allocation of pretax profit by line, on a net basis 3. Part 3: Allocation of pretax profit by line, on a direct basis

List the parts of Schedule P:

1. Part 1: loss & LAE experience as of 12/31 of the current year 2. Part 2: historical net incurred loss & DCC estimates 3. Part 3: historical net paid loss & DCC 4. Part 4: historical net IBNR for loss & DCC (before tabular discount) 5. Part 5: historical claim counts (closed with payment, open and reported) 6. Part 6: historical earned premium 7. Part 7: loss and premium data on loss sensitive contracts

Reason that tax calculations use Schedule P Part 1, instead of Part 3:

1. Part 3 contains only DCC, not A&O. Part 1 contains all LAE. 2. Part 1 is audited, whereas Part 3 is not 3. Some actuarial methods rely on judgement to select paid LDFs. The IRS method does not involve judgement

List the 2 parts of Part 7:

1. Part A: Primary contract (direct business) 2. Part B: Reinsurance contracts (assumed business)

Why does regulatory action need coordination:

1. Past: regulators who learned of severe weakness of an insurer might have been discouraged to take action by domiciliary commission due to local effect 2. FAWG: ensure domestic regulators are effectively dealing with financially troubled, nationally significant insurers

2 things that Claimants must agree to once the MSA is approved:

1. Pay the WC related medical bills using MSA 2. Complete the reporting of the payments

Briefly describe the transferring entity's accounting treatment of run-off agreements:

1. Payment to reinsurer -> paid loss 2. if payment < reserves transferred -> difference is recorded as a decrease in loss incurred 3. reinsurance recoverable contra-liability increases by the amount of reserves transferred

List some requirements of the insurer from the Mandatory Corrective Action:

1. Perform certain actions to reduce its liabilities 2. Limit its new or renewal business on products that are not guaranteed renewable 3. Reduce its general and commission expenses by specified methods 4. Increase its capital and surplus 5. Suspend or limit dividend payments to stockholders/ policyholder's 6. Limit or withdraw from specified investments 7. File reports concerning the value of its assets 8. Document the adequacy of its premium rates

List 2 responsibilities of NAIC's Financial Analysis Division (FAD):

1. Performs ongoing financial analysis of all nationally significant insurers 2. Identifies trends, benchmarks, identifies troubled companies

Two areas of concerns of MSA:

1. Pharmacy costs: MSA priced drugs at retail value; insurers negotiated price lower 2. Life expectancy: MSA based on claimant's actual age instead of "rated age"

3 pillars of Solvency II:

1. Pillar 1: Quantification - Quantitative capital requirements (Solvency Capital Requirement & Minimum Capital Requirement) 2. Pillar 2: Governance - Supervisory activities (internal control & risk management; supervisory process) 3. Pillar 3: Transparency - Supervisory reporting & public disclosure

3 requirements that the LRRA sets for the RRG:

1. Plan of operation 2. Copy of group's Annual Statement 3. Submit to financial exam of nondomiciliary state if domiciliary state refuses to do so

Briefly describe how the Courts impact insurance regulation:

1. Policy language 2. Policy coverage 3. Claim settlement

2 requirements to qualify a contract as a "Long Term Contract":

1. Policy term greater than or equal to 13 months 2. Reporting entity cannot cancel contract nor increase premium

List some differences between preferred stocks and common stocks:

1. Preferred stocks do not offer voting rights 2. Preferred stocks guarantee dividends 3. Owners of preferred stocks have priority to those of common stocks to receive a return of their investment during a liquidation

List some reasons that premiums in Part 6 of Schedule P may change over time

1. Premium audits 2. Retrospective rated policies 3. Lags in reporting/ accounting for premiums

4 additional criteria that retroactive reinsurance require for risk transfer:

1. Premium paid must be fixed amount 2. Direct/ indirect compensation prohibited 3. Provision for adjustment based on experience prohibited 4. Contract shall not be cancelled without approval

How are premium/ liabilities recorded under Tail Coverage contracts with a fixed period:

1. Premium should be earned over the term (UEPR should be created) 2. Losses should be recorded when reported

How are premium/ liabilities recorded under Tail Coverage contracts with an indefinite period:

1. Premium should be fully earned at inception of the tail contract 2. Liabilities for unreported claims should be recognized immediately

2 reasons that Receivership laws exist:

1. Prevent insolvencies 2. Minimize losses and protect policyholder's before/ during an insolvency

List some factors which the loss distribution can be based on:

1. Previous company experience 2. Industry benchmarks 3. Pricing information 4. Judgement 5. All of the above

What factors can be used to derive the projected loss payment patterns:

1. Previous experience of the ceding 2. Industry benchmarks 3. Combination of the two

3 reasons that if asbestos usage were to immediately cease, exposure would continue:

1. Previously manufactured asbestos containing products in use 2. Asbestos dust in environment from previous use 3. Erosion of deposits in asbestos bearing rocks

Describe 2 practices prohibited by the Clayton Act of 1914:

1. Price discrimination 2. Tying: requiring purchase of 1 product to purchase another

List how the NAIC bills (introduced after McCarran-Ferguson) achieved their purposes:

1. Prior approval of rates 2. Explained how to file rates 3. Describe the role of rating organizations 4. Recommend anti-rebating laws

Briefly describe 4 types of filing laws:

1. Prior approval: be approved by DOI before using 2. File and use: file rates or coverages but can then use them immediately 3. Use and file: use the rate or coverage, files the rate or coverage within a specified period after it's put into use 4. No file: not required make a filing of the rate or coverage

List some concerns created by GLB:

1. Privacy of personal financial information 2. Ability of state regulation to serve an integrated and global financial services market adequately

Explain how the Reinsurance Facility works:

1. Producer accepts application and submits to insurer 2. Insurer can: - handle submission as voluntary business, or - cede premium to facility and just service the policy 3. Claim occurs, servicing insurer handles and pays claim -> reimbursed by facility 4. Operating losses and expenses of the facility are shared by all insurers 5. Insured cannot tell if he is in the scarced market 6. Rates not uniform

How does GLB treat underwriting different from sales and marketing:

1. Prohibits national banks from forming subsidiaries to underwrite insurance 2. Banks can arrange financial holding companies to create insurance affiliates

List some parties disproportionately negatively affected in the credit scoring process:

1. Recent divorces 2. Recently naturalized citizens 3. Elderly 4. Disabled 5. Those with certain religious conviction 6. Younger individuals who have not established credit histories

List some functions of Insurance Industry Trade Associations:

1. Prompt access to legislative developments 2. Can use association personnel as their lobbying forum 3. Participate on committees in drafting new legislation or influence changes to pending legislation 4. Continually watch for new regulations promulgated by state insurance departments

Valuation rules of different type of real estate:

1. Properties occupied by the company (>50%): Depreciation - Encumbrances 2. Properties held for the production of income: Depreciated cost - Encumbrances 3. Properties held for sale: min (Depreciated cost, Fair value) - Encumbrances

List the NAIC fundamental insurance regulatory objectives:

1. Protect the public interest 2. Promote competitive markets 3. Facilitate fair and equitable treatment of insurance consumers 4. Promote reliability, solvency, and financial solidity of insurance institutions 5. Support and improve state regulation of insurance

Describe the intention of the Liability Risk Retention Act (LRRA):

1. Provide businesses (especially small businesses) the opportunity to reduce insurance costs 2. Promote greater competition among insurers when setting rates 3. Elimination of regulation by multiple states to facilitate formation and interstate operations of RRGs (b/c they don't need public protection from insolvencies)

List some uses of Schedule P ( in addition to being used by outside parties to assess the reserve adequacy):

1. Provide disclosure for the SAO: - direct + assumed & net loss&LAE reserves - anticipated S&S - tabular and non-tabular discounts 2. How reserves are developed and where the development is coming from 3. Source of payment patterns that is used in the tax discounting calculations 4. Split between case reserves and IBNR 5. Claim count data => review trends in frequency & severity, and change in claims handling & reserving 6. Data to calculate RBC loss sensitive discount

Criteria for a short duration:

1. Provides protection for a fixed period of shot duration 2. Allows the insurer to cancel or change the provisions

List some criticism of Schedule F:

1. Provision is formulaic, ignores management input 2. Formula has no statistical, historical, or actuarial basis. May underestimate credit risk 3. Unauthorized reinsurers may provide high quality, lower price protections 4. Financially sound slow paying reinsurers may eventually pay. However, a reinsurer that is current may not be able to withstand a stress event 5. The formula may lead to false level of precision 6. Cost of collateral passed from reinsurer to insurer, and then ultimately to customers 7. May limit competition due to the penalty associated with unauthorized reinsurers 8. Does not reveal problems about a reinsurer's solvency

Criteria to classify an insurer as an "exempt commercial purchaser":

1. Purchaser who employs a qualified risk manager to negotiate insurance coverage 2. Has paid over $100K in P&C premiums in the past 12 months 3. Meets at least one of the following criteria: - net worth >= $20M - annual revenue >= $50M - over 500 employees, or a member of a group with over 1000 employees - not for profit organization/ public entity with budgeted expenditures of >= $30M - municipality with population of >= $50K

When determining if something is material, what are the two things that are necessary to study

1. Purpose 2. Intended users

Factors that the actuary should consider when determining the appropriate method to derive the reserves:

1. Purpose 2. Nature of claims & exposure 3. Development characteristics of the claims 4. Characteristics of the available date 5. Applicability of various methods to the available data 6. Reasonableness of the assumptions underlying the various methods

House Energy and Commerce Committee identified three principal causes of Product Liability insurance price and availability crisis of the 1970s. List them.

1. Questionable Ratemaking and reserving practices 2. Unsafe products 3. Uncertainties in the tort and legislation system

Criteria for the insurer to undergo a trend test:

1. RBC ratio between 200% & 300% 2. Combined ratio > 120%

List 2 reasons that private companies will need to understand IFRS accounting, even if they do not follow it, in order to remain competitive:

1. Raising capital in a foreign market 2. Conducting transactions with an international company

What constitutes a credit-based insurance score?

1. Ranking assigned to an insurance risk based on that risk's underlying characteristics 2. Common purpose: produce useful information for underwriting and pricing insurance 3. Provides a relative measure of the expected cost of risk 4. Uses items found in a typical individual's credit report, such as number of inquiries into opening new accounts and accounts 30 days or more past due

What should user look out for when using written premium section of the Five-Year Historical Data Exhibit

1. Rapid change in revenue 2. Changes in level of reinsurance protection 3. Increase in exposure to riskier/unprofitable lines 4. Shifts from liability to property lines (increased catastrophe loss) 5. Shifts from property to liability lines (more uncertain reserves)

List some of the most frequent contributors to insurer insolvency:

1. Rapid premium growth 2. Inadequate rates and reserves 3. Unusual expenses, such as unexpected catastrophic losses 4. Lax controls over managing general agents 5. Uncollectible reinsurance 6. Fraud

What areas governed by state laws are exempt from the preemption:

1. Rates 2. Premiums 3. Underwriting 4. Sales practices 5. Coverage requirements 6. Application of state antitrust laws or state capital or insolvency requirements

Examples of other long term assets

1. Real estate not directly owned by the insurer 2. Joint ventures 3. Partnership interests 4. Surplus debentures

Two components of the total gain from bonds

1. Realized gain on sale/maturity 2. Other realized adjustments - Foreign exchange gain on disposal - Other than temporary impairments

5 types of Statement of Actuarial Opinion

1. Reasonable provision 2. Deficient provision 3. Redundant provision 4. Qualified opinion 5. No opinion

Considerations actuary have after deriving unpaid claim estimate

1. Reasonableness of the estimate 2. Multiple components: estimates of various components are reasonably consistent 3. Presentation (consider the intended purpose)

Compare the GAAP & SAP treatment of anticipated prospective reinsurance recoverables

1. SAP records the reserves net of anticipated reinsurance recoveries 2. GAAP establishes an asset to recognize the ceded reinsurance recoverables

Give two criticisms of the use of rating agencies:

1. Recent downgrades of highly rated debt 2. Now required by law extensive disclosure of rating agency methods 2. Oligopolistic nature of rating agency industry 3. Greater efficiency of free markets in determining bond yields

List some actions that FEMA has taken to address the problem of Repetitive Loss Program:

1. Reconstruct/ elevate or flood-proof substantially damaged structures to prevent future damage 2. Phasing out premium subsidies to RLPs 3. Provide data to communities to help them address RLPs

How is the structured settlement treated

1. Records the amount paid for the annuity as a paid loss 2. Closes the claim

List some areas of major legislation that have been created due to consumer complaints:

1. Redlining prohibitions 2. Unfair claims practices laws 3. Unfair trade practices laws 4. Compulsory insurance laws 5. High-risk driver pools 6. FAIR plans 7. Windstorm and other catastrophe pools 8. Tort reform

What are two conflicting objectives of policymakers:

1. Reduce the long term exposure to flood losses, while 2. Maintaining the program's solvency & mandate to provide affordable flood insurance to the public

2 changes made to the Crop Insurance Program in 2005:

1. Reduced reimbursement rate to insurers for administrative and operating expenses 2. Risk sharing between government and insurers are rebalanced

List the benefits of the "Funds held or deposited with reinsured companies" form of collateral:

1. Reduces credit risk 2. Reduces administrative burden of having to continually collect money from reinsurer to make payments 3. Reinsurer gets paid interest

3 reasons that settlement rates may reduce

1. Reduction in staff 2. Growth in the book without a corresponding increase in staff 3. Surge in claims from a catastrophe

2 fears of businesses due to WC laws that encouraged the government to set up State Funds:

1. Refusal of coverage by private insurers 2. High rates

Which type of bonds is preferable in regular tax environment and AMT environment:

1. Regular: tax exempt bonds 2. AMT: taxable bonds

List 2 regulations that outline the SEC reporting requirements:

1. Regulation S-X: form & content of financial statements 2. Regulation S-K: integrated disclosures rules

List cases in which the Federal Government regulates the insurance industry:

1. Regulation of securities (issued by insurers) 2. Federal Taxation of Insurance Companies 3. Employee Retirement Income Security Act of 1974 4. OSHA 5. Federal regulation concerning discrimination in employment relationships 6. Federal agencies affecting the insurance industry because they administer federal laws that apply to the insurers

List 3 problems with regulation:

1. Regulator fallability 2. Regulatory forbearance 3. Regulatory capture

The US financial regulatory system consists of a 3 stage process. List the 3 stages:

1. Regulators limit/ eliminate risks via restrictions/ prior approval requirements 2. Financial oversight 3. Regulatory backstops and safeguards

List 4 elements of building an effective system of regulation (that emphasizes coordination & cooperation):

1. Regulators must have confidence in each other 2. Free sharing of information among supervisors 3. Ability for other countries to take action if they are dissatisfied with actions of another supervisor 4. Must be credible mechanism to resolve situation where assets are insufficient to fund all of the claims

List some uses of the IEE:

1. Regulators: monitor the financial health of the insurer. It may indicate trends by line of business may threaten the solvency of the entire insurer 2. Regulators: monitor rate adequacy 3. Stakeholders: determine the lines that were profitable, and use this knowledge to help make business decision 4. Investors: help determine how much to invest in the insurer 5. Actuaries: source of premium, losses and expenses for benchmarking

7 core principles of the US Insurance Financial Solvency Framework:

1. Regulatory Reporting, Disclosure & Transparency 2. Off-site Monitoring & Analysis 3. On-site Risk Focused Examinations 4. Reserves, Capital Adequacy 5. Regulatory Control of Significant, Broad-based Risk-related Transactions/ Activities 6. Preventive and Corrective Measures, including Enforcement 7. Exiting the Market and Receivership

Two possible outcomes from receivership:

1. Rehabilitation 2. Liquidation

List 4 lines of business where high ratings are important:

1. Reinsurance 2. Surety 3. Homeowners 4. Structured settlements

2 assets that need to be adjusted in Part 8 of Schedule F

1. Reinsurance recoverable on loss & LAE payment 2. Net amounts recoverable from reinsurers

2 criteria to classify a transaction as having risk transfer:

1. Reinsurer assumes significant insurance risk 2. Reasonably possible that the reinsurer may realize a significant loss

Describe why profit commissions can have an indirect impact on risk transfer:

1. Reinsurer may. Charge higher premium to account the fact that profit commissions may need to be paid 2. Carryforwards -> profits/ losses from prior years can impact the results of future years

2 issues with using a rate higher than risk free if the reinsurer has a higher expected investment yield:

1. Reinsurers yield most likely not known by ceding 2. Generate risk transfer more likely to be triggered when dealing with reinsurers with poorer investment yield

Describe how the Assigned Risk Plans/ Automobile Insurance Plan work:

1. Rejected in voluntary market -> apply through plan 2. Plan assigns application to insurer -> based on market share 3. Insurer handles as if written voluntarily 4. Rates in a state are uniform

Factors that management need to consider when deciding portions of stocks versus bonds to hold:

1. Relative tax rates 2. Yield 3. Diversification 4. Asset liability management 5. SAO 6. Management dislike of erratic income

Contract provisions included in most reinsurance contracts:

1. Reporting responsibility: details required & time schedule to report loss 2. Payment terms: time schedules to make payments, currencies of payments, and rights of parties to withhold funds 3. Payment of premium taxes: which party needs to pay the premium taxes 4. Termination: - Cut-off: reinsurer not responsible for losses incurred after termination of the contract - Run-off: reinsurer responsible for losses from reinsured policies in force at time of termination 5. Insolvency clause: reinsurer's obligations will be maintained in the event of insolvency of the ceding company

List some preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and offsite regulatory monitoring:

1. Requiring the insurer to provide an updated business plan 2. Requiring the insure to file interim financial reports 3. Prohibiting the insurer from certain investments or investment practices 4. Restricting/ suspending the business that can be written/ renewed 5. Ordering an increase to the capital & surplus 6. Ordering the insurer to correct corporate governance practice deficiencies 7. Requiring replacement of senior management 8. Seeking a court order to place the insurer under conservatism/ rehabilitation/ liquidation

What should financial statements disclose on high deductible policies

1. Reserve credit from the high deductible on unpaid claims 2. Amounts that have been billed and are recoverable on paid claims

What does Scope paragraph contain:

1. Reserve elements upon which the actuary is opining 2. Review date 3. Statement about who provided the data 4. Statement about reconciliation

What is listed in the Loss Reserve section of Exhibit A: SCOPE:

1. Reserve for unpaid losses 2. Reserve for unpaid LAE 3. Reserve for unpaid losses - direct & assumed 4. Reserve for unpaid LAE - direct & assumed 5. "Retroactive Reinsurance Reserve Assumed" 6. Other loss reserve items on which actuary is expressing opinion

Required disclosures in the Notes about retroactive reinsurance:

1. Reserves transferred 2. Consideration paid 3. Paid losses reimbursed 4. Special surplus generated 5. The reinsurers involved

Disclosure on asbestos or environmental claims:

1. Reserving methodology 2. Amount paid & reserved for loss & LAE 3. Description of the LOB where there is potential exposure, and the nature of the exposure 4. For the 5 most current CYs, on a gross & net basis, separately for asbestos and environmental exposures: beginning reserves/ incurred losses & LAE/ CY payments for loss & LAE/ ending reserves

3 reasons that premium subsidies are often thought to be appropriate for flood risk:

1. Residents of flood-prone areas did not understand the flood risk when they build there 2. No public safeguards restricting construction in the floodplain 3. Premium subsidies on pre-FIRM structures could motivate communities to participate in the program

2 reasons that the insurer needs to hold surplus in addition to reserves:

1. Resources can cover the policyholder obligations in most future economic scenarios 2. Sufficient resources for the regulator to be able to suggest or take corrective action in the case that an adverse trend is detected

2 reasons that only a few states have historically had fraud departments

1. Restraints on budgets 2. Lack of insurance fraud laws

List 4 changes in the litigation environment since 2001:

1. Restrict nonmalignancy claims or restrict the extent to which claimant's actions may be combined 2. Venue reform and join and several liability reform 3. Validity of some chest X-rays to justify nonmalignancy claims has been challenged 4. Significant decrease in the number of new nonmalignancy claims

2 reasons that hazard mitigation is not always incorporated into the risk management decision making of the government and private sector:

1. Restrictive land-use zoning regulations and building requirements -> conflict with plans for economic development 2. Cost-sharing mitigation funding requirements on property buyouts and relocation of at risk properties -> financial burden for the communities

What changes should be considered when using the information in Parts 2 to 4 to develop losses

1. Retentions 2. Claims settlement & reserving 3. Business mix 4. Underlying exposurers

Comments about reinsurance that the actuary should make:

1. Retroactive reinsurance 2. Financial reinsurance 3. Reinsurance collectability

List some issues of contention that still exist after the Biggert-Waters Act:

1. Revised analysis & mapping of Non-Accredited Levees: difficult to assess the levee-specific risk and corresponding risk premium 2. Actuarial soundness, program solvency & affordability: possibility of property owners dropping their policies 3. Experts believe that even if FEMA increase the rates up to the max (20% per yea), they would still have insufficient funds to cover the obligations 3. Debt forgiveness: do not believe that FEMA will be able to repay the $17.5B debt due to Katrina within 10 years 4. Development of an Integrated Disaster Risk Management Approach: disaster strategy that goes beyond floodplain development management 5. Private sector role in financing flood risk: is it feasible for private sector to assume a portion of the flood risk? Will reinsurers be willing to assume the risk and transfer it to the capital markets?

List 2 cases in which the Federal Government does intervene in the "Business of Insurance"

1. Risk Retention Act 2. National Flood Insurance Act

Methods to derive discount rate

1. Risk free approach 2. Portfolio approach 3. Discount rate requested by another party

What questions do the interrogatories contain about the Board of Directors:

1. Role of the board in approving the purchase/ sale of investments 2. Does the company have a process in place to notify the board of conflicts of interest within senior management 3. Whether the permanent records of the board proceedings are retained

List 3 agencies that produce credit ratings:

1. S&P 2. Moody's 3. Fitch

Compare the GAAP & SAP treatment of nonadmitted assets:

1. SAP does not consider these assets for the purpose of calculating statutory surplus 2. GAAP does not have a "nonadmitted assets" category. All assets are included in the surplus calculation

2 aspects of credit risk that are included in the RBC charge:

1. The counterparty will default (on at least part of the debt) 2. The risk associated with estimating the amounts due

Compare the GAAP & SAP treatment of loss reserve discounting:

1. SAP: rarely allows, except WC and long term disability claims that have fixed and reasonably determinable payment patterns - Tabular discount: typically 3.5% - Non-tabular discount: capped at min(investment yield of 1.5%, yield of US treasury debt that has a duration similar to the loss duration 2. GAAP allows the SAP discounts. It also gives the insurer's the option to use an alternative discount rate

Compare the GAAP & SAP treatment of structured settlements if a release is not signed

1. SAP: treatment is the same as the case where there is a release. However, the insurer must also disclose the contingent liability in the Notes to the Financial Statements 2. GAAP: the settlement is treated like a reinsurance contract, which involves creating a reinsurance recoverable asset

Describe the different intended users of SAP & GAAP

1. SAP: used primarily by regulators, and therefore focuses on the insurer's ability to pay claims (surplus adequacy) 2. GAAP: used mainly by investors and creditors, and is therefore focuses on the measurement of earnings emergence

Hierarchy applying to accounting rules:

1. SSAPs 2. Consensus positions of the Emerging Accounting Issues Working Group 3. NAIC Annual Statement Instructions Purposes & procedures manual of the NAIC Securities Valuattion Office 4. SAP Statement of Concepts 5. Sources of nonauthoritative GAAP accounting guidance & literature, including practices that are widely recognized and prevalent either generally or in the industry/ FASB Concept Statements/ International Financial Reporting Standards/ Accounting textbooks, handbooks & articles/ etc

Four key areas model guide for examiners to review:

1. Sales and advertising 2. Underwriting 3. Pricing 4. Claims

Describe concerns of Insurers & Reinsurers:

1. Same as policyholders 2. Interpretation of the contracts 3. Making settlements with claimants who have no clearly identifiable injury 4. Want predictability of financial results, and finality with respect to quantifying their expected liabilities

Describe the concerns of Plaintiff's Attoneys:

1. Same as their clients 2. Represent seriously injured claimants -> more supportive of legislative changes

Guidance about interest rates used to discount by SSAP 62

1. Same discount rate for each simulated iteration 2. Reasonable and appropriate 3. Reflect the expected timing of payments Duration (cash flows) = duration (loss) - duration (premium)

What is the difference between Schedule P and Schedule F in terms of their treatment of pooling

1. Schedule P: net of pooling 2. Schedule F: treat the pooling as reinsurance

What do the 2 sections of the new Part 6 of Schedule F contain:

1. Section 1: Provision for reinsurance for certified reinsurers due to collateral deficiency 2. Section 2: Provision for overdue reinsurance ceded to certified reinsurers

List the five sections of each part of Part 7:

1. Section 1: net loss &LAE unpaid and NWP on loss sensitive contracts, relative to all contracts, for each Schedule P line 2. Section 2: incurred loss & DCC on loss sensitive contracts, in the same format as Part 2 3. Section 3: loss & DCC IBNR on loss sensitive contracts, in the same format as Part 4 4. Section 4: net earned premiums on loss sensitive contracts, in the same format as Part 6 5. Section 5: triangle of net reserves for premium adjustments & accrued retrospective premiums for each of the last ten years that the policies were issued

List the AM Best financial strength ratings:

1. Secure: - Superior: A++, A+ - Excellent: A, A- - Good: B++, B+ 2. Vulnerable: - Fair: B, B- - Marginal: C++, C+ - Weak: C, C- - Poor: D - Under supervision: E - In liquidation: F - Rating suspended: S

What are some internal controls the board or audit committee is interested in during the governance processes:

1. Segregation of duties: different people performing the reserving & pricing roles 2. Use of reserve committees 3. Internal audit 4. Actuarial peer review 5. Report from the Appointed Actuary

3 uses of the flood hazard maps developed by FEMA for NFIP:

1. Set insurance rates 2. Regulates floodplain development 3. Inform those who live in the 100-year floodplain of the potential flood hazards

List the exceptions to the rule that states are given primary regulatory control over the "business of insurance" (where the Federal government is involved):

1. Sherman Act - prohibits boycott, coercion, and intimidation 2. Federal antitrust laws apply to the extent that state laws do not regulate such activities 3. Federal laws enacted specifically to regulate the "business of insurance" preempt any state laws that apply to the same activities addressed by the federal laws

3 questions regarding debt forgiveness:

1. Should Congress eliminate NFIP's debt? 2. If so, what would be the consequences across the various stakeholders of debt forgiveness? 3. Will the NFIP reserve be sufficient to offset the future catastrophic loss years?

2 questions regarding the movement toward a comprehensive integrated watershed management framework of risk perception, risk management, and disaster response strategy:

1. Should there be a more encompassing water resources and mitigation planning process that encourages flood & water resources planning and flood mitigation on a watershed basis? 2. What is the best approach to strengthening local floodplain management and planning, and to guide development in regulated flood plains to save lives and reduce property damage?

Examples of distortions arise when there are changes in the exposure

1. Significant changes in premium volume 2. Shift in product mix

Indemnification of a ceding company only exists if both:

1. Significant insurance risk applies (both timing and amount) 2. Reasonably possible that the reinsurer will incur a significant loss

When comparing companies' investment performance, what do analysts need to consider:

1. Size of investable assets 2. Risk 3. Taxes

4 exemptions from producing SAO:

1. Small companies 2. Insurers under supervision or conservatorship 3. Nature of the business 4. Financial hardship

Amount of coverage government provides through TRIA:

1. Small losses: no coverage 2. Medium losses: spread loss over time and over entire industry -> provides financial assistance to insurers, but later recoups it via broad levy on the insurers 3. Large losses: government covers most of the loss, and recoupment is also possible

Describe the different thresholds for small, medium, and large losses that TRIA defines:

1. Small: <$100M 2. Medium: <$27.5B 3. Large: >$27.5B and <$100B 4. No coverage: >$100B

List the 4 causes for economic regulation:

1. Social & ethical values need to be reflected in the operation of the economy 2. Government necessary to more efficiently coordinate and use the resources: it's able to prescribe land use zoning ordinances and building code standards 3. People interested in shifting risk from themselves to the government. Premium subsidies were thought to be appropriate 4. Sole reliance on insurance markets was not an option. Insurers & individuals have not had sufficient information for the market to operate efficiently

2 examples of government acting as exclusive insurer:

1. Social security (federal) 2. Government-run works compensation program (state)

Reasons for low investment yields (ratio 6)

1. Speculative investments 2. Large investment in affiliated companies 3. Large investment in home office facilities 4. Large investments in tax exempt bonds 5. Significant interest payments on borrowed money 6. Extraordinarily high investment expenses

3 methods to calculate the SCR:

1. Standard formula: a spreadsheet provided by the regulator 2. Internal models 3. Mix of both

Briefly explain the top-down approach used by the Rating Agencies:

1. Start with economic and industry forecasts 2. Go to insurer's position within the industry

If an actuarial document contains materially different results to a prior report from the same actuary, the later report needs to:

1. State clearly that the earlier results are no longer valid 2. Explain why the results have changed

3 reasons some model laws are changed or never adopted by states:

1. State may view as an inappropriate or unnecessary due to coverage in other state laws 2. Legislators might decide to modify a model law to meet their states' particular needs or better match other laws 3. Legislature considers many matters and may see NAIC model law as just another agenda item

Main purpose of SAO:

1. State the actuary's opinion about the reasonableness of the insurer's reserves 2. Notify the stakeholders about significant risks/ uncertainties that may impact the reserves 3. Disclose whether the risks could produce significant material adverse deviation

Law requires commissioner to submit an annual report to legislature which summarizes activities of department and status of insurance industry in state. State four requirements of this report.

1. Statement of income and expenses of insurance department 2. Exhibit summarizing the financial status and business transactions of licensed insurers in state 3. Listing of insurers closed for that business year 4. Names of insurance companies in receivership or other official financial difficulty with a brief explanations of status 5. Recommendations by insurance commissioner about insurance laws and the department's operations

Law requires commissioner to submit an annual report to legislature which summarizes activities of department and status of insurance industry in state. State four requirements of this report.

1. Statement of income and expenses of insurance department 2. Exhibit summarizing the financial status and business transactions of licensed insurers in state 3. Listing of insurers closed for that business year 4. Names of insurance companies in receivership or other official financial difficulty with a brief explanations of status 5. Recommendations by insurance commissioner about insurance laws and the department's operations 6. List of other insurance matters of general interest determined by commissioner

List exceptions for which the McCarran-Ferguson Act will not apply:

1. States not regulating activities 2. Sherman Act continues to apply to the use of boycott, coercion, or intimidation 3. Congress passes a law that applies only to the insurance industry, it will supersede any state regulation

Difference between Statistical Agent & Rating Bureau:

1. Statistical agents/ advisory organizations: collect & report loss experience 2. Rating bureaus: prepare rate filings & submit to regulators on behalf of members

What is reviewed in the financial examination:

1. Statistical statements 2. Accounting procedures 3. Financial statements 4. Financial controls 5. Management practices 6. Investment procedures

List some examples of the extensive background material that the agency requests from the insurer:

1. Statutory A.S. And GAAP financial statements 2. History of company focusing on major events with biographies of senior executives 3. Investment strategy & guidelines 4. Organizational charts 5. Product descriptions and business strategy by line

Earned premium formula based on Statutory and Tax accounting:

1. Statutory accounting: EP = WP - Change in UEPR 2. Tax accounting: EP = WP - 80% * Change in UEPR

2 implications of the fact that RRGs are prohibited from participating in state guaranty funds:

1. Strong incentive to establish adequate premiums and reserves 2. Insureds and their claimants could be exposed to losses above what RRG can pay

What should a company with 0% share of a pool include in SAO:

1. Submit an Opinion that reads similar to that of the lead company 2. Exhibits A&B of the lead company need to be attached

2 ways in which RMA (Risk Management Agency) subsidizes the cost of the Crop Insurance program:

1. Subsidizes the premium 2. Reimburses the insurers for the administrative costs

4 elements of an insurance risk:

1. Sufficiently large number of insured -> make losses reasonably predictable (N) 2. Losses must be definite & measurable (Y) 3. Losses must be fortuitous or accidental (N) 4. Losses must not be catastrophic (depend on the insurer's u/w actions)

Exceptions that flat fee service charges that need to be recorded as written premium instead of other income

1. The insurance policy can be canceled for non payment of the fee 2. The fee is refundable in the event that the policy is canceled

List some examples of ways that NAIC staff supports state insurance regulatory officials:

1. Supporting NAIC's committees and task forces 2. Maintain databases to help regulators track financial adequacy of insurers 3. Scrutinizing alien or E&S insurers seeking to do business in U.S. 4. Supporting individual state insurance regulators in court cases by issuing "friend of the court" supportive briefs 5. Valuing insurers' securities 6. Keeping track of insurance issues at federal level 7. Helping state insurance officials with info about pricing and coverage 8. Assisting states in responding to federal reporting requirements 9. Producing various publications about insurance issues 10. Developing statistical report dealing with financial and market matters 11. Giving expert advice about financial regulation, market conduct regulation, and computer usage to state insurance officials

If insurer uses tabular discounts, what additional disclosures need to be made:

1. Tables used 2. Rates used 3. Discounted liability 4. Amount of tabular discount

What type of claim does tabular and non-tabular discounts often apply to

1. Tabular discounts are often applied to specific claims 2. Non-tabular discounts often are applied to aggregate reserves

Due to "dividends received deduction" (DRD), what portion of dividends are tax exempt:

1. Taxpayer owns < 20%, 70% 2. Taxpayer owns between 20% and 80%, 80% 3. Taxpayer owns > 80%, 100%

Components that liabilities & surplus are divided into:

1. Technical provision (incl. reserves & risk margin) 2. Minimum capital requirement 3. Solvency capital requirement (which includes MCR) 4. Free surplus (assets - technical provision - SCR)

Signs of undue management influence that may be apparent during an executive session:

1. The actuary is not provided with comprehensive information on emerging problem areas 2. Information is provided late to the actuary, leaving inadequate time for the analysis 3. The actuary is denied access to certain employees 4. Management makes it clear to the actuary that his continued employment is contingent on agreement with managements reserves 5. The opining actuary is replaced, and the new actuary immediately agrees with managements position

Examples of items that should be disclosed in the actuarial report:

1. The actuary responsible for the document 2. The date & subject of the document 3. The intended user of the report 4. The scope & intended purpose 5. Acknowledgement of qualification 6. Any cautions about risk & uncertainty 7. Any limitations/ constraints on the use of the actuarial findings 8. Any conflict of interest 9. Any material info which the actuary relied on, for which the actuary does not assume responsibility 10. Information date 11. Subsequent events 12. Documents comprising the report

Items to be included in the AOS:

1. The actuary's range of reasonable estimates for loss & LAE reserves, net and gross of reinsurance (if calculated) 2. The actuary's point estimate for loss & LAE reserves, net and gross of reinsurance (if calculated) 3. The company's recorded loss & LAE reserves, net and gross of reinsurance 4. The difference between the carried reserves, and the actuary's point estimate and/or range, net and gross of reinsurance 5. If there is adverse development in excess of 5% of surplus in at least 3 of the 5 past years, a description of the reserve elements and/or management decisions that were major contributors to this adverse development.

Describe accounting treatment when stocks are issued

1. The amount collected associated with the par value is recorded as paid in capital 2. The excess is paid-in surplus

Factors that the actuary should consider when trying to determine whether to rely on the work of others:

1. The amount of the reserves covered by the other actuary's analysis in comparison to the total reserves 2. The nature of the exposure and coverage 3. How reasonably likely variations in the other actuary's analysis may impact the total reserves on which the actuary is opining 4. Credentials of the other actuary

Disclosures necessary if any of the used assumptions/ methods are prescribed by law:

1. The applicable law 2. The assumptions or methods prescribed by the law 3. That the report was prepared in accordance with the law

Identification Paragraph mentions:

1. The appointed actuary 2. The actuary's relationship to the company 3. The actuary's qualifications for acting as the appointed actuary 4. Date of appointment 5. State that the appointment was made by the Board

In securities lending, why should the collateral be invested in short term, low risk, highly liquid markets:

1. The arrangements between borrower and lender are usually short term 2. The borrower can usually return the securities with short notice

Disclosures necessary if the actuary states reliance on other sources and does not accept responsibility:

1. The assumption or method set by the other source 2. The other source 3. The reason that the other source set the assumption or method 4. Either (if applicable): - the assumption/ method significantly conflicts with that which the actuary believes to be reasonable for the purpose of the report - the actuary was unable to judge the reasonableness of the assumption/ method without performing a substantial amount of additional work beyond the scope of the assignment

If the insurance purchaser meets the definition of an exempt commercial purchaser, in what cases does the surplus lines broker not have to satisfy the state requirement to conduct a due diligence search for admitted insurance:

1. The broker has informed the purchaser that the insurance may or may not be available in the admitted market 2. The purchaser had subsequently requested the non-admitted coverage in writing

Describe the accounting treatment of retroactive reinsurance:

1. The ceded reserves are recorded as a negative write in item in the balance sheet 2. Any gain is recorded as: - Other income in the income statement - Special surplus in the balance sheet

GAAP treatment of retroactive reinsurance:

1. The ceded reserves are treated as a reinsurance recoverable asset 2. Any gain is deferred, so there is no immediate income or surplus benefit 3. This gain is amortized over time

How is the run-off agreement accounted for

1. The consideration paid is recorded as a paid loss 2. If the consideration paid is less than reserves transferred, the difference is treated as a decrease in losses incurred

List 2 reasons that the reserves are subject to a lot more uncertainty if the insurer is growing rapidly

1. The insurer won't have as much insight into the new business 2. The estimate of unpaid claims is more difficult for a growing company relative to one in a steady state: the average writings of the insurer are going to be skewed towards the end of a policy year. It is difficult to adjust the analysis for this shift, and also quite likely that insurers will neglect to make an adjustment

3 things that the actuary needs to disclose if he provides a Qualified Opinion:

1. The item to which the qualification relates 2. The reason for the qualification 3. Amounts for the above items, if disclosed by the insurer

Disclosure about the Risk of Material Adverse Deviation that the actuary should make:

1. The materiality standard 2. How this standard was derived 3. Whether there are significant risks that could produce material adverse deviation 4. If the risk exists, major factors that could result in material adverse deviation 5. Major factors, combination of factors, or particular conditions underlying the risk and uncertainties that the actuary considers relevant

Describe 2 ways in which commutations will distort the financial statements:

1. The payment from the reinsurer is a negative paid loss (income statement) 2. The loss reserve is increased (balance sheet)

Compare the GAAP & SAP treatment of structured settlements if the claimant signs a release:

1. The purchase price of the annuity is recorded as a paid loss 2. The claim is closed

Motivations to enter into a commutation:

1. The reinsurer/ insurer may wish to exit a line of business 2. Concerns about the other party's solvency 3. Wish to end a troubled relationship 4. Each side may believe that they are benefiting from the commutation

What do the Notes disclose about High Deductible policies:

1. The reserve credit that the insurer has recognized for the unpaid claims 2. The amount billed but not yet collected for the paid claims

2 reasons that it is necessary to disclose the potential asbestos/ environmental exposure:

1. The reserves have developed adversely over the last few decades 2. There is a lot of uncertainty associated with the reserves

List 2 reasons measurement tools are very useful

1. The results of a tool may indicate the need for further investigation (either via evaluation of other tools, or inquiry of management) 2. When multiple tools are sued together over a period of several years, they can provide an early warning of "high risk" insurers

What does the insurer need to disclose about premium deficiencies in the Notes:

1. The size of the deficiency 2. Whether investment income was considered

What is described in the Summary of Significant Accounting Policies note:

1. The source of the accounting rules used to construct the Annual Statement (typically the NAIC Accounting Practices & Procedures Manual) 2. Any exceptions that were made to the above rules, and the basis of the exceptions. The exceptions need to be either prescribed (required by state law) or permitted (requires approval by state) 3. Additional detail on the insurers significant accounting policies

List 3 points to support the argument that the US regulatory system has been "successful":

1. There is a strong track record of protecting consumers and overseeing solvency 2. There is a strong depth & breadth of the US insurance industry 3. Capacity of the insurance guaranty system

2 reasons that insurers should not have large investments in mortgages:

1. They are not part of the core business strategy 2. They are illiquid

List some reasons that Schedule T is useful to actuaries:

1. They can see where the company writes business, so that they can research the relevant insurance laws of the state 2. By looking at historical schedules, they can see if the insurer has changed its geographic exposure 3. When industry factors are used, this can help derive the weight to apply to the industry factors from each state

Which insurers are exempt from the RBC procedure:

1. Title insurance companies 2. Monoline financial guaranty insurance companies 3. Monoline mortgage guaranty insurance companies

Disclosures SAO needs to make:

1. Title should mention "Statement of Actuarial Opinion" 2. Intended users of the SAO 3. Intended purpose of the SAO 4. Reserves being opined upon 5. Basis of reserve presentation 6. If there have been changes in accounting procedures since the prior statement 7. Whether the reserves are on a gross or net basis 8. If the reserves are deficient (redundant), the minimum (maximum) amount that the actuary believes it's reasonable 9. If the actuary issues a qualified opinion, the items to which the qualification relates, the reason for the qualification, and the amount for such items, if known 10. Significant risks that could cause material adverse deviation 11. If the actuary used the analysis/ opinion of another actuary, whether the actuary reviewed the other's analysis 12. If the reserves are calculated using discounted reserves, the actuary should disclose this. The rate used and the amount of the discount 13. If the reserves are net of reinsurance, the collectability of the reinsurance 14. If the reserve was based on risk margin, this needs to be disclosed, as well as the amount of the risk margin

Explain how MAIF works:

1. To be insured with the fund, motorist must first provide: - evidence of the cancellation from one insurer - evidence that application has been rejected by two other private insurers 2. All services, including claims, are handled by personnel of MAIF

What do the Notes disclose about Structured Settlements:

1. Total amount of the structured settlement payments for which the insurer could be held liable 2. In the event where the remaining payments from a single life insurer exceeds 1% of surplus , the name of the life insurer and associated remaining payments.

Financial reports help stakeholders & regulators:

1. Track the company's financial performance 2. Compare the company's performance 3. Make informed financial decisions

2 options that a receiver has during a liquidation

1. Transfer all of the insurer's business including all liabilities and assets to other insurer 2. Sells the insurer's assets and terminates the insurer's business

What do regulators look at during Market Regulations:

1. Treatment of policyholder's & claimants in product development & pricing 2. Competition 3. Statistical reporting 4. Administration of residual markets 5. Licensing of insurance producers 6. Consumer assistance & information services

Contracts can be divided into a number of categories:

1. Treaty (Pro rata): proportional reinsurance 2. Treaty (Excess of loss): non proportional reinsurance 3. Treaty (Catastrophe) 4. Facultative (Pro rata) 5. Facultative (Excess of loss)

2 classes of reinsurance contracts:

1. Treaty: transfers whole class or type of business written 2. Facultative: transfers individual risks

List 2 concerns of judges:

1. Trial docket pressures, and fairness of results 2. Trial docket pressure -> speed up trial process -> less fair outcome

2 categories of subsequent events:

1. Type 1: "Recognized Subsequent Events": provide additional evidence with respect to conditions that existed at the date of the balance sheet 2. Type 2: "Nonrecognized Subsequent Events": provide evidence with respect to conditions that did not exist at the date of the balance sheet, but arose after that date

How is intercompany pooling impacting the A.S.

1. U&IE shows: - the direct business written by each company - amounts ceded to the lead company - portion of the pool assumed by the affiliates 2. Schedule F: - cessions to the lead company as ceded reinsurance in Part 3 - lead company will show this as assumed business in Part 1 3. Schedule P: reflects only the member's portion of the aggregate results

4 categories that bonds are divided into

1. US government bonds 2. Bonds exempt from US tax 3. Other bonds (unaffiliated) 4. Bonds of affiliates

2 components of Insurance Risk:

1. Ultimate amount of net cash flows (underwriting risk) 2. Timing of those cash flows (timing risk)

Bond types included in the bond size factor adjustment

1. Unaffiliated bonds in classes 2-6 2.Non US government bonds in class 1

Compare the GAAP & SAP treatment of anticipated salvage & subrogation

1. Under SAP accounting, the insurer has the option about whether to record the reserves in Schedule P gross or net of anticipated salvage & subrogation 2. Under GAAP accounting, the insurer must subtract the anticipated balances

What type of data does the rating agency collect during the interactive meetings:

1. Underwriting 2. Reserving 3. Investment 4. Operating performance with supporting data

SAP treatment of retroactive reinsurance:

1. Undiscounted ceded reserves are recorded as negative write-in liabilities 2. Schedule P is therefore not impacted 3. A gain may be generated if the consideration paid is less than the negative write in liability. This is treated as a write-in gain as part of "other income"; and the surplus benefit is treated as "special surplus" until the paid reinsurance recovery exceeds the consideration paid

5 principles of nationwide regulation proposed by NAIC to help achieve uniformity & reciprocity:

1. Uniform standards where appropriate 2. States have the responsibility for setting/ enforcing standards 3. State regulators have equal standing regarding the regulation of holding company structures 4. Mechanism for collaboration & interaction with international & financial services regulators on matters that impact US insurance 5. System shouldn't reduce state's authority to impose taxes & fees

2 methods to estimate the cash flows from the nominal reserves:

1. Use a payout pattern based on the loss reserve development 2. Use the implied pattern based on the ratio of paid losses to ultimate losses by accident year

Outline 3 approaches to determine risk margins:

1. VaR: the needed load to the expected value to result in a specific probability that the insurer has sufficient funds to pay for the liabilities 2. TVaR: probability weighted average of all scenarios in the tail - mean estimate 3. Cost of capital method: the amount necessary to produce an adequate return, after factoring in the investment income

What types of property are considered to be uninsurable under FAIR:

1. Vacant or open to trespass 2. In poor physical condition or has unprepared fire damage 3. Subject to poor housekeeping 4. In violate of law or public policy 5. Not built in accordance with building and safety codes

Issues with using the information in Parts 2 to 4 to develop losses

1. Various allocation in Schedule P are based on the interpretation of the person completing it 2. Internal pooling or reinsurance arrangements that may have an impact on the data set may not be obvious by looking exclusively at Schedule P 3. Schedule P includes voluntary and involuntary pools and/ or associations: - many of these pools record IBNR as case reserves - the level of participation in the pool may have changed over time 4. Schedule P only contains 10 AY of data, but long tail lines may experience development later than 10 years 5. Commutations will distort the reserves 6. The data combines losses and DCC, potentially hiding trends in either component

What do regulators examine during an organizational exam of an insurer applying for a license:

1. Verify minimum capitalization is on deposit at an approved financial institution 2. Verify that management team in place 3. Corporate records are in good order 4. Policy forms and rates have department approval 5. Gives employees chance to review with the examiners the various DOI expectations for reporting

2 reasons that the selected interest rate should at least exceed the risk free rate:

1. Very unlikely that a lower rate will be reasonable 2. A lower rate would over detect risk transfer

2 ways that the premium subsidies to RLPs have been phased out:

1. Voluntary buyouts 2. Charging full actuarial rates to owners who do not accept FEMA's offer to mitigate the impact of flood damage

3 questions regarding the increasing flood risk vulnerability due to frequent extreme weather events and population growth in flood prone areas:

1. What additional steps should the government take to manage and mitigate the flood disasters and discourage overdevelopment in the flood vulnerable areas? 2. How to best improve the coordination between the water resources and floodplain management agencies at the federal, state and local levels? 3. Is there a need to plan for the sustainability of the NFIP in an environment of increasingly frequent catastrophic flooding?

2 questions regarding the feasibility of catastrophe disaster insurance:

1. What is the best approach to address misperceptions about the nature of the NFIP, and barriers to public understanding about flooding? 2. Should the NFIP cover all claims associated with catastrophic losses, or just the claims in an average annual loss year?

List some questions that the actuary may have about the disputed balances:

1. What is the issue causing the disagreement? 2. Is the disputed amount material to either the reinsured or reinsurer? 3. Are there legal opinions available?

List 3 circumstances in which State laws and regulations can be void under the U.S. Constitution:

1. When a state law contradicts a federal law 2. When courts determine a state law interferes with federal law although the state law does not expressly contradict the federal law 3. When state law imposes improper burden on interstate commerce, even though a federal law does not exist

How is the value of preferred stocks drived

1. When common stocks are purchased, they are value at the initial carrying value 2. After purchase, - The highest 2 ratings of redeemable preferred stock: original purchase price + acquisition costs - The highest 2 ratings of perpetual preferred stock: fair value - Lower rated redeemable & perpetual: min (book value, fair value)

How is the value of common stocks derived

1. When common stocks are purchased, they are valued at the initial carrying value: actual cost + commission and taxes 2. After purchase, they are valued at fair value. Changes in fair value are recorded as unrealized valuation changes.

How to calculate the value of the bonds

1. When the bond is purchased, it's recorded at actual cost (incl. brokerage and other fees) 2. After purchase, it is valued at adjusted carrying value: - NAIC 1&2: amortized cost - NAIC 3-6: min (amortized cost, fair value)

What does the insurer disclose about discounting in the notes:

1. Whether it uses tabular discounting 2. Basis & assumptions supporting tabular discounts 3. Whether it uses nontabular discounting 4. Basis & assumptions supporting nontabular discounts 5. Whether there has been a change since the prior year of any of the key assumptions that were used to calculate the discount

What questions do the Financial interrogatories contain

1. Whether the financials were developed using an accounting system other than SAP 2. Loans made to senior leadership & other stakeholders 3. Assets that the insurer was obliged to transfer to another party which were not reported as liabilities 4. Assessments other than guaranty fund assessments 5. Amounts due from affliates

What does the Opinion paragraph contain:

1. Whether the opinion is for losses & LAE combined or separately 2. Opinion of the actuary (depend on the level of the booked reserves relative to what has been indicated) 3. Whether the reserves satisfy the insurance laws of the state in which the insurer is domiciled 4. identify the actuary that the appointed actuary relied on the opinion of for a material portion of the reserves covered by the scope 5. Degree of variability or if a reasonable fluctuation can have a material impact on surplus

Stated basis of the reserve presentation:

1. Whether the reserves are discounted 2. Whether the reserves include an explicit risk margin 3. Whether the reserve is gross or net of recoverables 4. Whether the reserve considers the potential for uncollectible receivables 5. Types of LAE covered by the reserve 6. If the opinion is only for a portion of the reserve, the claim exposure that is incorporated by the opinion 7. Anything else that the actuary believes is necessary to describe the reserves sufficiently for the actuary's evaluation of the reserves

Factors that the actuary should consider when there is insufficient historical data:

1. Whether there is adequate data to evaluate the reserves 2. If industry data or another company's data were used, is this data reasonably similar to the company for which the actuary is providing an opinion 3. Whether to provide disclosures about the data used 4. Whether to provide disclosures about the resulting variability & uncertainty

What should the actuary comment on if mass tort exposure exists:

1. Whether there is material exposure 2. The aggregate amount of reserves held 3. The significant variability & uncertainty inherent in the estimate 4. Whether the actuary believes the liability is actuarial lay estimable 5. The difficulties involved in providing an actuarial estimate of these liabilities 6. Whether the liabilities are being handled by a dedicated and experienced claim/ legal unit

List some questions that the actuary may have about the Uncollectible Insurance note:

1. Why is the reinsurance uncollectible? 2. Is there other outstanding recoverable that may also be uncollectible in the future for similar reasons? 3. How long has it taken the company historically to write off the uncollectible reinsurance that had been disclosed in the notes?

List some questions the actuary may have if the insurer has material credit risk exposure to a reinsurer:

1. Why wan't security provided? 2. Are there concerns about the financial health of either the insurer or reinsurer? 3. Was the large amount of recoverables caused by a catastrophe? 4. Are all of the unsecured recoverables concentrated with one reinsurer?

4 questions regarding the Affordability of insurance coverage in era of actuarial premium pricing:

1. Will the changes in the premium structure from the 2012 Act be sufficient to address the solvency concern? 2. What is the feasibility of vouchers for low income policyholder's? 3. What is the best approach to balance the trade off between increasing the NFIP's future income vs making coverage available and affordable? 4. Would privatization of flood risk make insurance more or less affordable?

Where can a user of the financial statements see increased exposure to catastrophic / large events:

1. Writings by state in Schedule T 2. U&IE by line of business 3. General interrogatories, Part 2

Conditions needed to receive run-off agreement accounting treatment:

1. assuming entity is properly licenses 2. contain same limits and coverages as the original contract 3. should not contain any adjustable features, profit sharing or retrospective rating 4. meet the requirements of risk transfer 5. assuming reinsurer financial strength ratings from at least two agencies -> ratings at least equal to the transferring insurer 6. assuming reinsurer responsible for all assessments on the business being assumed 7. only cover liabilities of lines that are no longer actively marketed 8. neither party can cancel the agreement for any reason

Describe assuming company's accounting treatment of retroactive reinsurance:

1. excluded from the existing reserves 2. retroactive reinsurance reserve assumed 3. loss -> write in item "Retroactive Reinsurance Loss" under Other Income 4. consideration received -> increase the assets

List some examples of A&O:

1. fees of adjusters & settling agents 2. fees & salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors (if working in the capacity of an adjuster) 3. attorney fees incurred in determination of coverage

2 components of investment income from common stocks

1. investment income earned (dividends received; change in accrual for dividends declared but unpaid) 2. realized capital gains

What needs to be disclosed in the "Reinsurance Assumed & Ceded" section of the Notes to the Financial Statements:

1. maximum return commission due to reinsurers if all reinsurance cancelled 2. accrual of additional or return commission based on the loss experience

What needs to be disclosed about uncollectible reinsurance was written off during the year:

1. name of reinsurer 2. losses incurred 3. LAE incurred 4. premiums earned

What needs to be disclosed when there is a commutation:

1. name of reinsurer 2. losses incurred 3. LAE incurred 4. premiums earned

How is the Statutory accounting double count the deduction for pre-paid acquisition costs:

1. once as an expense item 2. the second time in the UEPR

Accounting treatment if the assuming insurer receives the premium prior to the effective date:

1. record it as a liability 2. cannot consider it as income until the effective date

Briefly describe deposit accounting for the assuming company:

1. record it as a liability 2. record consideration to be returned -> liability 3. If total losses are valued upwards, record an interest expense

Accounting treatment if reinsurance premium is paid prior to the effective date of the contract:

1. reflect prepaid item as an admitted asset 2. should only be recognized as reinsurance premium on the effective date of the policy

When is a disclosure for unsecured aggregate recoverables required & what must be disclosed:

1. reserves and UEPR > 3% of ceding company's surplus 2. - each reinsurer - the unsecured aggregate recoverable

Briefly describe the ceding company's accounting treatment of retroactive reinsurance:

1. reserves recorded on a gross basis 2. recoverables -> contra liability ("retroactive reinsurance reserve ceded") 3. surplus gain -> special surplus 4. gain shall not be classified as unassigned funds until actual retroactive reinsurance recovered exceeds the consideration paid 5. special surplus adjusted to reflect any change in the ceded reserve 6. initial gain -> write in item (other income) as "retroactive reinsurance gain" 7. consideration paid -> reduce the assets

List some examples of DCC:

1. surveillance expenses 2. fixed amounts for medical cost containment 3. litigation management expenses 4. fees & salaries for appraisers, private investigators, hearing representatives, reinspectors, fraud inspectors (if working in defense of a claim) 5. attorney fees incurred due to duty to defend

Criteria for reinsurance premiums over 90 days overdue to be admitted:

1. the reinsurer maintains UEPR and loss reserves due to the ceding entity 2. the ceding entity is licenses and in good standing

Criteria for funds held or deposited with reinsured companies to be admitted assets:

1. they do not exceed the liabilities they secure 2. the reinsured is solvent

Rule to determine non admitted EBUB:

10% of EBUB excess of collateral. If any of this amount is not anticipated to be collected, should be written off

Non admitted portion of Accrued Retrospective Premium:

10% of the unsecured Accrued Retrospective Premium is non admited

Threshold for an insurer to be defined as having excessive growth

3 year average growth rate in GWP (capped at 40%) exceeding 10%

By when most the RBC report be filed

3/1

When is AOS due:

3/15

Loss sensitive discount factor:

30% for direct business, and 15% for assumed

When does the IEE need to be filed

4/1 following the Annual Statement date

When is Actuarial Report due:

5/1

How is the discount rate to be used in tax calculated:

60 month moving average of the "federal mid-term rates", ending December 1 of the prior AY. Rate is then vintaged.

How long does the actuarial report and underlying work papers supporting the SAO need to be maintained at the company

7 years

What is listed in the Premium Reserve section of Exhibit A: SCOPE:

7. Reserve for D&A unearned premium for long duration contracts 8. Reserve for net unearned premium for long duration contracts 9. Other premium reserve items on which actuary is expressing opinion

Requirement for the "small company" exemption:

< $1M of total direct & assumed premiums written in a CY AND < $1M of total direct & assumed loss & LAE reserves at year end

Formula for Total Investment Gain

= Company's investment gain * investable funds associated with the LOB Where investable funds associated with the LOB = Mean net loss & LAE reserves + Mean UEPR - Mean net agents' balances + ceded reinsurance premiums payable + allocated PHS

Equation for investment gain ratio

= Net investment gain / Total investable assets Where Total investable assets = Mean net loss & LAE reserves + Mean net UEPR + Mean ceded reinsurance premiums payable + Mean policyholders' surplus - Mean agents' balances

Equation for pretax profit

= Premiums earned - dividends to policyholders - incurred loss - DCC expenses incurred - A&O expenses incurred - commission & brokerage expenses incurred - taxes, licenses & fees incurred - other acquisitions, field supervision and collection expenses incurred - general expenses incurred + other income less other expenses

Equation to derive current year's surplus from prior value:

= Prior year's surplus + current year's net income + other surplus changes + additional capital contributions + stockholder dividends

Equation for investment gain on funds attributable to insurance transactions:

= investment gain ratio x funds attributable to insurance transactions for the line Where the funds attributable to insurance transactions for each line = mean net loss & LAE reserves + Mean UEPR x [1 - (prepaid expenses / written premium)] - Mean net agents' balances + ceded reinsurance premium payable

Formula for RBC charge if the equity approach is used:

= min(affiliate RBC x ownership %, book/adjusted carrying value of stock)

Formula for RBC charge if the market valuation approach is used:

= min(affiliate RBC, statutory surplus) x ownership %

R0 charge for Preferred Stock investments in Insurance Subsidiaries

= min(pro rata share of excess RBC, book/ adjusted carrying value of preferred stocks) Where the pro rata share is the share of the total outstanding preferred stock that is owned by the insurer. Excess RBC is the total RBC after the covariance adjustment in excess of the value of the stocks

R0 charge for Bond investments in Insurance Subsidiaries

= min(pro rata share of new excess RBC, book/ adjusted carrying value of bonds) Where the pro rata share is the share of the total outstanding bond value that is owned by the insurer. Excess RBC is the total RBC after the covariance adjustment in excess of the value of the stocks & preferred stocks

Formula for Total adjusted capital

=Surplus - Non-tabular discount (from Schedule P, Part 1) - Tabular discount on medical reserves

Definition of an "insurance contract" under IFRS:

A contract under which one party accepts a significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely effects the policyholder

What does ratio 3 measure

A large change in NWP may indicate a lack of stability

Define premium deficiency reserve

A separate liability that the insurer needs to create if the premium is insufficient to cover losses, expenses & other costs

Define commutation:

A transaction which results in the settlement and discharge of all (or a portion) of future obligations between the reinsurer and ceding company.

List the 8 sections in Reinsurance notes in the Notes to Financial Statements

A. Unsecured reinsurance recoverables B. Reinsurance recoverables in disputes C. Reinsurance assumed & ceded D. Uncollectible reinsurance E. Commutation of ceded reinsurance F. Retroactive reinsurance G. Reinsurance accounted for as a deposit H. Disclosures for the transfer of P&C run-off agreements

List an agency that produces Financial Strength Ratings for life and P&C insurers:

AM Best

Relationship between RTI & AMTI that would produce the optimal tax strategy:

AMTI = RTI * 175%

Alternate Minimum Taxable Income (AMTI) equation:

AMTI = RTI + 75% * Income that escapes taxation

Adjusted Regular Income Tax (ARIT) equation:

ARIT = RIT - prior year's minimum tax creidt

Describe the accounting treatment of novations:

Accounted for as prospective reinsurance agreements: 1. amount paid -> reduction of written or earned premium 2. novated balances -> written off the accounts 3. assuming insurer - amount received -> WP or EP - obligations assumed -> incurred losses

How is Dividends to Stockholders derived

Actual amount paid during the year + change in amount of dividends declared but unpaid during the year

How is Part 4 prior row calculated

Add columns 15, 16, 19, 20 from Part 1 of Schedule P prior row together

How can regulators effectively regulate in a market as big as the US insurance market:

Adopt risk focused approach, where they focus on the greatest risk that insurers are exposed to

What level of reserves does the appointed actuary opining on

Aggregate

Describe "covered agreements":

Agreement between the US and foreign nations that allow non US insurers to operate in the US, subject to the prudential measures that would provide protection comparable to the level of protection provided by state regulation

Formula to derive realized gain when bond is sold:

Amount received - adjusted carrying value

Define commutation agreement

An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the he parties under a particular reinsurance contract.

What is IEE

An exhibit that provides detailed information about the expenses of an insurer. It provides detail about the insurer's profitability by line of business.

Define "loss contingency" / "asset impairment"

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 occur of fail to occur

How does a change in the Provision impact surplus:

An increase in the provision results in a direct decrease to surplus

Briefly describe the Own Risk & Solvency Assessment (ORSA):

An internal assessment of the solvency need based on the risk profile. The entirety of the processes and procedures employed to identify, assess, monitor, manage and report the short and long term risk a (re)insurance undertaking faces or may face and to determine the own funds necessary to ensure that the undertaking's overall solvency needs are met at all times

Define materiality:

An item is defined as being material if it has an impact on the user's decision/ conclusion

Briefly define market regulation:

Analysis/ oversight of insurer's behavior in the market

Explain the implications of the IFRS requirement that insurance contracts that have both insurance and investment features be unbundled and accounted for separately.

As a result, some products, that may be less profitable on a stand alone basis me may need to be modified or discontinued. In addition, some products (eg life insurance contracts) may need to be modified (shortened) to reduce volatility.

What topics does Interrogatory 2 cover:

Asks if the LAE is being defined as DCC and A&O

What topics does Interrogatory 7 cover:

Asks if there are any changes or anything special that the user needs to be aware of if she relies on the Schedule P data to assess the adequacy of recorded loss & LAE reserves

Main purpose of off-site solvency monitoring:

Assess the financial condition of the insurer on an on-going basis, and also to identify & assess current & prospective risks

List another rule listed in NRRA:

Assign the domiciliary state the sole responsibility for regulating the reinsurer's financial solvency

Describe substantially all requirement and provide examples:

Assume virtually all of the insurance risk of the reinsured portion of the underlying contracts - quota share - individual contract that do not have risk limiting feature

Purpose of insurance regulation:

Assure that the future performance promise, to pay a claim, will be fulfilled as needed (protects the public interest)

CWP ratio equation:

CWP claims / total closed claims

How is Part 2 prior row calculated

Calculate Part 3 prior row, reserves as of previous year (Part 2 - Part 3); Part 2 = Part 3 + reserves as of previous year

How is the Industry RBC% derived:

Calculating the ratio of net incurred loss & DCC development during the year (from Schedule P, Part 2) to the net loss & DCC reserves from the prior year. Uses industry data.

Briefly describe Medical Set-Aside Allocation (MSA):

Calls for all parties to a settlement to agree to set aside money to be primary over Medicare, for the period where the individual is eligible for Medicare

Margin needed to compensate the lost of yield as a percentage of premium (assuming premium is paid at inception and taxes are paid midyear)

Capital x [investment yield x corporate tax rate / (1 - corporate tax rate)] / [premium x (1 + investment yield)^0.5]

Why are the regulatory requirements for captives less restrictive than for RRGs:

Captives are wholly owned insurance subsidiaries. If fail, only assets of parent at risk

Accounting treatment of a commutation:

Ceding: 1. Premium -> recovery of paid losses 2. Eliminate reserves ceded Reinsure: 1. Premium -> paid losses 2. Eliminate loss reserves

Why is it important to monitor closure rates

Changes will distort loss projection methods. E.g. an increase in settlement rates will result in higher than average claim payments, which will produce an overstated ultimate loss projection

Excessive premium growth charge formula for reserves:

Charge = Average growth rate factor x 0.45 x net losses & LAE reserves

Excessive premium growth charge formula for NWP:

Charge = average growth rate factor x 0.225 x NWP

Claims frequency equation:

Claim counts (from Part 5) divided by earned premium (from Part 1)

Unaffiliated bonds RBC factors:

Class 1 - Highest credit quality - US gov guaranteed by US gov: 0.000 US gov not guaranteed by US gov: 0.003 All other Class 1: 0.003 Class 2 - High credit quality: 0.010 Class 3 - Medium credit quality: 0.02 Class 4 - Low credit quality: 0.045 Class 5 - Lowest credit quality: 0.1 Class 6 - In or near default: 0.3

Preferred stock RBC factors:

Class 1: 0.003 Class 2: 0.010 Class 3: 0.020 Class 4: 0.045 Class 5: 0.1 Class 6: 0.3

Formula for closure rate:

Closed claim / total reported claims

Briefly describe the purpose of NAIC's Financial Analysis Working Group (FAWG):

Collaborate to work on problems of potentially troubled insurers

Formula for Prepaid Expense

Commission & brokerage expenses incurred + taxes, licenses & fees incurred + other acquisition field supervision x collection expenses + (1/2) x general expenses incurred

What is contingent commission

Commissions that are based on the profit of the ceded business

Purpose of financial reporting

Communicate financial results to the stakeholders

Formula for Adjustment for Company Experience

Company avg development / industry avg development

Formula for the company development factor by line:

Company development factor = sum of incurred loss & DCC from 9 prior AYs evaluated as of the current year / sum of initial valuations of the same AYs Where the losses are pulled from Schedule P, Part 2 (Col 10 & the values along the diagonal). The factor is capped at 400%.

Source of underwriting expense ratio in NWP RBC calculation

Company's actual ratio of other underwriting expenses incurred in the current year to the total net written premium in the current year (capped at 400%)

Procedure to test that it is reasonably possible for the reinsurer to realize a significant loss:

Compare the present value of the cash flows between the ceding and assuming enterprise

Difference between competitive state funds and exclusive state funds:

Competitive state funds: compete with private insurers, may not be last resort Exclusive state funds: only state funds are available, last resort

Define "long duration contracts":

Contracts with terms greater or equal to 13 months where the insurer cannot cancel or increase the premium

Purpose of the preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and offsite regulatory monitoring

Correct problems to prevent insovlencies

Define retroactive reinsurance

Covers liabilities that occurred prior to the effective date of the policy

Define Fidelity coverage

Covers the policyholder for a loss incurred due to the fraudulent act of specified individuals

Formula to populate the right most column of the Prior Years Row of Part 2:

Cumulative paid losses + reserves, where the cumulative paid losses is the right most column of the prior years row of Part 3 and reserves is derived from Part 1: col 24 - (21 - 22)

If there are no random loss fluctuations, what is the equation for cumulative % losses paid at each valuation date:

Cumulative paid losses / cumulative incurred losses

List 3 concerns of nonseriously injured & unimpaired claimants:

Currently unimpaired, although the they may have an x-Ray that indicates pleural changes 1. If do not begin today, may be prevented from recovering damages in the future if serious conditions occur due to the Statute of Limitations 2. If do not file a lawsuit, funds may not be available later 3. Uncertainty about future health, and will require ongoing expenses for medical monitoring

2 types of investment guidelines that are permitted by the NAIC Model Investment Law:

Defined Limits: quantitative limits Prudent Person: a principles based approach, which enables the insurer to develop its own guidelines

How should the reinsurance agreement be treated if it does not transfer both components of insurance risk:

Deposit accounting

Describe Replication (Synthetic Asset) transactions:

Derivative transactions that are made in combination with other investments in order to replicate the investment characteristics of a certain type of investment

Main purpose of Schedule F:

Derive the provision for reinsurance, which is a minimum reserve for the uncollectible reinsurance

Schedule DL of A.S. describes:

Detail about securities lending collateral assets. The purpose is to add transparency about these assets

Schedule DA of A.S. describes:

Detail about the short term investments

List an advantage of Fair Value & one for Historical Cost

Fair value: more accurate (consistent with actual market value) Historical cost: more reliable (objectively verifiable)

Compare Fair Value to Historical Cost:

Fair value: value it can be traded at in the open market Historical cost: purchase price - depreciation

Equation and normal range for Adjusted Liabilities:Liquid Assets

Equation: adjusted liabilities / liquid assets Where adjusted liabilities = liabilities - liabilities equal to deferred agent's balances And liquid asset = liquid asset - investment in parents, subsidiaries, affiliates Normal range: < 100%

Equation and normal range for Change in Adjusted PHS

Equation: change in adjusted PHS / Prior PHS Where change in adjusted PHS = PHS of the current year - changes in surplus notes - capital paid-in or transferred - surplus paid-in or transferred - PHS of the prior year Normal range: between -10% and 25%

Equation and normal range for Estimated Current Reserve Deficiency to PHS

Equation: estimated deficiency / PHS Where estimate deficiency = reserve required - current reserves Where reserve required = premiums earned * ratio of reserves: premium Where ratio of reserves : premium = avg (reserves:premium from prior yr, reserves:premium from 2nd prior yr) Where reserves:premium from prior yr = (reserves from prior yr + 1yr loss development) / premiums earned in prior yr And reserves:premium from 2nd prior yr = (reserves from 2nd prior yr + 2yr loss development) / premiums earned in 2nd prior yr Normal range: < 25%

Equation and normal range for Gross Agents' Balances to PHS

Equation: gross agents' balances in course of collection / PHS Normal range: < 40%

Equation and normal range for Surplus Aid:PHS

Equation: surplus aid / PHS Where surplus aid = ceding commissions ratio x sum of UEPR (non affiliates) Where ceding commissions ratio = reinsurance ceded commissions (including contingent commissions) / reinsurance premiums ceded (to affiliates AND non-affiliates) Normal range: < 15%

Equation and normal range for 2yr reserve development to PHS

Equation: two yr reserve development / 2nd prior PHS Normal range: < 20%

Describe the 10-Q form:

Essentially an abbreviated version of the 10-K

Accounting treatment if ceding commission > anticipated acquisition costs:

Establish a liability equal to the difference between the two. Liability is amortized pro rata over the effective period of the reinsurance agreement.

Accounting action required of insurer if it provides tail coverage at no additional charge:

Establish a policy reserve to ensure the premiums are not earned prematurely

Accounting treatment of earned but uncollected premium:

Establish as direct and assumed written premium. If later determined to be uncollectible => charge to expenses as "net gain (loss) from agents or premium balances charged off"

Purpose of Guaranty Funds:

Established to protect policyholder's from inability of an insolvent insurer to pay claims; and refund a portion of the UEPR

Actuary's major role in income statement

Estimate the amount and timing of payments

Define Type 2 (Nonrecognized Subsequent Events):

Events that did not exist at the accounting date

Define events subsequent

Events that occur between the accounting date of the statement (12/31) and the date at which the statement is issued.

Define "subsequent events"

Events that occur subsequent to the balance sheet date, but before the issuance of the statutory financial statements

Define Type 1 (Recognized Subsequent Events):

Events that provide additional detail on conditions that existed at the accounting date

What topics does Interrogatory 1 cover:

Extended reporting endorsements (EREs) arising from death disability or retirement (DDR). There are six parts: - The first asks whether the insurer offered the endorsement for free ( or at a reduced rate) - The remaining parts are about how the company reports the DDR

RBC charge for Mandatory Convertible Securities

Factor of the asset pre-conversion x Annual Statement value?

RBC charge for Replication (Synthetic) Assets:

Factor of the equivalent investment x Annual Statement value

RBC charge for Miscellaneous Asset:

Factor x book/ adjusted carrying value of assets Where the factor is: 1. Cash, net cash equivalents, other short-term investments: 0.003 2. Admitted collateral loans: 0.05

Describe regulatory forbearance:

Failure to take prompt & stringent action in the face of a potentially trouble firm

List some perils covered under FAIR:

Fire, lightning, windstorm or hail, explosion, riot, aircraft, smoke, and vandalism or malicious mischief Some states: crime, sprinkler leakage, and earthquakes

Purpose of Common Interrogatories section:

Give more details about the company's: 1. operations 2. business practices 3. types of internal and external controls in place

Immediate effect of the SEUA decisions:

Federal legislation now applied to insurance: 1. Sherman Act (1890): prohibits collusion in attempts to gain monopoly power 2. Clayton Act (1914): identified and made illegal practices that lessened competition or created monopoly power - Robsinson-Patman Act: price differences to be justified by reduced operating costs - Prohibit tying (requiring purchase of 1 product to purchase another)

List a few examples of government partnering with private insurer:

Federal: 1. NFIP 2. TRIA 3. Federal crop insurance State: 1. FAIR 2. WC 3. Windstorm plans 4. Residual auto plan

Describe the 8-K form:

Filed to disclose certain material events, including: 1. Change in principal officers or directors 2. Change in the company's certified accountant 3. Entering/ terminating a material definitive agreement

Why is an insurer placed into receivership:

Financial difficulties are so severe that more than supervision is needed

In IFRS 4, under what circumstances can an insurer change its accounting principles:

If that change: 1. Makes the financial statements more relevant to the user's decisions, without being less reliable 2. Makes the statements more reliable, without being less relevant

When does the Dodd-Frank Act authorize the FIO to preempt state measures:

If the FIO believes the state measures: 1. Are inconsistent with covered agreements 2. Would result in less favorable treatment of insurers domiciled in foreign jurisdictions that are subject to covered agreements, compared to insurers that are admitted in the state

When is a Reinsurance Summary Supplement Filing need to be filed

If the insurer answers affirmatively to the interrogatories about the ceded reinsurance

How can a derivative qualify to be a "highly effective" hedge:

If the insurer can demonstrate that a derivative has significantly reduced a particular risk exposure

What disclosures does the insurer need to make about unsecured reinsurance recoverables:

If the recoverables from the reinsurer exceed 3% of surplus (for reinsurers that don't provide collateral), disclose: Name/ Paid losses billed but not yet collected/ Ceded reserves/ Ceded unearned premiums

Intention of self evaluation of the insurance solvency regulatory framework, as part of a Solvency Modernization Initiative (SMI):

Improve the insurance solvency regulatory framework & review international developments for potential use in the US.

Define liability (SSAP 5)

It consists of "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 or event

What does Schedule F include

It contains details of the insurer's prospective reinsurance transactions

Why is IFRS more transparent than GAAP:

It contains significantly more footnote disclosures that explain how the company interpreted & applied IFRS, also provides more information about the estimated amounts.

Why has the 10% charge for reinsurance recoverables been criticized by insurance carriers:

It does not differentiate by the reinsurer strength, or whether the recoverables are collateralized

How is asset concentration factor derived

It doubles the RBC charge of the 10 largest issuers that the insurer is exposed to. The total charge factor (after this adjustment) for each asset is limited to 0.3.

Define net claim counts

It equals direct & assumed counts, unless all of the business is ceded

Define tail coverage for claims made coverage

It extends the reporting period for claims for an additional period of time

Why do reinusreds like the Letters of Credit (LOC) form of collateral:

It is not part of the estate of the insolvent reinsurer, and therefore will not be tied up/ subject to degradation in the event of a bankruptcy

What does Dodd-Frank dictate about placement of non-admitted insurance:

It's only subject to the regulation of the home state

What does increase in the provision for reinsurance indicate and where this is

It's shown in the capital and surplus section of the income statement. This can indicate increased credit risk.

How did the judge respond to the 4 legal challenges that insurers used to oppose the limits imposed by the Florida Legislature:

Judge ruled against all but the last. He did agree that "disproportionate impact" needs to be defined more comprehensively

Amounts recoverable from reinsurers includes:

Just the balances due for the losses that have been paid (the ceding company recognizes recoverables on it unpaid losses by holding the loss reserves net of recoveries)

Explain how a downturn in the economy would impact different segments of the population:

Magnify differences in credit scores among vulnerable populations

Main reason that SAP rules are conservative

Main focus of the regulators is to ensure that the policyholders will be protected

Average claim severity formula:

Net paid loss & DCC (from Part 3) / direct and assumed claims closed with payment (from Part 5, section 1)

Average reported claim severity formula:

Net reported loss & DCC (from Part 2 - 4) / direct & assumed reported counts (Part 5, Section 3)

Can premium deficiencies in one group offset profits in other groups?

No

Describe the trust fund approach:

No fault trust established: claimants meeting asbestos & medical criteria will be compensated. Funded with $140B from corporate defendants, insurers & existing bankruptcy trusts

According to empirical data, is there a relationship between the credit score and frequency/ severity of claims:

No significant difference in magnitude of claims, only frequency: consumers with lower credit scores file more claims

Why are nonadmitted assets not included in the surplus calculation

Non admitted assets are not easily convertible to cash to satisfy the insurers liabilities

Describe why reinsurer expenses need to be excluded from the risk transfer analysis

Not a cash flow between ceding company & reinsurer

Why can't a yield curve be used to discount cash flow in a risk transfer analysis:

Not consistent with the accounting standards, as it would produce different interest rates in each iteration when the timing of cash flow differed, which is against the standard that interest rates cannot vary by scenario

Define "determination year":

Occurs in al years that end in a '2' or '7'.

Define parent, subsidiary, affiliate and control

Parent: entity that directly/ indirectly controls the reporting entity Subsidiary: the controlled entity Affiliate: an entity that is within the same holding company system, or controls/ is controlled by the reporting entity Control: the power to direct, via ownership of voting securities/ contracts/ common management.

What part of Schedule P should be used to determine the loss payment pattern:

Part 1

Formula to populate the right most column of the Prior Years Row of Part 3:

Part 3 2nd right most column + (D&A loss - ceded loss + D&A DCC - ceded DCC)

Briefly describe a "Rehabilitation":

Process of reorganizing an insurer's financial affairs so it can continue to exist as a financial entity, with creditors satisfying their claims from its future earnings.

What does the "internal audit" functional area require that the insurer do:

Produce a report at least annually to the board of directors about any deficiencies of the internal controls & any shortcomings in compliance with internal policies & procedures.

What does the federal Nonadmitted and Reinsurance Reform Act (NRRA) prohibit:

Prohibits a state from denying credit for reinsurance, if the domiciliary state: 1. Has recognized credit for reinsurance, and 2. Is an NAIC accredited state

Briefly describe the Sherman Act of 1890:

Prohibits collusion in attempts to gain monopoly power

Describe the anti-rebating laws:

Prohibits insurers from returning portions of premium and producers from returning portions of commissions to persons who purchase insurance

What types of properties are covered by Beach and Windstorm Plans:

Properties along Atlantic and Gulf Coasts vulnerable to windstorm loss

Briefly describe the FAIR plan:

Property owner unable to get coverage through voluntary market => apply to FAIR plan via authorized agent or broker

Argue for and against the use of credit-based insurance scores in personal lines:

Proponents: 1. Scores are predictive of an insured's future claim experience 2. Necessary tool for underwriting and/or rating Critics: 1. Studies show use of scores disparately impacts certain classes of people 2. Examples: lower income, protected class

List the US Insurance Regulatory Mission

Protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first and foremost, while also facilitating the financial stability and reliability of insurance institutions for an effective and efficient marketplace for insurance products

Purpose of the Company RBC%:

Provide a surplus cushion against adverse development

Formula for Provision for Reinsurance for Authorized Non Slow Paying reinsurer:

Provision = 20% x recoverables over 90 days overdue

Formula for Provision for Reinsurance for Unauthorized Reinsurer:

Provision = Unsecured total recoverables + 20% * recoverables over 90 days overdue + 20% * amounts in dispute

Formula for Provision for Reinsurance for Authorized Slow Paying reinsurer:

Provision = max [ 20% * unsecured total recoverables, 20% * paid recoverables over 90 days overdue]

Describe GAAP treatment of goodwill:

Purchase accounting: assets & liabilities are recorded at fair value. Goodwill is the difference between the purchase price and the fair value of net assets. It is regularly evaluated for impairment (as opposed to amortized)

Describe the differences between RRG and non-RRG captives:

RRG captives: 1. States can charter RRGs under regulations for traditional insurers or captives 2. Regulatory requirement for captives generally less restrictive 3. LRRA provides single-state regulation Non-RRG captives: 1. May provide property coverage, which RRGs cannot 2. Generally cannot conduct insurance transactions in states other than domiciliary

Briefly describe what happens during the "Fact Finding" stage:

Regulators from several states examine the insurer

Define reliable and relevant:

Reliable: the information about an item is representationally faithful, free of material errors, and free of bias Relevant: the item can make a difference in the user's decisions

How is the Dodd-Frank Act a first step in the direction of federal involvement in insurance regulation:

Requires Federal Reserve Board regulate large insurers that have been recognized as systematically significant

Define unassigned funds

Results from the contribution of retained earnings to surplus

Describe the McCarran-Ferguson Act of 1945:

Returned regulation of insurance back to states, as it was "in the public interest"

Briefly describe a market conduct examination:

Review of ways in which insurers do business: 1. Advertising 2. Soliciting 3. Policy issuing 4. Claims handling

Why is R0 excluded from the covariance adjustment

Risk from the insurance subsidiaries is not assumed to be independent. Instead, it is assumed to be directly correlated with the aggregate risks of the insurer.

What approach does the creation of NFIP take:

Risk identification/ risk financing and floodplain management approach that incorporates individual responsibility

What does WP RBC reflect:

Risk that future business may be unprofitable

Describe why profit commissions need to be excluded from the risk transfer analysis:

Risk transfer analysis focuses on scenarios that would generate a loss to the reinsurer -> profit commission is not required

Different net/gross basis for SAP & GAAP

SAP: net basis GAAP: gross basis

RBC charge for Investment Affiliates:

Same as if the insurer owned the investments directly

What happens to Schedule P if there is a change in the intercompany pooling percentage

Schedule P is restated retroactively to reflect the updated pooling percentage

Describe the Balance Sheet

Shows the assets and liabilities as of a certain point in time

Describe the Cash Flow Statement

Shows the cash flows into and out of the firm

Describe the Income Statement

Shows the financial results (income) earned during a period

What is IASB's definition of significant insurance risk:

Significant if, and only if, an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance

What inconsistency should users be aware of when comparing Part 5 data of different companies:

Some companies record counts on a per claim basis, whereas others record them on a per claimant basis

Explain why a distributional shift is likely to have a smaller effect on renewal business:

Some states/ companies only allow use of scores for renewals if it reduces insured's premium

What is unassigned surplus

Surplus that is not assigned to the par value of stock, special surplus funds, surplus notes, or treasury stock

Accounting treatment between statutory & tax accounting in years following the year of loss occurrence:

Tax accounting: investment income offsets the amortization of the interest discount of the reserves Statutory accounting: earns positive investment income

Describe regulatory capture:

Tendency of regulators to side with an interest group

How do the interrogatories help identify if an insurer is using finite reinsurance

The insurer needs to answer an interrogatory that asks if it ceded reinsurance that: 1. Resulted in an underwriting gain/ loss of more than 5% of the prior surplus; or ceded premiums/ loss reserves of more than 5% of surplus 2. Was accounted for as reinsurance (not deposit) 3. Had at least one of the following features: - Duration of at least 2 years and non-cancelable - Limited cancellation provision - Aggregate stop loss coverage - Either party has the right to commute for a reason other than the downgrade in the credit rating of the other party - Ability to report or pay losses less frequently than quarterly - Delayed reimbursements to the ceding company 4. If it has entered into any ceded reinsurance contracts where the ceded premium is 50% or more of the gross premium, or at least 25% of the ceded premium is retroceded back to the insurer

Describe the liability adequacy test:

The insurer needs to assess whether it's insurance liabilities are adequate at each reporting date. This is based on current estimates of future cash flows, including the cost of handling the claims, and any options or guarantees

Define High Deductible policy

The insurer pays the entire loss, and then seeks reimbursement from the insured for the portion within the dedcutible.

Why is the discount rate used in determining the discounted reserves vintaged?

The insurer uses the premiums to buy fixed income securities to fund future loss payments, at the period the loss occurs. The yield of these securities is set at the purchase date.

How should Type 2 Events be accounted for:

These events should not be included in the financials. They should however be described in the note if they could have a material impact to the financials of the firm.

Why should users be concerned if there are large receivables from parent, subsidiary of affiliates

They are usually not as liquid as other assets

How is reinsurance assets impairment treated:

They need to be tested for impairment at the reporting date. Impairment can only be recognized if objective3 evidence suggests that it may not receive all amounts due (the amount must be reliably measurable)

How is the uncollectible reinsurance written off

They need to be written off as an expense

3 reasons that insurers may enter into Portfolio Reinsurance arrangements:

They want to: 1. Exit a certain type of business 2. Remove the risk/ uncertainty associated with the liability off their books 3. Obtain surplus relief (via the discounted premium)