CAS Exam 6

CHASBESTOS. Asbestos Exposure in Future

1) Due to previously manufactured products still in use 2) Asbestos dust in environment from previous use 3) Erosion of deposits in asbestos bearing rock

CHMAYER. Exempt Commercial Buyer

1) Has qualified risk manager 2) Paid over $100k in P&C premiums in last yr 3) Net work > 20M, revenue > 50M, > 500 employees, and in municipality with pop > 50k

CH22/23. GAAP Fair Value

Price at which orderly transaction to sell asset or tfer liab would take place between market participants at the measurement date under current market conditions.

CH1. Statutory Accounting Principles

Princ/Pract prescribed or permitted by insurer's domiciliary state regulators.

CH5. Principle-based vs rule-based

Principle describes a general approach that must be interpreted. Rule describes specifically what must be done.

CH25. Solvency II

Principle-based solvency regulation used in Europe. Links req capital to specific risk profile.

CHGovIns. Details on why Gov Fills Unmet Insurance Need

Private industry lacks capacity to subsidize/profit on certain risks. Government fills supply gaps via tax.

CH4. Definition of a Liability

Probable sacrifices of economic benefit arising from present obligations of a company to transfer assets or provide services to other entities in the future, as a result of past events.

CHSSAP5. Likelihood Definitions

Probable: likely Reasonably Possible: chance is more than remote, but less than probable Remote: low chance

CHPreamble. Definition of Accounting

Process of accumulating and reporting financial information about an economic unit

CH25. Internal Audit Functional Area

Product report at least annually to board on any deficiencies of internal controls or compliance with internal policy. Auditors needs to have unrestricted access to info/staff

CH1. SEC Mission

Protect investors, maintain fair, orderly and efficient markets, and facilitate capital formation.

CHWiening. Medicaid Details

Protection for low income groups who pass means test. Covers hospital services, physician services, etc.

CH25. Solvency II SCR

Protects against 99.5% VaR for the year. 1) Non-insurance assets valued using IFRS 2) Reinsurance assets valued same was as insurance liabs

CH10 Purpose of Notes to Financial Statement

Provide additional qualitative or quantitative information that enhances picture of financial condition Very relevant notes for actuaries - 1) Reinsurance, 2) Changes in incurred L&LAE, 3) PDR, 4) Discounting unpaid L&LAE reserves, 5) asbestos/environmental reserves Less relevant notes for actuaries - 1) summary of significant accounting pols, 2) Events subsequent, 3) Intercompany pooling, 4) Structured settlements, 5) high deductibles

CH15. Schedule P Purpose

Provide details about L&LAE Reserves

CH14. Schedule F Purpose

Provide details of insurer's prospective reinsurance transactions (not including retroactive), resulting in a "provision for reinsurance".

CH18. Purpose of IEE

Provide financial information on a LoB basis. Must be filed 4/1 following the AS date.

CH19. R4 Reserve Base RBC - Adj for Inv Inc

Provided by NAIC assuming 5% interest and certain payment patterns

CH1. Codification of SAP

Provides common set of principles that ind. states can follow to ease regulatory burden on companies/promote consistency. Probably published in the NAIC Accounting Practices and Procedures Manual.

CH 14. Ceded Reinsurance (Schedule F Part 3)

Provides comprehensive list of ceded balances by reinsurer. Lists authorized, unauthorized (unlicensed in insurer domiciliary state), and protected cells

CHCOPLFR. Relevant Comments Section Purpose

Provides context around the actuary's justification and the Opinion. Most valuable section of SAO.

CH 8/9. Exhibit of Net Investment Income

Provides details by asset class. a) Differentiates between income earned (accrual) and income collected ($ flow). b) Deductions for investment expenses and other costs

CHSSAP62. Amounts withheld: Ceding company (Deposit funds???)

Record as "funds held by entity under reinsurance treaties." Interest due recorded as write-in "miscellaneous income".

CHSSAP62. Run-Off Agreements: Accounting for Reinsurer

Record tx in same LoB as ceding company, and same level of detail

CHSSAP53. PDR

Recorded as liab when anticipated L&LAE, Comm & other acq, maintenance costs > UEPR. Must disclose difference. Make sure to group business in same way policies LoB. Deficiency in one LoB cannot offset profits in another.

CHSSAP53. Advance Premiums

Recorded as liab. Not considered income until due.

CHSSAP62. Ceded Reinsurance Payable: How it's accounted

Recorded as liability. Can be deducted from amounts owed from reinsurer.

CHSSAP53. Addt'l Prem Charged

Recorded on effective date of endorsement/change.

CH10 Uncollectible Reinsurance

Recoverables written off during year because considered uncollectible. Written off as expense.

CHSSAP62. Assumed Company: Premium before due date/after eff date

Reduce the asset "deferred but not yet due"

CHIRIS. NWP and Ceding Commissions

Reduced NWP and stable GWP may => trying to increase cash flow from ceding commissions. Look at Surplus Aid (Ratio 4) to see if true.

CH1. Acceleration of Income for Tax Purposes

Reduction of unearned premiums and discounting of loss reserves.

CH19. Purpose of Sq Root Rule

Reflect diversification among risks in RBC formula (assuming risks are independent). Assume R0 dependent with risk of insurer.

CH22/23. Deferred Tax Assets (DTA)

Reflect temporary differences between accounting and tax treatment of assets and liabs. E.g. tax accounting discounts reserves, but SAP doesn't. DTA recognizes future reduction in taxable income.

CH19. R2 Concentration Factor

Reflects diversification. Doubles RBC Charge of 10 largest (based on total fixed income/equity) issuers of exposure.

CH15. Schedule P, Part 5 Overview

10 years direct claim count history, by AY for some LoBs.

DOI and Determining Receivership

DOI will determine need for liquidation, receivership or rehabilitation

CHFeldblumStatIncome. Taxable Income

EP - IL - Exp + Inv Inc Note you can compute pieces using Direct or Indirect methods for Tax Accounting

CH 8/9. UW Income

EP - IL - UWExp

CH15. Part 2 Hindsight Tests

Identify anomalous loss dev by LoB or AYs. Can compare to prior reserves and prior surplus.

CHFeldblumStatIncome. Proration Provision

Insurer adds 15% of tax-exempt income is added to taxable income (1986 tax reform)

CH13 Schedule T Footnote

Insurer has to allocate by geographical location, and insurer must describe the basis for the allocation in footnotes.

CH19. RBC Common Stock Formula (Equity)

Min(RBC * Ownership,Book/Adjusted Carrying Value of Stock)

CH19. RBC Common Stock Formula (Market Val)

Min(RBC, Stat Surplus) * Ownership %. Also an additional R2 component.

CH14. Amounts in excess of Provision for Reinsurance

Record amount on IS by "reversing accounts used to establish reinsurance recoverable"

CH19. Collateral Accounting Choices

Record as 1) Investment schedules correspond to collateral 2) Schedule DL, Part 1 3) Off-BS

CH5. Adv of principle-based and rule-based accounting

Rule: Easy to understand and audit Principle: More adaptable to changing business environments.

CHIFRS. IFRS &SAP

Since SAP is based on GAAP with NAIC oversight, IFRS replacing GAAP may imply NAIC use IFRS rules.

CH15. Claim vs claimant

Some companies may use claimant instead of claim, so possible inconsistency

CHRAND. Consequences of Daubert

1) Judges closer scrutiny resulted in increase proportion of excluded evidence 2) Summary judgments more frequently requested and granted

CH22/23. Purchase GAAP Accounting (P-GAAP)

The GAAP system for business combinations. Owned company A & L valued at Fair Value.

CHKlann. Commutation Distortions for Re

1) Jump in paid losses 2) Ultimate loss dec purely due to commutation price being lower than reserve 3) Jump in claim closure count

CH14. Certification Considerations

1) Jurisdiction 2) Financial position 3) Capital and Surplus 4) Regulatory History 5) Financial Strength Ratings

CHWAGNER. First Rate Regulatory Statute

1) Kansas Superintendent of Insurance - excessive or inadequate 2) Upheld in German Alliance Insurance vs Lewis

CHSSAP55. Booking an insured event

1) L & LAE recognized as expense 2) Establish liab for unpaid L&LAE. Recognize charge to income.

CH 8/9. Bond realized capital gain (loss)

1) Realized gain on sale/maturity 2) Other adjustments (?) a) Foreign exchange gain on disposal b) Other than temporary impairments

CHASOP43. Next Steps Post Estimate

1) Reasonableness of estimate 2) Multiple components - consistency 3) Presentation (point estimate, range, etc)

CHFREIHAUT. Expected Reinsurer Deficit (ERD)

ERD = Probability of (NPV UW loss to reinsurer) * Avg Severity (UW loss) If > 1%, assume risk transfer exists

CH6/7. EBUB

Earned But UnBilled - Premiums estimated to be earned once the policy ends and an audit is performed. EBUB premiums must be reliably estimable in the aggregate.

CHKUCERA. Credit Scores and the Economy

Economic crises causing job loss and dropping asset values lead to increases in premiums

CH18. Mean Agents' Balances

Money owed to insurer but not paid by the policy holders or agents yet. Included in surplus calculation, but not investable.

DOI and Security Monitoring

Monitor sale of stocks, bonds, real estate and mortgaged loans

CH19. Off-BS & Other Items

Off-BS items are not included in FS, but can still create risk. Disclosed in Notes to FS and Gen Interrogatories

CHASOP43. External Conditions

Only consider relevant conditions that would be known by another qualified actuary working in the same area.

CH14. Assets pledged / Collateral held in trust

Other forms of collateral in control of reinsurance company

CHSSAP62. NFIP Overview

Premiums set by FEMA. Insurers perform UW, premium collection, claim payments, admin and tax payments

CHASOP41. Actuarial Report

Prepared when actuary believes A Comm is relied upon by a user. Must state findings, and identify methods, assumptions, data.

CH4. Balance Sheet

Presents A and L as of a specific date.

CH4. Cash Flow Statement

Presents all operational payments or receipts strictly from a cash perspective. The timing is not related to when assets or liabilities are recognized.

CH4. Income Statement

Presents net income (net loss) during a specific time period (usually using revenue and expenses).

CH 14. Schedule F 2012 Changes

1) Added new Part 6 2) Shifts original parts 6-8 to 7-9, respectively

CHCOPLFR. Insufficient Data Sample Wording

"Certain critical assumptions on which company relied to estimate reserves were based on external industry data sources" "Company started in 201xx" "These data re relevant to the operations of the company. The uncertainty has increased by using this data" "No opinion formed based on a lack of sufficient historical experience on which to be reliable. No external data"

CHCOPLFR. Relevant Comments Paragraph

"Extraordinary loss reserve strengthened caused exceptional values for NAIC IRIS Test regarding BLAH." "No exceptional values for NAIC IRIS tests observed"

CHHamilton. Assigned Risk Plan

1) Administered by governing board repping licensed companies 2) Applicant gets rejected, then they apply to the ARP, who assigns to an insurer. That insurer responsible for premiums and losses, and claims. Voluntary insured required to subsidize assigned risk drivers. 3) May be limited to liability only / minimum limits. But can purchase all coverages 4) RATES UNIFORM FOR THE STATE

CH15. Schedule P Part 2 and 4 Disc

1) Data is gross of discounting

Licensing Regulation

1) Domestic - often required to place home office in state and provide access to accounts. 2) Foreign & Alien

CHCOPLFR. SAO Scope Paragraph

"I have examined the actuarial assumptions and methods used in determining the reserves listed in Exhibit A" "In forming my opinion on L&LAE reserves, I relied upon data prepared by BLANK" "I evaluated that data for reasonableness and concistency" "I reconciled that data to Schedule P, Part 1 of the AS" "My examination included such review of the actuarial assumptions and methods used and such tests of the calculations as I considered necessary" "I am part of an intercompany pool and the data was reconciled via XYZ. The pooling arrangement is as follows: BLAH"

F Surplus. Adkinson & Dallas Formulae

"Insurers required to invest in relatively low risk assets in order to protect insurers" - investment constraint. Total cost of holding capital = DT CoC + Cost of safe investments = AD DT CoC

CHCOPLFR. Opinion Paragraph

"The opinion is for L&LAE or L separately from LAE" "A. Amounts meet requirements of insurance laws" "B. Amounts are computed in accordance with accepted standards and principles" "C. Amounts make a reasonable provision for all unpaid L&LAE obligations under contract terms" "D. Make reasonable provision for UEP for long duration contracts" "Reserve is subject to high degree of variability because BLAH" Give an (qualified) opinion on the reasonable/deficient/redundant amount of the booked reserve as compared to the indicated reserve range.

CHCOPLFR. Sample wording for excessive development

"company had 1-yr adverse development in excess of 5% of surplus in 3 of past 5 years" "Exceptional values occurred in 2008 to 2010 and resulted from strengthening in loss reserves made by management to reflect unexpected trends in asbestos and environmental claims on excess liab pols written X to Y" "In 2011 the company entered into retroactive reinsurance agreement whereby 100% of this run-off business is ceded" "Going forward, this reinsurance will mitigate impact of adverse development"

CH18. Profit

(Pretax Profit Excl Inv Gains + Inv Gains) / EP

CH 8/9. Hedge Accounting

* If a risk exposure is significantly reduced by derivative ("highly effective" hedge), then the derivative receives same accounting treatment as hedged asset E.g. interest rate swap to effectively hedge bond portfolio. Can record the swap on amortized basis and offset the bond portfolio value changes.

CH19. RBC Bond Formula

**Only if Total RBC > Value of Common&Pref Stocks RBC = min(Pro rata share of excess RBC, book/adjusted value of bonds) Pro rata share = % of bond value owned by insurer

RBC Preferred Stock Formula

**Only if Total RBC after Cov Adj > Value of stocks RBC = min(Pro rata share of excess RBC, book/adjusted carrying value of preferred stock) Pro rata share = % of total outstanding pref stock owned by insurer

CH14. LOC Adv/Disadv

+ Reinsured favors since bank is not harmed by reinsurer insolvency - Expensive for reinsurer to fund (reduction to line of credit and subject to large fees)

CHCOPLFR. Data Testing Process

- Done when important data has material influence opinion 1) Insurer selects Appointed Actuary, provides company data (subject to auditor's testing process) 2) Auditor gets scope and designs testing procedures. Know which data is significant 3) Actuary requests necessary data for reserve review. Identify to auditor which data is significant.

CHPORTER4. Executive Branch

- Enforce state insurance code - Adopt regulation resulting in administrative law - Issue bulletins/circulars about their policies - The Attorney General provides legal advice and opinions, and enforces state criminal laws

Insurance Companies can Impact Insurance Regulation

- Insurers are experts in their areas - Might lobby state legislatures and departents - Testify about issues that can impact the industry

CH22/23. SAP Accounting Hist Changes

- Originally based on GAAP, with mods of conservative view focused on solvency - Main difference due to intended users

CH14. Certified Reinsurer Ratings

1 to 6. Higher rating means 1) insurer has lower provision and 2) reinsurer does not need to post as much collateral.

CH19. RBC Off-BS Formula

1% to each Off-BS item (except securities lending program, which gets .2%)

CH 8/9. Schedule DB details

1) # of contracts for derivative 2) Notional amount 3) Original trade and mat/exp dates 4) Transaction price 5) Current price 6) Information about item hedged

CH21. L&LAE Reserve Adequacy: Referenced Sources

1) 5-yr hist data exhibit: shows loss dev 2) Notes to the Fin Statements incl management's comments on changes to IL. 3) Sched P, 2-4: data for reserve adequacy tests 4) Sched F, 3 (&Notes): can examine reinsurer strength and look for reins recs that are unsecured/uncollectible/in dispute

Receiverships

1) A type of bankruptcy when the IC becomes receiver 2) IC plans how to settle obligations via the assets 3) Complex activities among courts, IC, other parties

CHSSAP62. Novations

1) Accounted for as prospective reinsurance agreements 2) Novated balance written off accounts originally recorded 3) Assumer reports received amounts as WP/EP, and obligations assumed as incurred losses

CHIFRS. Implications of moving to IFRS

1) Accounting changes 2) Capital Requirements 3) Product modifications

CH30. FIO Powers

1) Act like national regulator for purpose of negotiating contents of ComFrame. 2) If treatment inconsistency between US/Foreign companies

CH14. Schedule F Actuary Commentary

1) Actuary comments on reasonableness of L&LAE reserves (incl assumed business) 2) Collectability on reinsurance recoverables (look at recent reg action / accounts overdue > 90d / amounts ceded and collateral held by insurer) 3) Amount of reserves from participation in pools.

CHASOP41. Disclosure List

1) Actuary responsible 2) Date and subject of document 3) Intended users of report 4) Scope and intended purpose 5) Acknowledgement that qualified 6) Cautions about risk/uncertainty. 7) Limitations/constraints on use of results 8) Conflicts of interest 9) Information relied upon (data, methods, etc). Disclose the extent of reliance too. 10) Evaluation Date 11) Subsequent event a) Material and known between info date and report date, and cannot revise report in time.

CH14. Reinsurer Groups in Schedule F Part 1

1) Affiliated a) US Intercompany Pooling b) US Non Pool c) Other (Non US) 2) Other US Unaffiliated 3) Pools & Assoc a) Mandatory Pools b) Voluntary Pools 4) Other Non-US Insurers

Deputy Liquidator

1) Agent for IC who is tasked with freezing insurer liabs, and converting the assets to cash 2) Often in court dealing with lawsuits from creditors 3) Conflicts with other state regulators and guarantee funds 4) Yields high admin expenses that reduce assets

Licensing Producers

1) Agents/brokers must pass exams and pay fees 2) Subject to continuing ed requirements

CHCOPLFR. Rules on Intercompany Pooling @ 100% Lead/0%

1) All companies submit pooled opinion listing description of pool, ID lead company, all companies 2) IRIS ratios/risk of material adverse deviation comments refer to total pooled risk and surplus of leading 3) Exhibit A&B of each company in pool represent it's share of pool. For non-leads, attach A&B of lead. 4) SAO refers to aggregate pool. File with AS of each company. 5) AOS of non-lead include statement they are 0% participant

CHSSAP62. SLOC Conditions

1) All listed banks on LOC are qualified/meet NAIC SVO approved bank listing 2) Severally and not jointly liable 3) Specific % for each assuming bank are listed in LOC

NAIC Accreditation - Successes

1) All states enacted laws to bring them closer to compliance 2) Some critics say it's better to have federal oversight

CH18. Steps to allocate investment gain to line

1) Allocate surplus to line 2) Allocate ceded reinsurance premiums payable to line 3) Calculate company's IGR 4) Calculate UW Inv Gain 5) Total Investment Gain 6) Calc investment attributable to capital & surplus

CH18. IEE Parts

1) Allocation of other UWE/LAE to Expense Cat and to Expense Class 2) Allocation of pretax net profit by LoB 3) Allocation of pretax profit by LoB

CH18. IEE Part 3

1) Allocation to LoB (Direct) 2) Inv Gain excluded from the profit

CHSSAP65. Structured settlements disclosures

1) Amount of reserves no longer carrying because purchased annuity with claimant as payee 2) How contingent liable for liabs 3) Agg annuity value from a life insurer > 1% of surplus. Disclose name, location, and annuity value.

CH10 Notes for Change in Incurred Loss & LAE

1) Amount of the change 2) Segments/lines that led to change 3) Reason for change

CHSSAP62. Accounting for Prospective Reinsurance

1) Amounts paid for prospective reinsurance are reported as REDUCTION TO PREMIUM 2) Changes to reinsurance recs recorded as changes to incurred losses 3) Reinsurance recs on loss payments is admitted asset 4) Reinsurance recs on unpaid losses is recognized by REDUCING RESPECTIVE RESERVES

CH14. BS Which AS Accounts from Schedule F?

1) Amounts recoverable from reinsurers (only on the paid L&LAE). Unpaid recoverables are reflected in the loss reserves. 2) Reinsurance payable on paid L&LAE (payable the ceded losses from assumed business) 3) Funds held by co under reins agreements 4) Prov for reins

CH10 Structured Settlement Accounting

1) Annuity recorded as paid loss 2) Closes claim

CHCOPLFR. Exhibit B Items

1) Anticipated net S&S 2) Nontabular discounting 3) Tabular discounting 4) Net reserves for company's share of pools 5) net reserves for asbestos & environmental 6) CM pol tail coverage reported as UEPR and as loss reserves

CHMAYER. DF Info Collections

1) Any insurer (not small) can be asked to submit specific data 2) FIO must first look to regulators for it 3) Any confidentiality agreements are maintained 4) Can subpoena for information if info can't be obtained from regulators

CHSSAP62. Reinsurance Disclosures: Part 3

1) Any run-off agreements? Disclose description, consideration paid, and liabilities transferred 2) Any deposit accounting, disclose 1) description, and 2) any adjustment of original deposits

NAIC Post-MF Act Actions

1) Approved two model rate regulation bills to 1) Ensure sound rates, and 2) allow coop in setting rates, if it didn't hinder competition Not all states adopted model laws

CHIRIS. Chg in Net Writings Considerations

1) Are assets properly valued and liquid to meet cash demands 2) Are reserves adequate? Look at Ratios 11, 12, and 13, and Sched P.

CHCOPLFR. Reserve Presentation Basis

1) Are reserves discounted 2) Do reserves include explicit risk margin? Basis of such? 3) Reserves gross/net? 4) Reserves consider potential for uncollectable receivables? 5) Type of LAE covered by reserve

CH18. Interrogatories - No 4

1) Are there any items in IEE requiring special comment or explanation? 2) Are items allocated to LoB in Part 2 and 3 using methods not defined in instructions? 3) If yes, explain

CH19. R0 Determinants

1) Asset Class 2) Type of subsidiary 3) Whether Subsidiary is subject to RBC (otherwise excluded from R0)

CH19. P&C RBC Formula Risk Groups

1) Asset Risk 2) Underwriting Risk 3) Covariance Adjustment

CH11. Gen Int Part 1 Investments Section

1) Asset/Investment decisions 2) Security lending programs/collateral 3) Hedging programs 4) Mandatory convertible stocks/bonds 5) Compliance with NAIC PPM

CH14. Schedule F Parts List

1) Assumed Reinsurance - Supp 2) Portfolio Reinsurance - Supp 3) Ceded Reinsurance - Supp 4) Aging of Ceded Reinsurance - Prov for Re 5) Unauthorized Reinsurance - Prov for Re 6) Overdue Authorized - Prov for Re 7) Slow Paying Authorized - Prov for Re 8) Restatement of BS

CHSSAP62. Contracts with no specific due date: Rules

1) Assumed due 30 days after a) date ceding entity notified of the premium or b) date assuming entity books premium

CHSSAP62. Assuming Company Accounting

1) Assumed retroactive reinsurance excluded from existing reserves. Recorded as liability called "Retroactive Reinsurance Assumed" 2) Income bucket is write-in item called "Retroactive Reinsurance Loss" 3) Consideration received increases assets

CHSSAP62. Run-Off Agreement Accounting: Conditions

1) Assuming entity properly licensed 2) Agreement has same limits/coverages as original contract 3) No adjustable features, profit sharing, or retrospective rating 4) Meet requirements of risk transfer 5) Assuming reinsurer must have financial ratings from at least 2 agencies, must >= rating for ceding company 6) Assumer responsible for all assessments on business being assumed (e.g. guarantee fund assessments) 7) Agreement must only cover liabs of lines not actively marketed 8) Neither party allowed to cancel for any reason

CHGovIns. Details on how Gov can be more efficient than Private Industry

1) Assuming lower cost possible, can more quickly penetrate market 2) Keep in mind the savings may be overstated since other government departments may be sharing a portion of the cost.

ASOP20: Disclosures

1) Assumptions for selected discount rate & support 2) Diff b/w disc. and undisc. reserves 3) If disc. reserves include risk margin (and basis for it) 4) Sig. limitations that had material impact 5) Accounting, valuation, review dates 6) Sig. risk in future payment timing 7) Law imposed assumptions 8) Reliance on other sources 9) Deviation materially from ASOP 10) Basis for a range if range is provided 11) Any changes in assumptions/procedures that have material impact. and the reason for the change (no need to quantify change)

CHFeldblumRating. Rating Agency Capital Requirements

1) BCAR adds some more risk groups - interest rate, asbestos/pollution, and cat risk 2) BCAR adds more weight to written premium risk vs reserve risk 3) BCAR uses 1% EPD ratio - expected adverse development over market value of reserves is only 1% of market value. 4) BCAR heavily weighted toward underwriting risks

CHFeldblumRating 5 STeps of the Interactive Rating

1) Background research by rating analyst and data submitted by insurer 2) Interactive meetings between company and ratings analyst 3) Lead analyst prepares rating proposal and insurer submits additional data 4) Ratings committee decides on a final rating after lead analyst presents proposal 5) Rating is published

CH4. Primary financial statements

1) Balance Sheet 2) Income Statement 3) Statement of capital and surplus 4) Statement of cash flow

CH21. Annual & Qtrly Fin Statements & Schedules

1) Balance Sheet Strength: Provide regulators with a view of areas that can impair solvency, like a) L&LAE reserve adequacy, and b) UEP reserve adequacy 2) Earnings Potential

Legislative Influence of Noninsurance Laws

1) Banking 2) Contract 3) Premiums 4) Fraud 5) Investments 6) Lobbying

Liquidation

1) Bankruptcy proceeding in which assets can't pay all creditors 2) Creditors are prioritized and paid 3) Receiver can a) transfer all business to other insurance companies, or b) sell assets and terminate the business 4) If insurer not found to take over the business, state guarantee fund will provide limited coverage for remaining pol holders

ASOP20: Recommended Practices

1) Be aware of context of reserve use (e.g. booked vs internal only) 2) Uncertainty in ranged estimate for discounted reserve may be different from uncertainty in same for undiscounted reserve 3) Payment magnitude and timing of future payments must be projected by actuary. (sum of future payment amounts should reconcile with unpaid loss reserves) 4) Assumptions&Considerations used in payment timing estimates should be same as used in full value reserves. They should be reasonable. They should be consistent with future expected internal/external conditions 5) Actuary should consider the sensitivity of the timing of payments to different assumptions

CHWiening. Social Security Survivor Benefits

1) Benefit goes to dependents if worker currently/fully insured upon death 2) To unmarried minor children, unmarried disabled adult children, spouse at any age caring for dependent under 16, 60+ spouse if fully insured 3) Whopping $255 paid to an eligible surviving spouse

CHGovIns. Crop Insurance Evaluation

1) Bills had to be passed to cover uninsured losses - so not enough penetration 2) Farmers felt lack of coverage 3) Opponents encouraged overproduction 4) Fed eventually rebalanced UW risk and improved coverage (2000 and 2005) 5) Fed rewarded coverage with other farm benefits (2007)

CHASBESTOS. Litigation Points

1) Borel v Fibreboard - manufacturers strictly liable for failure to communicate dangers 2) Many class action suits in pro-plaintiff courts 3) Inefficient litigation (nonmalignancy cases/fraud - RAND)

Pre-1944

1) British Crown charters 2) 1752 - first US property insurer protected Fire 3) 1972 - PA first state to charter insurers. Most other states did by 1997. 4) Early 1800s, regulations for competition, consumer protection, and solvency developed. 5) Regulations developed per State 6) Some laws passed to prohibit insurers from other countries, and protect domestic insurer

CHMAYER. Broker Due Diligence and DF

1) Broker doesn't have to perform due diligence if selling to exempt commercial purchaser 2) Broker must inform the admitted market is "better", and receive rejection in writing

Legislative Oversight

1) Budget via Performance Review 2) Framework of legislation 3) Regulators periodically submit to scrutiny of legislature via a) annual reports, b) performance reviews, and c) audits 4) Audits of solvency of insurers in state

CHFREIHAUT. Some Reasonably Self Evident Concepts

1) CAS Working Party recommends a) aggregate limits no less than one per occurrence limit or twice premium b) No ceding commissions c) Rate on line under 500% (= prem / limit)

CH19. R4 RBC Excessive Prem Growth Notes

1) Calc performed on group basis so not distorted by realignment of business 2) Business acquired/divested as a "shell" is only included in calc if liabilities are retained 3) Servicing carriers of invol pools can exclude WP from pools (no control over assignment of risk) 4) Calc to derive average growth rate uses as many years as possible (up to 4) 5) Insurer in first year must assume 40% average rate 6) If no GWP, use 0 rate

CHIFRS. Risk Margin Recommendations

1) Calculated using consistent methodology over life of contract 2) Calced using consistent assumptions to those made in calc of the liab 3) Consistent with sound insurance pricing 4) Vary by product to reflect difference in risk

CHFeldblumInvStrat. Munis and Corp Bonds - Reasons Munis have Higher Yield

1) Callability 2) Liquidity - less liquid 3) Tax legislation (??)

NAIC Support and Service Office - Database Maintenance

1) Can be from claims handling, advertising and marketing, or producer licensing a) Can prohibit state violators from licensing in other states b) Can compile financial data for solvency checks and controls

CH21. Fin Health Tools Uses

1) Can be used as support for further investigation 2) Several tools in combination can provide early warning of high risk insurers

CHFREIHAUT. RTA and Pricing Assumptions

1) Can help select parms for small/immature books. 2) Appropriately priced contract helps deduce expected losses and payment patterns, as well as appropriate risk load. 3) Pricing assumptions also reflect market risk (hard/soft cycles), and this should not be impacting a simulation for RT. 4) Freihaut says use actual data that led to pricing assumptions.

IC Influence

1) Can increase attention on insurance regs by having good relationship with state legislature 2) Can encourage large budget 3) Is commissioner just a stepping stone position to a political career?

CHRAND. Daubert Expert Testimony Considerations

1) Can it (has it) be tested? 2) Subject topeer review? 3) Rate of error? 4) Existence of maintenance standards controlling the particular technique's operation 5) Generally accepted in scientific community 6) others

CH13 Schedule T Interest to Actuaries

1) Can see where business is written 2) Look for changes in geographical exposure 3) Can help derive a weight to apply to industry factors from each state

CHIFRS. Prohibition of Offsetting

1) Can't offset liabs against related assets 2) Can't offset income/expense from reins contract against expense/income from insurance contract

CHGAO. Regulation and Non -RRG Captives

1) Captives must be licensed in all states it does business 2) Must follow the NAIC licensing process

CH19. R2 Concentration Factor Mechanic

1) Categorize assets into R1 and R2 by issuer 2) Calc RBC charge for each aggregate asset 3) Limit total asset charge factor after the adjustment to .3

CHFeldblumRating. Post '08 Crisis Review of Weighting of RBC Risk Charges

1) Cats, equity, and financial derivatives are huge risk 2) Reserve adverse development is low risk 3) Asbestos risk is high 4) Reinsurance recoverable risk is low

CH10 Retroactive Reinsurance Accounting

1) Ceded reserves are negative write-in item in BS 2) Ceded Reserves - Premium Paid = Other income in IS or Special Surplus in BS.

CH22/23. GAAP Retroactive Reinsurance

1) Ceded reserves treated as reinsurance recoverable asset 2) Gain is deferred, so no immediate income or surplus benefit 3) gain "amortized over time" a) if payments from reinsurer are reasonably estimable, "interest method" b) else amortize via portion of actual recoveries to estimated total recoveries

CH10 Change in IL & LAE - Importance of Note

1) Changes can distort current year's UW income 2) Recurring material changes may indicate there are issues with reserving process. User can refer to 5-yr hist Exhibit.

CHWiening. Social Security Retirement Benefits Details

1) CoLA included 2) Early retirement - 20% reduction from 62 to 65, or 30% reduction from 62 to 67 3) Get 5% to 8% delayed retirement credit 4) Can be paid to worker age 62+, spouse age 62+, unmarried minor children, unmarried disabled adult children, spouse at any age if caring for dependent under 16

CHMAYER. FIO Responsibilities

1) Collect info 2) Monitor insurance industry 3) Make recommendations on improving insurance regs

CH 6/7. Surplus Common Components

1) Common capital stock - par value on stock issued outstanding. 2) Gross paid in & contributed surplus -excess of sale price over par value when insurer issues stock 3) Unassigned funds - contribution of retained earnings to surplus. Note mutual insurers surplus consists primarily from unassigned funds.

CHCOPLFR. Actuarial Report Purpose and Scope

1) Communicates actuary's professional conclusions and recommendations 2) Documents analysis underlying opinion Due 5/1, kept in-house and available to regulators for 7 years. Not public and has proprietary information.

CH11. Gen Int Part 1 Gen Section Insights

1) Company may lack discipline if licenses are suspended or company is noncompliant 2) May leveraging commission to maintain/grow business

CHIRIS. GWP:PHS Considerations

1) Compare to NWP:PHS. If large diff, may be heavy reliance on reinsurance. 2) LoB: long tail lines usually have lower ratio because harder to estimate losses 3) Profitability of insurer w/adequate reinsurance cvg => sustain higher ratio and has incentive to do so. 4) % of assumed vs direct: less control on assumed business => need more surplus protection

CHHARRINGTON. Adverse effects of Binding Rate Floors

1) Compete through things like service, which is less efficient 2) Slower expansion of efficient firms 3) Higher prices

CHWAGNER. O'Mahoney Committee (1958)

1) Competition should be prime regulator of insurance 2) Rates formed in concert seriously threatened natural competitive market structure 3) Reconsider the "file and use" system

CHKUCERA. Economic Crisis and Individual Premium Level

1) Concern that credit score could change relative risks 2) Competition motivates insurer to regularly review rate differences (e.g. young male/young female) 3) No evidence of quick shifts that don't show up in data in time to adjust

CHKUCERA. Economic Crisis and Aggregate Premium Level

1) Concerns that economic crisis will cause unwarranted premium increases due to credit-based insurance score 2) If distributional shift occurs, actuary will adjust overall premium level to maintain premium level 3) Thus no long term impact

DOI Financial Exam Contents

1) Conducted every few years 2) Uses NAIC Financial Condition Examiners Handbook 3) Reviews statistical statements, accounting procedures, financial statements, management practices, and investment procedures

CHKlann. Commutation Distortions for Primary

1) Downward development of paid losses 2) Net ultimate loss increase, despite constant gross ultimate

CHIFRS. Approaches to determine risk margins

1) Confidence Level Technique (VaR) - amount added to mean to ensure probability to pay 2) CTE/TVaR - probability weighted average of tail scenarios - mean estimate. Reflects skewed distributions better than VaR. 3) Cost of capital method - amount to produce adequate return after factoring in the investment return. Most risk sensitive method. Closely related to other industries. Difficult to implement.

CHCOPLFR. Options if Cannot Reconcile Data to Schedule P

1) Confirm person responsible is aware of difference 2) Recommend company inform auditors 3) Discuss in SAO, and elaborate in actuarial report If cannot explain/correct, you can 1) not rely on the data, or 2) conclude opinion cannot be formed.

CHFREIHAUT. Conservatism and RT

1) Conservative assumptions built into price (boost losses) 2) This is not conservative from RT viewpoint.

CH10 Transfer of P&C Runoff Agreements - Accounting

1) Consideration paid is recorded as a paid loss 2) If Consideration paid is less than transferred reserves, difference is treated as a decrease in losses incurred.

CHSSAP62. Retrospective rating: Commission adjustment

1) Contingent/straight profit: % of profit 2) Sliding scale: final commission is based on actual experience

SEUA and Federal Criminal Indictments - Causes (1944 Decision)

1) Continuing agreement and concert of action to take control of 90% of fire market 2) Fixing premium rates and agents' commissions 3) Using boycott/coercion to force non-SEUA members to comply 4) Withdraw rights of agents to rep SEUA members if they also repped non-SEUA 5) Threatening consumers with boycott and loss of patronage if they didn't buy from SEUA members.

State Legislator Influence on Regs

1) Control DOI budgets 2) Pass insurance law that insurance commissioner must enforce 3) National Conference of Insurance Legislators 4) National Conference of State Legislators - inform legislator about insurance

NIC Subcommittee on Federal Legislation: recommendations

1) Coops are necessary to Establish statistical base for adequate rates, and thus prevent insolvency 2) Congress is pressured to allow states to continue regulating insurance 3) Sherman/Clayton Acts amended to allow coops to establish adequate rates and coverages 4) FTC Act/Robinson-Patman Act amended to exclude insurance

CH21. Credit Rating Agency Qualitative Analysis Factors

1) Corporate governance 2) Product Development 3) Composition of cap structure 4) Asset quality 5) Inv strat 6) Reserve adequacy 7) Claims management 8) Contingent assets & liabs 9) Level of reins dependency

Liquidation Payout Classes

1) Costs and expenses of administering liquidation 2) Partial payment of debts to employers for service rendered within one year of order for liquidation 3) All claims for policy losses 4) Claims for UEP and claims of general creditors

CH19. R3 (Credit Risk) Aspects

1) Counterparty will default (on at least part) 2) Risk associated with estimating amounts due

Court Decisions Impacting Insurance Regulation

1) Courts determine how laws apply to insurance companies 2) DOI's laws must meet constitutional requirements, and afford due process rights (e.g. notice to another party for suing, or right to fair hearing) 3) Court can view insurance contract as Contract of adhesion (ambiguous language -> insured). Court also created the doctrine of reasonable expectations. 4) Court-tested language can over time improve policy coverage language and clarify meanings 5) Can influence claim settlement process

CHASOP43. Nature of Unpaid Claims Considerations

1) Coverage 2) Circumstances that can change freq/sev 3) Claim adj process 4) Potential recoverables

Surplus Lines

1) Coverage from nonadmitted insurers when admitted insurer won't cover a) Unique risks with whigh limits or difficult UW characteristics 2) These lines are indeed regulated 3) Common characteristics for surplus a) permit only specially licensed producers to place business b) The unauth insurer must meet specified financial/managerial requirements c) Risk my first be declined by admitted market 4) Key characteristic - Insurers have freedom from rate/form requirements a) rate/form not regulated b) flexibility to adjust and quickly meet insurer needs 5) Lack of guaranty fund protection!

CHCOPLFR. Reserve Considerations

1) Coverage provisions and any disputes 2) Changing conditions - claims, losses, personnel, reinsurance, exposure 3) External conditions - economic, regulatory, judicial, political/social 4) Data 5) Assumptions - sensitivity to various 6) Changes in assumptions, procedures, or methods

CHSSAP62. Assumed Company: Premium before effective date

1) Create liability until effective date 2) Cannot add funds as income until effective date of policy

CHHARRINGTON. Arguments for Competitive Rating

1) Creates strong incentive for insurer to accurately forecast costs, and price/uw so as to avoid adverse selection 2) Increases availability (small residual markets) 3) Provide incentive for high risk buyers to control losses 4) Encourage insurer to minimize LAE

CHWiening. Social Security Insured Status

1) Credit = qtr of coverage earned per $870 of annual earnings. Get a max of 4 credits per year. 2) If 40 credits, or 10+yrs work, you are fully insured 3) If 6+ credits in last 13 qtrs ending in death, disability, you are Currently Insured for retirement benefits 4) If you are 31+ with 20+ credits in last 10 yrs and you become disabled, then you are Disability Insured and get disability benefits

CH15. Schedule P, Part 5 Sections

1) Cumulative CWP Count 2) Count of outstanding 3) Cum Rpt Count

F Surplus. DTA rules

1) DTA from Acq: UEPR x Acq x Corp Tax Rate 2) DTA from loss reserves: LR x (1 - Disc Factor) x % Paid out in Yr x Corp Tax Rate

CHSSAP53. Pro Rata Premium Methods

1) Daily pro rata - # days past / total 2) Monthly pro rata - 15th of the month 3) If demonstrable, can recognize over period of risk when not uniformly distributed.

CH 6/7. Unearned premiums, Part 1 in U&IE

1) Daily pro rata method: based on # days expired (more common) 2) Monthly pro rata method: assumes premiums are written evenly each month. Uses middle of the month rule.

CH11. Gen Int Part 1 Gen Section Latest Financial Exam Details

1) Date of latest exam 2) Eval date 3) Release date for examiner's report 4) Department performing exam 5) Complied with all adjustments and recommendations from examination report

CHPORTER5. Executive Branch Regulation

1) Day-to-day regulations 2) Oftentimes has separate DOI a) Licensing b) Regulating Coverage/Pricing (incl financial exams)

CHKUCERA. Insurance Score: Def and Purpose

1) Def - numerical score assigned to risk based on characteristics 2) Provide useful information to measure expected cost of risk 3) Statistically reliable tool for segmenting risks with diff exp costs

CH22/23. Differences between SAP and GAAP

1) Deferred acquisition costs 2) Nonadmitted assets 3) Deferred tax assets (DTAs) 4) Invested assets 5) BS presentation of reinsurance 6) Ceded reinsurance (prospective & retroactive) 7) Structured settlements 8) Anticipated S&S 9) Discounting of loss reserves 10) Goodwill under purchase accounting

CH 8/9. NAIC Model Investment Law - Investment Guideline Options

1) Defined Limits - NAIC stipulates the types and amounts of assets an insurance company can invest in 5% limit of admitted assets with any single issuer (exceptions for government bonds) • 1% limit of admitted assets with any single issuer with rating of NAIC 3 • 0.5% limit of admitted assets with any single issuer with rating of NAIC 4 or lower • 20% limit of admitted assets in all securities rated NAIC 3 or lower • 10% limit of admitted assets in all securities rated NAIC 4 or lower • 5% limit of admitted assets in all securities rated NAIC 5 or lower • 1% limit of admitted assets in all securities rated NAIC 6 • 25% limit of admitted assets or 100% of surplus in all common stocks 2) Prudent Person - Investments are evaluated based on the guidelines and standards of the company: a) Insurer should protect the policyholder b) Consider investment expertise and resources available

CHHARRINGTON. Test for efficient regulation

1) Demonstrable market failure 2) Substantial evidence for efficient solution

CHSSAP55. S&S

1) Derived in similar manner to loss reserves. 2) S&S subtracted from loss reserves. 3) Changes are charged to operations during period in which change occurs

ERISA (1974)

1) Designed to curb abuse in private pension system and in employee benefit plans 2) Inform employees of their benefits and set standard for qualified plans, determine funding levels, and provided protection to plan participants

NAIC Unfair Methods of Competition (1947)

1) Designed to preempt application of FTC Act to insurance industry 2) Deemed following activities unfair/deceptive: a) Misrepresentation and false advertising of pols b) False information and false advertising in general c) Defamation d) Boycott, coercion, indimidation e) False FS f) Unfair discrimination g) Rebating

CH11. Part 1 Purpose

1) Details on company operations 2) Business practices 3) Type of internal/external controls

CHKlann. Pricing a Commutation

1) Determine estimates of future claim payments from reinsurer. For ceder: reinsurance recs. For reinsurer: loss reserves 2) Determine the timing of the payments and apply a discount factor accounting for time value of money, and risk. 3) Unique tax treatments 4) Reflect factors related to motives for entering into commutation. (e.g.lower price due to financial difficulty of other party)

Court Considerations in SEUA Case

1) Did Congress intend Sherman Act prohibit insurer's conduct of restraining / monopolizing business? YES 2) Do tx across state lines constitute "commerce among several states"? YES

CH11. Finite Reinsurance Interrogatory 1

1) Did you cede reinsurance that created surplus movement or loss reserves movement impacting surplus (5% or more) 2) Was reinsurance or deposit accounting used 3) Included Features? a) Duration of at least 2 years and non-cancelable b) limited cancellation provision c) aggregate stop loss coverage d) commutation rights (other than credit downgrade) e) ability to report/pay losses less frequently than quarterly f) delayed reimbursements to ceding company

CH10 Underwriting and Investment Exhibit

1) Direct business written by each company 2) Amounts ceded to lead company 3) Portion of pool assumed by affiliates Schedule F Part 3 - cessions, Part 1 - assumes Schedule P - reflect member's portion of aggregate.

CHIFRS. IFRS Disclosure

1) Disclose gain/loss from ceded business 2) Assets, Liabs, Income, Expenses of ins contracts

CHASOP41. Oral Comms

1) Disclose items 2) Produce actuarial document if comm may be transferred to other parties

CH10 Asbestos/Environmental Reserve Notes - Benefits

1) Disclose presence of loss exposure 2) Magnitude of exposure 3) Recent development of the exposure

CH11. Gen Int Part 1 Financial Section

1) Discloses whether financials use SAP 2) Loans to senior leadership/stakeholders 3) Asset transfers not reported as liabs 4) Assessments other than guaranty 5) Amounts due from affiliates

CHIRIS. Reserve Deficiency to PHS Considerations

1) Distortions from changes in exposure a) Significant changes in prem volume (growth or rate changes) b) Shift in product mix (e.g. from property to liability). Should calculate the ratios separately by line.

CHSSAP55. Liability Estimate

1) Do not discount 2) Rely on past experience 3) Adjust for trend and other factors 4) Perform technique by LoB and consider assumptions of each technique

CHFREIHAUT. Freihaut and RTA Parameter Risk

1) Do not explicitly include. Do implicitly include. 2) No widely acceptable method to incorporate 3) Resources expended may exceed benefit 4) Document existence and be mindful of parameter risk

Guarantee Fund Questions and Comments on Regulatory Performance

1) Does the protection make consumers too unconcerned about selecting financially strong insurers? 2) Do they diminish pressure on regulators to shut down weak insurers? 3) Cost passed on to other policyholders and taxpayers? 4) How effective is the record of state regulation Benchmark of good regulatory performance - low insolvency rate, and extent to which regulation increases expenses and restricts products

CHFeldblumLR. Loss Payment Pattern

1) Each AY gets payment on July 1st of each CY and 10 yr payment pattern used. 5 Yr extension for long lines 2) Base on Sched P, 1 instead of 3 because a) 3 doesn't have AAO b) 3 is not audited c) IRC procedure does not incorp judgment

CHHARRINGTON. Insurance Market Structure and Competitive Incentives

1) Ease of entry 2) No market failure on it's own

CH30. ICPs from 2011 Changes

1) Economic value should reflect time value of money 2) Economic value should reflect level of risk

NCOIL

1) Educate legislator on insurance issues 2) Help communications between state legislators on insurance issues 3) Improve insurance regs 4) Asset legislators' prerogative in making state insurance policy 5) Speaking about Congressional initiatives that might affect state insurance regs

CH14. Portfolio Reinsurance Transaction Details (Schedule F Part 2)

1) Effected or cancelled in CY 2) Portfolio reinsurance is transacted to a) Exit business b) remove certain type of loss exposure c) Obtain surplus relief 2) Reinsurer requires a risk premium to assume the risk

CHIFRS. IFRS Phase 1

1) Elimination of cat and equalization provisions 2) Insurance liab and reinsurance asset adequacy/impairment tests. 3) Prohibition of offsetting insurance liabs with reinsurance recoverables 4) Certain disclosures

CHASOP41. Requirements for Actuarial Comms

1) Ensure form&content is appropriate to circumstances/users. 2) Clear and understandable. Identify actuary. 3) Issued within reasonable time period.

CH25. Compliance Functional Area

1) Ensure internal control system is effective to comply with laws and regs 2) Promptly report compliance issues to board

CH25. Actuarial Functional Area

1) Ensure methods/assumptions used to derive technical provisions are reasonable 2) Perform retrospective analysis of best estimates vs experience 3) Opine on overall UW policy and adequacy of reinsurance arrangements

CH10 PDR Accounting - Two methods

1) Establish write-in liability 2) Reflect as part of UEPR (must then be identified via the Notes to FS)

CHWAGNER. Purpose of Rating Bureaus

1) Establish/maintain adequate rates 2) Control excessive commissions 3) Standardize policy forms RB was seen as limiting competition because it set rates, challenged filings of competitors who set lower rates, and encouraged agent and reinsurer boycotts of companies that deviated from the rates

CHIFRS. Liability Accounting under IFRS

1) Established as soon as insurer engages contract 2) Calc unbiased prob weighted exp cash flows 3) Apply discounting using risk free rate with adjustments to reflect currency, liquidity, and cash flow timing.

Pre-1944: New York as a Regulator

1) Established process to manage liquidation 2) Imposed 10% retaliatory premium tax on other states 3) Required filing of AS 4) Required UEPR 5) 1859 DOI created

CHGovIns. Work Comp Insurance Structure - State Programs State Funds

1) Established to reduce possible negative effect of high rates on economy, and so that employers aren't forced out of business for refusing to buy coverage in a state with WC law 2) State fund is exempt from fed taxes, and serves as insurer of last resort

CH22/23. Cost of Capital Approach

1) Estimate required capital to support reserves at each future evaluation date 2) Required return on capital in excess of risk free rate & illiquidity premium (R) is applied to 1) to get Excess return expected by investor. Excess return also called "cost of capital". 3) Risk margin = PV of Excess returns (discounted at R)

CHSSAP62. Transfer of Risk: Evaluation Tests

1) Examine contract features that limit amount of reinsurance risk 2) That delay the timely reimbursement 3) Examine PV of cash flows between companies. Must use same interest rate for all cash flow simulations.

CHHamilton. ARP Troubles

1) Excessive Losses 2) Substantial growth

Ch 8/9. For currency bond valuation

1) Exchange rate differences present in adjusted carrying value 2) Impact of these differences unrealized until bond is sold

CHFREIHAUT. RTA and Profit Commissions

1) Exclude from RTA (loss scenarios to reinsurer) 2) Can indirectly preclude RT; reducing may create RT 3) Carryforwards of prior year results

CHGovIns. Type of Gov Involvement

1) Exclusive insurer e.g. social security (federal level) and government run WC program (state level) 2) Partner with private insurer e.g. NFIP, TRIA, Federal Crop Ins (federal level), or FAIR, WC, WIndstorm, REsidual Auto (State level) 3) Competitor to private insurer e.g. WC

CHRAND. Daubert v Merrel Dow (1993)

1) Expanded considerations for judges examining expert testimony 2) Judge was the gatekeeper - not jury nor expert community

CHSSAP62. Benefits of Reinsurance

1) Expands capacity 2) Share large risks 3) Spread risks of catastrophes and stabilize underwriting results 4) Aid withdrawing from a line 5) Reduce net liability to amounts appropriate to financial resources

NAIC Support and Service Office - Financial Services

1) Expert advice on accounting, reinsurance and financial reporting 2) Review alien insurer's filings

CH11. Gen Int Part 2 P&C Relevancy

1) Exposure to cat/large loss 2) PML calculation process 3) Level of reinsurance protection 4) Limiting provisions in reinsurance, guaranteed/retro pols 5) Releases of liability for reinsured pols 6) Exposure to warranty business

CHASOP43. Purpose of Reserve

1) External financial reporting 2) Internal management reporting 3) Special purposes (appraisal work, scenario analysis) Actuary should adjust estimates to fit the multiple purposes (e.g. change discount rate for internal vs external)

Insurer Insolvency Acts post MF

1) Guaranty Association Model act in 1969 - all states have guaranty funds 2) Early Warning Test Program (1977 IRIS) - insurance takeover and merger if necessary 3) 1989 Accreditation program - create similar solvency standards in all states

CHGovIns. Work Comp Insurance Structure - Federal Programs

1) FECA providing coverage to civilian federal employees 2) Longshore and Harbor's WC Act - maritime coverage. Employers may purchase or self-insure this exposure. Reduced by state law benefits. 3) Black Lung Benefits Act - est because states didn't provide. Benefits reduced if state available. Funded through Fed and Trust Fund. 4) Byrd Amendment of 2010 said Black Lung is cause of death if employed in mining for 15+ yrs. Survivor benefits established to continue getting miner lifetime benefits.

CHMAYER. DF and Pre-emption

1) FIO can preemt state measures if a) inconsistent with covered agreements, or b) aren't fair to non-us insurer under covered agreement 2) Pre-emption excludes everything other than these international agreements

CHMcCarty. FL vs Insurers

1) FL limited credit score use in HO and PPA 2) Insurers opposed based on: a) FL didn't have authority to prevent use of credit scoring as rating tool b) Office did not have authority to define "unfairly discriminatory" c) Insurer didn't have necessary data to demonstrate effect of credit scoring d) Definition of "disproportionate impact" was too vague 2) Judge agreed only with last point

Steps of Intervention Procedure

1) Fact Finding 2) Imp reg action to control financial difficulties

CH 8/9. Bond valuation rules

1) Fair value published by NAIC Valuation of Securities Manual 2) Schedule D, Part 1 has NAIC designation, actual cost, fair value, par value, book/adjusted carrying value. 3) If valuation is adjusted to fair value, then adjustment is an unrealized loss 4) When bond is sold, realized gain = amount received - adjusted carrying value

National Flood Insurance Act

1) Fed will provide insurance when unavailable privately 2) NFIP est in 1968 3) FEMA -> NFIP (administered by Federal Insurance Administration) 4) P&C have WYO flood insurance program a) Fed acts as a reinsurer for flood loss b) FIA determins rates, limits, eligibility c) Insurer can keep 30% for admin expenses

Reactions to SEUA Decision

1) Federal legislation now applied to insurance a) Sherman Act 1890 - prohibits collusion in attempts to gain monopoly power b) Clayton Act of 1914 - It is illegal to engage in practice that lessens competition or creates monopoly power -> Robinson-Patman Act required price differences to be justified by reduced op costs (no price discrimination) -> Tying (must purchase 1 to buy another)

Pre-SEUA Decision

1) Fierce competition drove insurers to insolvency, despite the compacts 2) Antitrust settlements began to rise over 1) lack of corp regulation and 2) unethical execs

CHGovIns. Why does the gov participate in insurance?

1) Fill unmet needs 2) Feel obligated to if it's compulsory 3) Convenient 4) Efficiency over private industry 5) Social purpose

CHNAICSMI. How is the US regulatory mission achieved?

1) Financial Regs - monitor financial health and act appropriately as conservator, rehabilitator, or liquidator. Possibly restrict certain risk concentrations. Provide guaranty funds 2) Market Regs - pricing restrictions, licensing, statistical reporting, and administrate the residual markets

NAIC Support and Service Office - Education and Training

1) Financial examiners program to help new examiners 2) Regulating for Solvency program - study financial issues in depth 3) Regulating marketplace program 4) Investment seminar - non-technical derivatives program 5) Forum for market conduct chief examiners to explore topics about insurer exams

CHWAGNER. Merritt Committee and Exception to Anti-Trust (state regulatory investigation)

1) Fire rate problem was making rate, and maintaining rate, and that adequate protection required the adequate rates 2) Insurers should combine to avoid rate wars 3) Bureau rates are more credible and reduce insurer expenses

CHMAYER. Significances of Dodd-Frank (DF)

1) First step toward federal involvement - systematically significant insurers regulated by Federal Reserve Board 2) Est. Federal Insurance Office 3) Create uniformity for admitted/non-admitted reinsurance

CHNAICSMI. How can regs effectively regulate?

1) Focus on greatest risk exposed to - risk focused approach 2) Continue to peer review, check and balance, and centrist solutions

CHWAGNER. Ways Bureaus Countered Anti-Compact laws

1) Foreign insurers withdrew 2) Informal social rate agreements 3) Shunned employees of non-complying insurers

Foreign vs Domestic Insurer

1) Foreign licensed to operate but incorporated in another state 2) Advantages of Foreign - a) more likely to be approved in a strong performer, because b) already gone rigors of home state 3) Foreign has to provide 2-3 yrs of SAP/GAAP AS, an Financial Examination Report. and Charter/bylaws 4) Foreign provides cert of compliance, and hollding insurer registration statement 5) If affiliate already in applicant state, regs may require UW guidelines to ensure no business switcheroos 6) May require Foreign insurer to be seasoned

Pre-1944: National Insurance Convention

1) Formed in 1871 to address states' concerns over meeting various state regulatory demands 2) NIC developed constitution listing regulator goals, created a uniform accounting statement, guidelines for insurer taxation, and adopted model law for commissioner's duties and regulation of perils.

CH11. Gen Int Part 1 Sections

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

Early Stages of Liquidation

1) Give notices of liquidation to creditors and pol holders to inform right to file claims 2) Cancel pol coverage 3) Notify agents of their duties in liquidation 4) Sell assets 5) Recover improperly tferred assets 6) Make personnel decisions regarding insurer's staff

CHMcCarty. State Actions and Credit Scoring

1) Give regulator access to scoring model 2) Notify consumers about its use 3) Restrict\Disallow insurance decisions based solely on model 4) Prohibit use of credit to cancel/nonrenew/increase rates 5) Ban use of credit history on renewal book 6) 4 states have banned credit altogether

CHHARRINGTON. Competitive Rating Law Replaces Prior Approval

1) Gradual erosion of bureau pricing and increased admin costs associated with multiple rate filings by all insurers 2) Solvency regulation eliminated rate regulation's role in preventing insolvencies 3) Hope that competition would improve insurance affordability problems

Consumer Groups

1) Help individuals tackle public interest issues and insurance issues 2) Can alert regulator about industry problems. This may prompt conduct exams 3) More importance placed on matters with immediate impact to consumer and that draw media attention

NAIC Model Laws

1) Help legislative bodies streamline legislative development process because the research and draft work is done by NAIC for all states 2) Help guide states in adopting same or similar insurance laws, regulations, and guidelines 3) Insurers can benefit from uniform laws among states - licensing standards and filing requirements are similar. 4) Model Laws Regulations and Guidelines text includes record of action by state

DOI and Consumer Services

1) Help with claims, complaints, and inquiries 2) Educational programs to inform policyholders about insurance and loss prevention 3) Publish guides for purchasing insurance

CHKUCERA. Credit Score Intro

1) Helps insurers subdivide risks to determine appropriate rates 2) To not use will not lower overall premium, but redistribute changes and create inequitable rates 3) Has helped insurers write more risks

CH14. Notes on Provision for Unauth Reinsurance

1) Highest provision to reflect that these are unregulated cos 2) Capped at total amount recoverable (Col 5)

CHGovIns. Unemployment Insurance

1) Historically uninsurable by private market - cat risk 2) Federal Program - benefits to eligible workers unemployed through no fault of their own 3) Funded by employer taxes. 90% of tax returned to states, and 10% for federal admin. The taxes are experience rated and are based on firm size.

CH19. R2 (Equity Inv) Types

1) Holding company 2) Upstream affiliate (parent) 3) Insurance subs not subject to RBC (excl alien insurers) 4) Investment affiliates 5) Other non-ins subsidiaries 6) Off-BS Sheet Collateral 7) RATs and MCS 8) Insurance affils subject to RBC 9) Unaffiliated stocks (Primary Component) 10) Real estate 11) Schedule BA assets 12) Misc assets (incl sec receivables, agg write-ins for invested assets, derivatives)

CH11. Gen Int Part 1 General Section

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) If senior management is subject to a code of ethics

Supervision Timing Requires Judgment

1) How accurate are the loss reserves 2) Proceeds of swift lliquidation 3) Has management enacted measures to lift operating results 4) Is reinsurance adequate/collectible?

Rehab Complications

1) How will loss reserves develop? 2) Can expenses be trimmed/how fast? 3) How inadequate are rates? etc

CHCOPLFR. SAO General Contents

1) Identification 2) Scope 3) Opinion 4) Relevant Comments

CH10 Reinsurance Recoverables in Dispute - Purpose of Note

1) Identify credit risk 2) Identify insurers trying to over recover from reinsurers

CHMAYER. DF Pre-Emption and Reinsurance

1) If ceder home state is NAIC approved, other state's can't deny the ceder recognition for the reinsurance they bought 2) State law of non-home state is essentially pre-empted if it interferes with the reinsurance contract 3) All laws and regs on reinsurance a greements for non-home ceders are pre-empted

CHFREIHAUT. RTA and Fees

1) If depends on future event, include it. Be conservative and include maybe fees. 2) Treat these as premium so it's harder to manipulate (by tagging premium as fees and excluding them to create RT).

CHSSAP65. Discounting Disclosure

1) If discounting liabs 2) Tables used 3) Interest rates used 4) Discounted liab from FS 5) amount of tab discount, by LoB and reserve category

CHSSAP65. High Deductible Policies: Nonadmitted Balances

1) If no collateral, deductible recoveries > 90 days are nonadmitted 2) If collateral, 10% of deductible recoveries in excess of collateral is nonadmitted

Exceptions to McCarran-Ferguson Act

1) If states are not regulating activities 2) Sherman Act still applies to use of boycott, coercion, and intimidation 3) If Congress passed law that applies only to insurance industry, it will supersede any state law

CHSSAP62. Reinsurance Disclosures

1) If unsecured recoverables (for reserves and UEPR) > 3% surplus, list reinsurer and recoverable amount 2) Recoverables in dispute that are 1) > 5% of surplus, or aggregate disputes > 10% of surplus 3) If uncollectible reinsurance written-off that year (include name, losses incurred, LAE incurred, premums earned) 4) If commutation (name of reinsurer, losses incurred, LAE incurred, premiums earned) 5) All retroactive reinsurance tx generating special surplus. Put in Notes to Financial Statements. 6) Reinsurance accompanied by agreement to release reinsurer from liability 7) Are Risks reinsured under quota share treaty which includes provision that limits reinsurer's losses below the quota share % (e.g. deductible, loss corridor, loss cap, etc). If so: a) # contracts with provision, and b) if reinsurance credit reflects impact of provisions 8) Are these 3 criteria met? Cede risk under contract that generated + or - UW results > 5% of surplus, or ceded premium > 5% of surplus? A) Was this accounted for as reinsurance instead of deposit? Did it include any of the following? Term > 2 yrs and noncancellable provision where cancellation triggers obligation to enter into a new reinsurance contract agg stop loss coverage unilateral right for either party to commute other than decline in credit provision allowing reporting of loss less frequently than qtrly features that delay the timely reimbursement to the ceding

Rehabilitation

1) Impaired insurer continues to exist after receivership 2) If possible, DOI finds an investor to invest capital, perhaps in return for ownership stake 3) Generally a prelude to liquidation 4) Rehabilitator is commonly retired industry exec or lawyer

CHFREIHAUT. RTA and Parameter Risk Inclusion

1) Implicit Inclusion - via slightly higher expected loss output, or increased expected volatility 2) Explicit Inclusion - parameters are variable themselves. More scientific, but more judgment.

CH14. Provision for Reinsurance and Amounts in Dispute

1) Included in Unsecured Total recoverables 2) Excluded in Recoverables Over 90 days

CHNAICSMI. Dodd-Frank Act

1) Included the Nonadmitted and Reinsurance Reform Act a) Only the "home state" can collect the premium tax or regulate the surplus lines transactions. Home state is the one of principal business or the state with the greatest allocation of premium. 1) Home state has sole responsibility of regulating reinsurer's financial solvency 2) If home state is NAIC accredited and recognizes credit for reinsurance, no other state can deny the insurer that credit. 3) Dodd-Frank created the Federal Insurance Office (FIO) to provide insurance expertise at the Federal level. Also allowed the US Treasury Dept and US Trade Reps to enter into certain agreements

CHBLANCHARD. Six principal functions of reinsurance

1) Increase large line capacity 2) Provide cat protection 3) Stabilize loss xp 4) Provide surplus relief 5) Facilitate withdrawal from market 6) Provide UW guidance

CHMAYER. DF and NARRA

1) Increase market choice by allowing large commercial buyers to buy from non-admitted insurance 2) Non-admitted insurance -> home state authority only

CHHARRINGTON. Adverse effects of Rate Regulation

1) Increased cost of administration 2) Delays in adjust rates to trends 3) Greater variation in coverage availability over time 4) Inc variation in profits over time 5) Higher long-run prices

CHHARRINGTON. Adverse effects on restricted classification

1) Increased costs 2) Larger residual market 3) Lower prices for high risk buyers, vice versa for low 4) Inefficient incentives for loss control

CHSSAP65. Extended Reporting Coverage

1) Indefinite - premium fully earned at inception, and liabilities for unreported claims recognized immediately 2) fixed - premium earned over term, UEPR created. Losses recorded when reported. Est. policy reserve to ensure premium not earned too soon if there's no separate charge for the tail coverage.

CH21. Fin Health Tools - Considerations

1) Individual tool should not be used to conclude about fin health of insurer 2) Tools do not replace audits or guarantee accurate or complete data. 3) Tools do not indicate good internal management, systems, or controls 4) Tools don't uncover fraud

CH15. Causes of Sev Trend

1) Inflation 2) Law changes 3) One time cat claims 4) Changes in deductibles/retention 5) Internal factors

CHSSAP5. Conditions to Charge LC/AI to Operations

1) Information prior to issuance of FS indicate impairment/liability incurred at the date of the FS. 2) Amount of loss reasonably estimated: a) Book range within a range if it's a better estimate b) Book midpoint of range when no range better than others c) If no range or no upper bound, best estimate booked 1 and 2 are assumed met when judgment/fine rendered against insurer. In such cases, LC includes anticipated settlement amount, legal costs and recoveries.

CHFREIHAUT. RTA Proxies for Dependent Premiums

1) Initial Deposit Premium - intuitive/simple. can be manipulated bc does not include future payments 2) Expected premium - intuitive. may over detect risk transfer. 3) Actual premium (loss simulated) - best option because it reflects loss volatility. Intuitive.

CH 8/9. Calculate preferred stock capital gains (Unaffiliated)

1) Initial carrying value (when purchased) 2) If 2 highest rating: a) redeemable preferred: orig purchase price + acq costs (or use amortized cost if given) b) perpetual preferred: fair value 3) if lower rated: min (book value, fair value) Redeemable - Must be redeemed by issuer, but holder as an option to redeem Perpetual - Issuer has a redeem option, or no option exists at all.

CH 8/9. Calculate common stock capital gains (Unaffiliated)

1) Initial carrying value = actual cost + comm and taxes 2) After initial purchase, carried at fair value. Changes in fair value recorded as unrealized valuation changes. 3) If stock is not publicly traded, refer to NAIC Security Valuation Office

CHPORTER6. Surplus Requirements

1) Initial free surplus - amount of surplus in xs of minimum capital required. For new insurers. 2) Min basic surplus - amount of surplus required for existing insurers

CH19. R4 Base RBC Company Adj - Prohibited Cases due to lack of data

1) 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

CHWiening. Part A - Hospital Insurance

1) Inpatient hospital Care - 2 months per visit all expenses covered after deductible, next month pay coinsurance 2) Skilled Nursing Facility Care - 3 day min in hospital and require skilled nurse. You get 100 days covered in benefit period. First 20 paid in full, next 80 are coinsurance 3) Home Healthcare Services - pays for skilled nurse care, home health aides, therapists, and hospital stay not required 4) Hospice 5) Blood transfusions 6) Additional

CH21. AAA Insolvency Study Report

1) Insolvency caused by multiple factors (under-reserving not leading cause) 2) Size/xp/diversification had sig impact 3) Good management & governance is essential a) little or no reinsurance b) insufficient reins for risk c) rapid premium growth d) sig adverse development e) inadequate pricing f) serious data problems

CHNAICSMI. Model Laws Must be Implemented for State Accreditation

1) Insurance Company Financial Solvency Requirements a) Annual/Qtrly Financial Statements b) CPA audited financial statement, and reserved opined on by actuary c) Report RBC calculations in the annual statement d) Meet minimum capital and surplus requirements d) Submit to exams required by regulator e) Must invest in diversified portfolio 2) Regulatory Monitoring a) Examine insurer each 5 yrs. Nat sig insurers examined qtrly. FAWG reviews the poor performers b) Follow through with RBC framework actions if company capital is insufficient c) NAIC FAST tools (such as IRIS)

Insurance Trade Associations

1) Insurance Industry Trade Associations - basically court liasons for the industry 2) These operate on national, state, local levels - can influence NAIC, state, and federal legislators 3) Can provide accurate info on critical issues as legislation is developed

Supreme Court Justification for SEUA Case

1) Insurance is an interconnected and interdependent business among the states 2) Only 18 of more than 200 SEUA members domiciled in single state. 3) Other intangible products are subject to Congressional regulation (e.g. electricity from telegraph) 4) Insurers should not be an exception to Congress regulatory power over any single business doing business in many states.

CH Webel. TRIA coverage

1) Insurer Loss > 5M, and Industry Loss > 100M 2) Secretary of treasury certifies terrorism act 3) Insurer deductible 20% of annual WP If Industry losses < 27.5 Billion, government pays 85% and levies 133% surcharge fee. If industry losses in 27.5 to 100 Billion, no set recoup %.

CHIRIS. One Yr Reserve Dev to PHS Considerations

1) Insurer may be intentionally understating its reserves 2) Large losses in certain AYs and Lines (Examine Sched P, 2) 3) Possible reserve strengthening or weakening.

CHIRIS. NWP:PHS Considerations

1) Insurer part of group of affiliated companies? Ratio for group? High ratio among insurer and affiliates is even more serious. 2) Profitable insurer => sustain higher ratio 3) Long tail lines => lower ratios 4) Is reinsurance protection against large loss adequate? If not, focus on GWP:PHS. 5) Reinsurance collateral? Quality of reinsurers?

Unique Characteristics of Insurance Industry that Affect Regulation

1) Insurer sets rates before actual costs are known 2) Regulatory environment different by state 3) Insurance industry has many joint product-dev mechanisms that would raise antitrust issues in other industries

ERISA and Insurance Industry

1) Insurer that administers an ERISA employee plan must know their duties to fiduciaries 2) ERISA governs employee health plans

Captive Orgs

1) Insurer that insured owns a) Single-parent captive b) Group captive

CHASOP43. Disclosures

1) Intended purpose 2) Significant limitations 3) Scope 4) Accounting date, valuation date, review date 5) Specific sig risk/uncertainty 6) Sig events, assumptions that have material impact on estimate 7) Basis for range if providing a range

CHHARRINGTON. Rate Bureau Impacts

1) Intended to ensure adequate prices and reduce insolvency risk 2) Pressure for increased competition in 50s made it easier to deviate from Bureau rates

CH14. Transactions exempt from disclosure as fronting carrier

1) Intercompany cessions with affiliates 2) Cessions to pool/group/association of insurers that underwrite jointly a) if group is subject to examination by reg authority b) if group operates persuant to state or fed authorization 3) Less than 5% of gross annual premium 4) Cessions to captive insurers regulated in domiciliary state

F Surplus. Examples of NMA

1) Interest due & accrued 90 days overdue 2) Accrued retrospective premium (10% NMA) 3) Real Estate - (permanent) excess of book value over market value

CH19. Risks in Life RBC but not P&C RBC

1) Interest rate risk (smaller for P&C) 2) Business risk (implicitly included via loss xp)

CHIRIS. High Inv Yields Considerations

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

CH22/23. SAP Invested Assets

1) Investment grade bonds and higher rated redeemable pref stocks at amortized cost 2) Lower rated bonds & pref stocks valued at min(amortized, fair) 3) Common & higher rated non-redeemable pref stocks are fair value Change in carrying value due to change in fair value recorded as direct change to surplus

CH 6/7. Nonadmitted Assets (Approx 3% of industry assets)

1) Investment in bonds, stocks, mortgage loans/real estate in xs of specific limits set by state 2) Investments in electronic data processing equipment & software exceeding set limits 3) Furniture, equipment & supplies 4) Balances due from an agent from sale of a security, overdue by over 15 days from settlement 5) Funds held by ceding company that exceed the associated liabilities. 6) 10% of deductibles recoverable in excess of collateral 7) Premiums > 90 days overdue 8) DTAs that fail the admissibility test 9) Permanent excess of book over market for real estate 10) Interest due and accrued > 90 days overdue 11) 10% of accrued retrospective premium

CH19. R3 Non-Invested Assets

1) Investment income due & accrued 2) Amounts rec relating to uninsured plans 3) Federal income tax rec 4) Guaranty funds rec or on deposit 5) Rec from parent, subsidiaries, and affiliates 6) Agg write-ins for other than invested assets

CH 8/9. Stock Investment Income

1) Investment income earned: a) dividends received b) change in accrual for dividends declared but unpaid 2) realized capital gains

CH19. R0 Asset Classes

1) Investments (stock/bonds) in subsidiary 2) Investment in alien insurance co affiliates 3) Off-BS items

CH21. High Level Tests

1) Iris - focus on BS strength and earnings quality 2) RBC - focus on BS risk and profitability (but uses industry ratios and not insurer specific) 3) SAO & AOS - opinion on quality of loss reserve adequacy 4) Credit Rating Agencies (provide annual ratings) a) Provide Financial Strength Ratings b) debt/issuer ratings to measure ability to meet obligations

CHCOPLFR. Adverse Development Regulator Questions

1) Is development concentrated in particular segments? 2) How does development compare to change in actuary's estimate 3) Development related to unique insurer characteristics? 4) Dev/Reasons for dev differ by CY or AY?

CHRAND. Historic Expert Testimony Stanards

1) Is evidence relevant to case 2) Is evidence generally accepted in expert community

CHGovIns. Evaluation Questions

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

CH10 Tabular Discounting Note

1) Is tab/non-tab discounting used 2) If so, what is the basis and what are assumptions? 3) Change to any key assumptions to calculate discount (perhaps more useful for non-tab method)

CHCOPLFR. Options when Lack Hist Data

1) Is there enough to evaluate reserves? 2) If substituted with competitor/industry, is it similar? 3) Should you disclose what data is available? 4) Should you disclose increased variability and uncertainty of using subtitute?`

CHMAYER. Requirements for DF Preemption

1) Issue notice of potential inconsistency 2) Notify and consult with USTR 3) Advice House Financial Services Committee/Senate Committee 4) Issue notice in Federal Register 5) Give interested parties opportunity to comment 6) Establish reasonable time for notice to become effective

CH15. Schedule P Organization

1) L&LAE xp ao 12/31 curr yr 2) Hist net total incurred l&dcc triangle 3) Hist net paid loss & dcc triangle 4) Hist net IBNR for l&dcc (before tab discount) 5) Hist claim counts (CWP, open, rpt) 6) Hist EP 7) Loss and prem data on loss sensitive contracts

CHHARRINGTON. Adverse effects of average rate suppression

1) Larger residual market 2) Reduced service 3) Increased risk for insurers 4) Reduced entry and increased market exit

Regulatory Philosophy Bases

1) Law 2) IC appointed/elected 3) Regulation History 4) Business climate 5) IC experience 6) Relationship of IC to state governor and public

NAIC Accreditation - Standards of Financial Regs

1) Laws and regs used by state must meet the NAIC basic standards 2) Regulatory methods of state must be acceptable 3) Department practices must be adequate

CHIFRS. Reason to Raise Risk Margin

1) Less is known about estimate 2) low freq/high severity 3) longer duration 4) wide probability distribution 5) emerging exp increases uncertainty

CHNAICSMI. Reinsurance Regulation

1) Less of it because consumers are more knowledgeable. 2) Indirect regulation through SAP where only collectible reinsurance is recognizable. By this approach, US regs don't have to assess international regulatory systems and reconcile them to the US. See below for more with the Dodd Frank Act

CHSSAP55. Disclosures

1) Liab balance at beg and end of each year 2) IL&LAE (CY balance, change from Prior AY) 3) L&LAE payments (CY, Prior yrs) 4) Reason for changes in losses of prior years. Have addt'l or return premiums been generated due to changes. 5) Summary of management's policies to est L&LAE. Discuss 1) toxic waste, 2) asbestos, 3) other environmental 6) Paid loss for asbestos/environmental on assumed, assumed and net basis 7) Anticipated S&S recoveries deducted from reserves 8) Paid loss and claim counts from extra-contractual obligation lawsuits or bad faith lawsuits.

Grounds for Rehabilitation

1) Liabs > Assets 2) Insurer refuses to submit books, records, accounts or affairs to DOI 3) Insurer wilfully violates charter or any other state law

Alien Insurers

1) Licensed in state but incorped in another country 2) Must select state to act as port of entry for establishing US branch 3) Must appoint US manager 4) Provide Trust agreement 5) Certificate of alien funds on deposit

CHNAICSMI. Principle 5 - Regulatory Control of Significant, Broad-Based Risk-Related Transactions/Activities - What will the regulators examine?

1) Licensing Requirements a) Ownership structure b) Quality and history of management c) internal controls d) projected financial condition 2) Change in Company Control a) Financial statements b) Evaluation of current/potential management 3) Dividends a) Must approve extraordinary dividends 4) Transactions with Affiliates a) Intercompany cost-sharing arrangements b) Guarantees c) Reinsurance d) Asset purchases and disposal agreements e) Tax allocation agreements 5) Reinsurance a) Some transactions require pre-approval. Reinsure also may be required to post collateral.

State Insurance Regulatory Systems

1) Licensing requirements - CoA and license prior to soliciting sale 2) Reporting requirements - Annual/qtrly statements, and policy forms/rules/rates 3) Periodic Exams - ensure financial soundness and compliance 4) Power to impose sanctions

CHNAICSMI. 3 Stages of the US Reg System

1) Limit/eliminate risks via restrictions or prior approval requirements 2) Financial oversight 3) Regulatory Backstops and safeguards (guarantee funds and RBC)

CHHamilton. Joint Underwriting Associations (JUAs) Operation

1) Limited servicing insurers designated to handle all residual auto (get fee) 2) Assigned insurer gets P/L, and claims. Has greater control of results than in reinsurance facility 3) Results of businesses in pool shared based on voluntary market share.

CH10 Asbestos/Environmental Reserves Note Note Details

1) LoB affected 2) Nature of exposures 3) Reserving methodology 4) Dir/Ass/Net for last 5 years, and separately for asbestos and environmental a) Beginning reserves b) Incurred losses c) CY paid losses d) Ending reserves e) Pure IBNR

CHIRIS. Adverse Loss XP Considerations

1) Look at 1-YR Reserve to PHS (Ratio 11) 2) Reserve deficiency to PHS (Ratio 13) If Ratio 11 is outside normal range, then recalc Ratio 5 after removing prior year dev

CH21. Investable Assets and BS Strength

1) Look at changes in investable assets and yields 2) If insurer is investing in riskier assets than average. Hedges present?

CH 6/7. Two common sources of DTA

1) Loss reserves discounted in tax accounting, but undiscounted in SAP accounting. 2) Carry forward net operating loss from prior years

Ch19. Adjustments to written premium base RBC (same as reserve RBC)

1) Loss sensitive contracts 2) Premium concentration

CHFREIHAUT. RTA and Parameter Risk Impacts

1) Losses 2) Premium projected (based on treaty terms). Not significant 3) Discounting

CH Webel. Insurable Risk Definition

1) Losses must be reasonably predictable 2) Losses are definite and measurable 3) Losses are fortuitous and accidental 4) Losses must not be catastrophic

CH19. R2 Concentration Factor - Excluded Assetst

1) Low Risk assets 2) Factor is .3 already

CHFREIHAUT. Contract Features that call Reasonably Self Evident into Question

1) Low loss ratio caps 2) Swing rated premium

CHMcCarty. Credit Score Social Impacts

1) Lower income individuals and protected classes of people are disparately impacted

NAIC Financial Analysis and Government Relations Office

1) Main contact between NAIC and Government

DOI Financial Exams

1) Main tool to assess and regulate insurer financial condition 2) All insurers are subject to the exam, which can also include audits by CPA or loss reserve opinions 3) AS can be used as basis

CH15. Prior Year Row, Part 2

Previous AS Part 2 - Previous AS Part 3 = Total IBNR ao Previous AS. Then add Current AS Part 3 (payments) to get Current AS Total Incurred

Unavailable/Unaffordable Insurance Coverage - A 2nd focus of regulation post MF

1) Majority of states have FAIR plans (fair access to insurance requirements) - insurance pool of private insurers to cover unmet need for urban properties 2) Govern captive insurers 3) Buyers' guides to explain policy coverage and options 4) 1968 NFIP - cover Flood 5) 2002 TRIA - cover Terrorist Act 6) 1981 Risk Retention Act - Affordability of commercial insurance

CH10 Tab Disc Note - Why Matters

1) Make meaningful comparisons between companies 2) Non-tabular discount use may indicate solvency concerns about the insurer. This is because non-tab discounts are only allowed by the regulator. 3) Actuary must disclose and describe discounting in the SAO

CHPORTER12. Three levels of Reg Action to Control Financial Difficulties

1) Mandatory Corrective Action 2) Administrative supervision - do NOT let liabs go unmatched by assets 3) Receiverships, rehabilitation, liquidation

CHNAICSMI. Factors telling the success story?

1) Market health - good guaranty capacity 2) Levels of competition - strong breadth and depth of the system 3) Effective receivership? 4) Notice problems before they cause harm? - so far strong track record of protecting consumers

CH19. Accounting Method for Stocks

1) Market valuation approach 2) Equity Method = (statutory equity - unamortized goodwill) x ownership %.

CHSSAP62. Disclosures in "Reinsurance Assumed & Ceded" part of Notes to FS

1) Max return commission due to reinsurers if all reinsurance cancelled 2) Accrual of additional or return commission based on loss experience

CHIRIS. Surplus Aid Considerations

1) May indicate management believes surplus is inadequate 2) Surplus aid may assist other ratios such that concerning metrics are hidden 3) Examine reinsurance treaties and consider solvency in case of cancellation 4) Recalculate ratios excl surplus aid: a) Gross&Net WP: PHS (Ratio 1 and 2) b) Gross chg in PHS (Ratio 7) c) Gross Agent's Balances: PHS (Ratio 10) d) Estimated Current Reserve Deficiency to PHS (Ratio 13)

CHGovIns. Medical Set-Aside CMS Guidelines

1) Medicare can refuse payment if MSAs not submitted/approved 2) CMS reviews MSAs where claimant is medicare beneficiary and settlement exceeds 25k, or where claimant is expected to be eligible within 2.5 yrs, and future benefit > 250k. 3) MSA specialists now used to help construct MSA 4) Claimant must pay the WC related bills using MSA, and complete reporting of the payments 5) No provision necessary for drugs not covered by medicare 6) MSA based on claimant actual age

CHCOPLFR. Qualified Actuary Definition

1) Member in good standing with CAS 2) Member in good standing with AAA who is approved them 3) Must be appointed by 12/31 of the CY

CH10 Intercompany Pooling Note

1) Members of pool 2) Lead company 3) Pooling % of each participant

CHNAICSMI. Stage 3 - Regulatory Backstop

1) Minimum capital requirements by the states (for licensing?) don't reflect differences in size, risks, or financial condition of the insurer. RBC DOES! The reg can intervene with minimal court involvement 2) Guaranty funds will pay claims in case of insolvency, up to a limit

CH15. Important trend Considerations

1) Mix of business (exp, geography) 2) Policy limits 3) Reinsurance attachment points and limits 4) Definition of a claim count

CH25. Risk management Functional Area

1) Monitor risk management function and maintaining aggregate view 2) Ensure the internal model integrated with the risk management function

CHWiening Social Security Disability Income Benefits

1) Monthly cash to main guy, or all the kids and stuff 2) Hard to qualify for benefits - half are denied, so obvious not to rely on social security income during disability

CHHamilton. Reinsurance Facilities Objectives

1) More equitable pricing 2) Improve service 3) Avoid stigma associated with being in ARP btw, not in many states

CHNAICSMI. Preconditions for Effective Regulation?

1) Must have requisite authority such as legal basis, independence, adequate powers, resources

CHSSAP62. Required Terms for Reinsurance Agreements

1) Must have solvency clause 2) Recoveries due to ceding must be available "without delay" 3) No guarantee of profit for either party 4) Provide for reporting of premium and losses at least quarterly, unless no activity. 5) Mention credit risk for intermediary is responsibility of insurer 6) For certified reinsurer, must have proper funding clause that requires reinsurer provide at least sufficient security so that there's no FS penalty.

CHFREIHAUT. RTA and Commutation

1) Must reflect in model if it impacts cash flows 2) If fee to prevent commutation, treat as premium 3) Model should include some logic for economic commutation decisions (if unilateral) 4) No adjustment to projected payment pattern if commutation is based on agreed upon value or actuarial determination

Interstate Insolvency Remedies

1) NAIC Reforms 2) Interstate Compacts 3) Federalization

Financial Accreditations to DOIs

1) NAIC created basic standards to improve insurance company solvency regulation 2) Steps in program: a) IC submits request for review b) NAIC expert team visits company to review c) Interview department personnel d) laws and regs e) prior exam reports f) inspecting reg files for selected companies g) org and personnel policies h) gain understanding of document and communication flows i) approved or state must make changes and then be re-reviewed

CH19. R1 Formula Considerations

1) NAIC factors for book/adjusted carrying value of assets 2) Additional charges a) Bond size factor b) asset concentration factor

Ch19. Future of RBC

1) NAIC is reviewing the solvency regulation in the states 2) Going forward, RBC process will be complemented by national assessments that are part of ORSA (from solvency II). NAIC is also considering 1) Documenting the development of RBC over the last 20 years, including reasons for changes in the calculations 2) Evaluating enhancements to current risk charges (including addressing the relevance of current charges) and considering new charges 3) Making the details of the RBC calculation public

CH 8/9 stock impairment

Recognize a permanent reduction in value as impairment.

CH19. R4 Industry RBC History

1) NAIC provides, based on hist industry ratio of net inc loss&dcc development during yr (Sched P, 2) to net loss&dcc reserves from prior year. 2) Modified from "worst case year" approach a) insufficient data/unusual data was removed b) 87.5% percentile was used instead of worst case c) 5% floor RBC charge (after adjusting for investment income) d) Factors capped to limit change in base RBC (return to this at the end)

CH14. Part 1 Detail

1) Name of Reinsured 2) Paid / Case on L&LAE 3) Contingent Comm Payable 4) Assumed Premiums Receivable (Excl fixed comm payable, but Incl conting comm payable) 5) Various collateral values

CHCOPLFR. Notices to IC when Appointed Actuary Changes?

1) Name&Title 2) Manner of appointment 3) Statement that person meets requirements

Ch19. Cannot make the Company Adjustment If the following

1) Net EP or L&LAE <= 0 2) More than 1 year's Net EP for a line is < 20% of the all-yr average for that line (if just 1 year is less, exclude it from the average) The reason for this is that we're dealing with several years with relatively low premium. So we can't trust the average loss ratio figure that we calculate. 3) If more than 3 Net EP for a line is < 20% of the all-yr average for all lines (if less years, can be excluded). THe intent of #3 was just to perform the company adjustment for the major lines of the company and not the smaller lines

CH 8/9. Other Income Accounts

1) Net Gain from Agents' or Premium Balances Charged Off - used as a write-off when insurer doesn't think it will receive money. 2) Finance & Service Charges (includes premium installment fees) 3) Aggregate Write-ins for Misc. Income a) Gain on sale of equipment b) Retroactive Reinsurance c) Gain on Foreign Exchange d) Corporate Expenses e) Fines & penalties of regulatory authorities 4) Dividends to policyholders (paid or declared but unpaid) 5) Federal & Foreign Income Taxes (excludes portion deferred to future years)

CH 8/9. 2 Components of Investment Income

1) Net Investment Income Earned: a) mainly interest and dividends b) recorded net of investment expenses c) recorded gross of taxes d) accrual bases (reflected in year earned, not in year cash transferred) 2) Net realized capital gain a) adjusted for amortization of bond premium/accretion of bond discounts b) realized losses can be caused by impairment

CHFREIHAUT. RT and Prescribed Payments

1) No RT if pattern is prescribed. 2) Reinsurer must make timely reimbursement payments.

Arguments for Appointed IC

1) No need to raise funds -> not unfluenced by a certain group 2) Experienced and knowledgeable 3) Less likely swayed by public opinino 4) Perceived as a career state government employee interested in insurance reg

CHFREIHAUT. RAS Contents

1) No separate written/oral agreements between the parties 2) Document every reinsurance contract where risk transfer is not self evident: a) Describe economic purpose of transaction b) Disclose that you have backup demonstrating documentation 3) Confirm reporting entity complies with SSAP62. 4) Appropriate monitoring of the reinsurance

CHSSAP53. WP recording

1) Non-WC: effective date of policy 2) WC: installment basis to match billing to policyholder

CH19. R0 Off-BS Components

1) Non-controlled assets a) collateral loaned (sec lending program) b) asset reported on co BS but not have exclusive control over c) assets sold subject to put option 2) Contingent liabilities - uncertain amount (eg structured settlement) 3) Guarantees for benefit of affiliates

CH19. R3 (Credit Risk) Sources

1) Non-invested assets 2) Reinsurance rec 3) Health credit risk

CHSSAP62. Reinsurance Premiums: Overdue

1) Nonadmitted if over 90 days overdue Exceptions 1) Reinsurer maintains UEPR and loss reserves due to ceding entity (admitted limited to reserve sizes) 2) Ceding entity is licensed and in good standing

Common Reasons for Disapproval

1) Not in public interest 2) Illegal 3) Unfairly discriminatory 4) Excessive, Inadequate

CH15. Other Areas to Look in Further Adverse Loss Dev Research

1) Note "Changes in IL and LAE" 2) Note "Asbestos/Environmental Reserves"

CHCOPLFR. Steps if actuary is replaced

1) Notify Insurance Department within 5 days 2) Letter to IC about any disagreements in last 24 months (risk of material adverse dev, required disclosures, scopes, procedures, or data quality). 3) Request in writing to former actuary if they agree with 2). Actuary response in writing and forwards both letters to IC.

CH19. R4 Reserve RBC Combined LoBs

1) Occurrence and CM for Other Liability and Product Liability 2) Reinsurance property and Financial

CHHamilton. MD Auto Fund

1) Only state owned insurance company in the US. 2) To be insured, motorist shows evidence of cancellation, and 2 rejection letters. 3) Shit handled by MAIF

CH25. ORSA Minimum Contents

1) Overall solvency need (specific risk profile, approved risk tolerance limits, business strategy) 2) Compliance with cap reqs and tech provision reqs 3) Extent to which risk profile deviates significantly from assumptions underlying SCR.

CHHamilton. Reinsurance Facility Operation

1) P/L ceded to facility (if desires. can keep app as voluntary) 2) Facility shares total UW results with all insurers 3) RATES ARE NOT UNIFORM

CHCOPLFR. Data Reconciled against Schedule P

1) Paid Losses 2) Case Incurred Losses 3) Paid DCC 4) Case Incurred DCC 5) Paid AAO 6) S&S recvd 7) EP Reconcile at most detailed schedule P level. Compare pre-adjusted data P if adj made to perform analysis. (e.g. trend)

CH15. S&S

1) Paid losses recorded net of S&S rcvd 2) Unpaid losses recorded net of S&S anticipated

CHGovIns. Eval of WC Insurance

1) Private carriers are largest source 2) State funds have created big competition 3) Proponent of state fund - State funds can offer higher levels of services as a specialist WC insurer 3) Proponent of state fund - state fund self supporting so reduced overhead via no commissions. 4) BOTH private and state fund can be efficient

Ch10 Type1 Event Note

Recognized Subsequent Events - do this when it provides extra context about something existing on accounting date.

CHFREIHAUT. RTA and Practical Considerations

1) Parameter Selection - look to contract or selected by modelers 2) Alt Irate > RF Rate (unlikely that Alt is lower, and plus Alt would over detect RT) 3) Alt Irate issues: a) true yield not known by ceding company b) RT more likely when dealing with reinsurers with poorer inv yields than selected 4) IRate accounts for expected duration of cash flows. 5) RF Rate is simple to obtain and is historically acceptable. Makes sense to use as default. 6) Yield curve instead of single IRate. a) produce different IRate per iteration b) This is not allowed by accounting principles 7) Payment Patterns Must be Reasonable a) must be reasonable b) can be fixed or variable (extra complexity) c) can be based on hist exp of ceding company, industry benchmarks, or combination of these 8) Loss distribution based on a) hist comp xp b) industry benchmarks c) pricing information d) judgment e) all of above 9) Critical to test reasonableness of tail results: important because these high losses impact RT results, and difficult to model the tail 10) Parameter Risk (exists due to uncertainty in appropriate selection) can increase chance of RT.

CHKlann. Motivation for Commutation

1) Party wishes to exit LOB (cancelling reinsurance can make it easier to arrange loss portfolio transfer) 2) Concerns over solvency (insurer can eliminate credit risk, or get cash infusion) 3) Parties want to end a troubled relationship 4) May have very different ultimate loss projections and this disagree on premiums and future liabilities.

Pre-1944: Paul v Virginia

1) Paul arrested for ignoring VA law to not sell NY policies 2) Supreme court agree with lower courts: "insurance is a local contract". It is not interstate commerce. 3) States continued to regulate own insurance market without violating constitution

CHHARRINGTON. Important Cases

1) Paul v VA (1868) - Insurance is not commerce/states regulate 2) US v SEUA (1944) - Insurance is commerce/Sherman Act applies 3) McCarran-Ferguson (1945) - Endorsed state regulation. Insurance excluded from Federal antitrust law

CH10 Commutation Impacts

1) Payment from reinsurer is recorded as negative paid loss (income statement) 2) Loss reserve is increased (balance sheet)

CHSSAP62. Run-Off Agreements: Accounting for Ceding

1) Payment to reinsurer recorded as paid loss 2) If 1) < reserves transferred, difference recorded as decrease in losses incurred 3) Inc reinsurance recoverable by amount of transferred reserve

CH22/23. Estimating L&LAE future cash flows

1) Payout pattern based on loss dev 2) Implied pattern based on ratio of paid loss to ult loss by AY (similar to IRS approach)

CHWiening. Medigap Insurance Details

1) Pays what's not covered by medicare because of exclusions, deductibles, limitations, etc 2) Sold by private insurer and regulated by federal law 3) There's open entollment.

CHNAICSMI. What is the future of financial regs?

1) Peer review has been important historically. Probably to continue. 2) Optimum level depends on the costs, how fair customers are treated, and how stable the insurers are on their own

CHNAICSMI. Profitability and Competitiveness

1) Persistently high profit -> market is not attracting enough competitors 2) Persistently low profit -> insurer having trouble estimating losses, or can't set adequate rates

CH21. Stakeholders of FSRs

1) Policyholders 2) Directors of corporate policyholders - look at cancellation endorsements and highly rated insurers 3) Insurers look at reinsure FSRs 4) Investors

CHGAO. RRG

1) Pool to spread liability risk among members. 2) Members insuring similar risks 3) Owned by the members of the RRG

CH14. Schedule F Other Useful Figures to Examine

1) Portion of gross losses from assumed reinsurance tx 2) Signif of assumed and ceded tx to surplus 3) Allow further invest of fin str of insurer and reinsurer 4) Highlight slow payer or not regulated reinsurer

CHFREIHAUT. RTA and Premiums

1) Premium are gross (exclude payments from reinsurer like ceding commissions) 2) Profit based on discounted premium 3) Contractual features like loss ratio caps and xp adjustments - apply to nominal premiums and losses

CHSSAP62. Additional Required Terms for Retroactive Reinsurance

1) Premium paid must be specific, fixed amount stated in agreement 2) Direct/indirect compensation to ceding company/reinsurer is prohibited 3) Prohibits clause for adjustment based on actual experience, unless ceding company can get profits in good situations 4) Commissioner of domiciliary state of ceding company must approve contract cancellation

DOI Funding Sources

1) Premium taxes 2) Fees and assessments 3) Appropriation from state treasury (about 50%) 4) fines/penalties

Insurance Advisory Organizations

1) Primarily deal with filing rates or prospective loss costs and forms 2) Can develop rating system 3) Collect and tabulate statistics 4) Research topics 5) Provide forum for discussion of important issues 6) Educate about issues 7) Monitor regulatory issues of concern to members

Purpose of Rate Regulation

1) Primary purpose is create financial stability of the insurer 2) Current focus is on pricing because impacts insureds directly, and trying to satisfy social risk classification criteria

Types of Filing Laws

1) Prior Approval 2) File and Use 3) Use and File 4) No File

CHNAICSMI. Stage 1 - Limitation of Risk through Design of the System

1) Prior approval of investments through a) NAIC defined limits approach, or b) Prudent person approach (company follows a sound investment plan) 2) NAIC Capital Markets & Investment Analysis Office reviews credit risk 3) Material transactions require prior approval - see Principle 6 4) Conservatism in valuing assets 5) Collateral requirements in order to receive credit for reinsurance 6) RBC - designed to provide a) Uniform capital adequacy standard based on risk b) Safety net for insurers c) Reg authority for timely action Note that RBC does not impact investment decisions, since most insurers hold more capital than RBC formula demands, but it may reduce risk by influencing management decisions

NAIC Model Law Requirements

1) Prior approval of rates 2) Explained how to file rates 3) Describe role of rating organizations 4) Recommended anti-rebating laws

CHHamilton. Fair Access to Insurance Requirements (FAIR) Plans

1) Prop insurance available in underserved areas (so not residual market), and applied to via authorized agent. 2) Coordinated by participating private insurers 3) Risk is shared in proportion to market share 4) Servicing carrier(s) do u/w, service, and claim settlement

CHHamilton. FAIR Plan Eligibility

1) Property with environmental hazard can quality, which is any condition beyond control of property owner that might give rise to a covered loss. Might need inspection first. 2) Not eligible: -Vacant/open to tresspass -In poor physical condition or unrepaired fire damage -In violation of law or public policy -Not built in accordance with building and safety codes -Subject to poor housekeeping (overcrowding, storage of trash, flammable materials)

NAIC Fundamental Insurance Objectives

1) Protect public interest 2) Promote competitive markets 3) Facilitate fair and equitable treatment of insurance consumers 4) Promote reliability, solvency, financial solidity of insurance institutions 5) Support and improve state regulation of insurance

CHNAICSMI. What is the US regulatory mission?

1) Protect the policyholder and those who rely on insurance coverage 2) Facilitate financial stability and reliability of insurers 3) Create effective and efficient market

CHHARRINGTON. Arguments for Prior Approval

1) Protect uninformed consumers from buying overpriced insurance (fix via info sharing instead) 2) Prevent excessive profits in a compulsory LOB (fails to recognize concept of inelastic demand) 3) Limited exclusion from federal antitrust facilitates collusion to increase prices (there is actually substantial heterogeneity in prices; structure of market makes colluding hard to benefit from) 4) Restricted risk classes increases greater equity or fairness (raises costs on good risks; discourages incentives to control losses)

CHWAGNER. Benefit of Advisory Orgs for New Insurers

1) Provide information not available elsewhere - policy forms and policies serving as minimum standard and facilitate comparison among companies 3) Allow small insurers to continue their presence because they have access to credible data

CH11. Purpose of Gen Int.

1) Provide responses which give extra clarity to users of AS 2) Identify areas that need further regulatory review

F Surplus. Statutory Liabilities

1) Provision for Reinsurance - Affects BS, but not IS. Direct charge to surplus. 2) PDR - Direct charge to surplus

CH 14. Criticisms of Schedule F Accuracy for Solvency Check

1) Provision is formulaic and ignores management input (based on knowledge of reinsurers and contract terms) 2) Formula has no statistical, historical, or actuarial basis. Can underestimate credit risk. 3) Unauth reinsurance may provide higher quality protection / lower prices 4) Financially strong slow payers may eventually pay, whereas current reinsurer may not be able to withstand a stress event 5) Detailed calculations may lead to false level of precision (cause true risk to be overlooked) 6) Costs of collateral requirements will be passed from reinsurers to insurers, and then to consumer 7) Provision may limit competition in US due to penalty assoc with unauth European reinsurers 8) Does not reveal anything about reinsurer solvency

CHASOP43. Method Considerations

1) Purpose 2) Nature of claims/exposure 3) Dev characteristics of claims 4) Characteristics of data 5) Applicability of various methods 6) Reasonableness of assumptions underlying methods Use multiple methods

NAIC Support and Service Office - Statistics Reporting

1) Quality monitoring a) check completeness/correctness of financial data b) work with state DOI on insurer filing and data quality 2) Routing reporting a) premiums, losses, loss ratio, average premiums b) asset, surplus, profit, insolvencies c) real estate holdings 3) Special reporting a) requested by various parties b) e.g. market share reports, guaranty fund assessment, products liability, or market entry/exits 4) Model statistical reporting

Gramm-Leach-Bliley Act

1) Question over who regulates bank/insurer combos - federal covered banks, and states covered insurer 2) GLB says each segment is regulated separately 3) GLB says states can't prohibit bank-related firms from selling insurance on same basis as insurance producers 4) Underwriting is different from sales and marketing a) National bank can't form subsidiaries to underwrite insurance b) Can arrange financial holding companies to create insurance affiliates - makes it more difficult for a failing bank to use insurer assets 5) Banks must disclose information-sharing policies 6) Encourages states to facilitate producers' ability to operate in more than one state a) NAIC created Producer Licensing Model Act that requires state to establish a system of reciprocal producer licensing or uniform licensing standards

CHSSAP62. Reinsurance Contract Categories

1) Quota Share (Pro Rata) - fixed % of each risk is ceded 2) Surplus Share (Pro Rata) - establish "line" and cede multiple. You retain the line. 3) Excess per risk - covers portion of each loss that exceeds retention (capped at a specified limit) 4) Aggregate excess of loss - same for aggregate losses 5) Treaty (Cats) - indemnify losses > retention due to single event

CH19. RBC System Components

1) RBC Formula: Min required capital (based on exposures). Output is RBC Ratio = Actual / Req Cap 2) RBC Model Act for Insurers: state reg has authority act if RBC < threshold.

CHGAO. Captive Types

1) RRG Captive 2) Pure Captive 3) Group Captive - covers a group of companies with diverse risks. Can provide property coverage

CHMcCarty. Other Inappropriate Rating Factors

1) Race 2) Genetic Testing 3) Ethnicity 4) Religion 5) Income level 6) Potential proxies for 1-5 such as occupation/education

CH12 5yr Ex of Things to Look for

1) Rapid change in revenue 2) Change in level of reinsurance protection 3) Increase in exposure to riskier/unprofitable lines 4) Shift from liab/prop

Reasons for Insurer Insolvency

1) Rapid premium growth (precedes half of past insolvencies) 2) Inadequate rates/reserves 3) Unusual expenses, and cat loss 4) Lax controls over managing general agents 5) Reinsurance collectible (must ensure insurer have adequate reinsurance) 6) Fraud

CHWAGNER. Consequences of O'Mahoney

1) Rate enforcement activities stopped - barriers for entry reduced 2) Bureau viewed as service provider in a competitive marketplace 3) Independent insurer gained significant market share 4) Bureaus began losing influence

CHSSAP55. Liab Est Range

1) Record best estimate 2) If in range, book estimate inside range 3) If no point in range is more likely, book midpoint Note that the range does not correspond to best and worst case scenarios (due to unlikely assumptions at those cases)

CH 8/9. Calculating capital gain

1) Record bond purchase at actual cost (includes brokerage and fees) 2) After purchase, value at amortized cost (for NAIC 1&2), or at min(amortized cost, fair value) (for NAIC 3-6).

CHPORTER2.

1) Recurring issues over time - Historical decisions can provide guidance 2) Courts often cite decisions in their reasoning

Consumer Groups Influence on State Legislators

1) Redlining prohibitions 2) Unfair claims practices 3) Compulsory practices 4) High-risk driver pools 5) FAIR plans 6) Windstorm and other cat pools 7) Tort Reform They can also influence NAIC model laws

CHFeldblumRating. AM Best Financial Strength Ratings

1) Reduces info costs for agents and policyholders 2) Important to insurers because they get 1) objective assessment on their ability to pay claims, 2) reinsurers desire investment grade ratings to retain business, 3) insurers desire good ratings on reinsurer when evaluating uncollectible reinsurance, and 4) independent agents use ratings to place business

CHNAICSMI. Principle 6 - Preventative & Corrective Measures, including Enforcement

1) Regs can take action based on risks identified in on/off-site exam monitoring, in order to prevent insolvency. Also can take action based on RBC ratio. a) Require insurer to provide updated business plan b) Require insurer to file interim financial reports c) Prohibit certain investments d) Restrict/suspend business that can be written/renewed e) Order an increase in capital/surplus f) Correct corporate governance practice deficiencies g) Require replacement of senior management h) Seek court order for receivership

CHGAO. RRG Captives and Effect on Increasing Availability and Affordability

1) Regs provided by Liability Risk Retention Act 2) For those groups with limited access to insurance, RRGs increase the availability 3) Regulators say they've filled a void in the market by a) affording coverage to groups who can't find it in the traditional market, b) offer other benefits such as tailored coverage, and c) serve wide variety of businesses such as medical malpractice

CHGAO. Non-RRG Captives Post-Licensing Regulation

1) Regulator can conduct financial exams 2) Reg can issue administrative cease/desist order 3) Reg can withdraw license 4) Reg can make you wait (seasoning requirement)

Implementation of Reg Action Procedure

1) Regulator will decide if low) mandatory corrective action, med) administrative supervision, or high) receiverships, rehab/liquids 2) May negotiate with insurer to avoid negative publicity 3) FAWG ensures domestic regs need to take action, despite possible negative impact to local area/state

CHNAICSMI. Analysis of US P&C Markets

1) Regulators are mindful that a competitive market place is the best way to have an efficient and effective market. 2) Competitiveness is measured market structure (market share, size and # of firms, entry/exit rates), market conduct (degree of independence firms have in setting rates). optimal market performance (loss ratios, profits, and insolvency rates) is large # of sellers, free entry/exit, and independent pricing. An optimal market leads to "efficient, optimal outputs and available, innovative products". 3) Regulators aim for "reasonable" level of competition, where a) Markets are relatively unconcentrated b) barriers to entry are low c) profits are moderate d) inefficiencies are limited Evaluation: US market are highly competitive, with multiple writers, fairly low concentration, and reasonable profitability. Steady increase in number of groups providing insurance in US. But there are cases where the market doesn't respond to the best interests of the policyholders. In these cases, regulation is necessary to influence company behavior. Regulators also help consumers understand the product.

CH18. IEE Uses

1) Regulators can monitor financial health by LoB 2) Regulators can monitor rate adequacy 3) Stakeholders can determine profitable LoB 4) Investors determine investment value 5) Actuaries can obtain P, L, and E for benchmarking

CH10 Reasons for PDR Existing

1) Regulatory 2) Competitive 3) Other These items could lead to inadequate rates for a period

CHNAICSMI. The 7 core principles of Financial Solvency

1) Regulatory reporting, disclosure, transparency 2) Off-site monitoring and analysis 3) On-site risk focused exams 4) Reserves, capital adequacy, and solvency 5) Regulatory control of significant, broad-based transactions 6) Preventive/corrective measures 7) Exiting the market/receivership

CHSSAP62. Retroactive Reinsurance: Special Scenarios

1) Reinsurance contract not signed within 9 months of effective date of the policy 2) Liabilities from court ordered rehabilitations, liquidations, or receiverships 3) Portfolio reinsurance (tfer entire segment)

CH14. Schedule F Part 8 Asset Adjustments

1) Reinsurance rec on paid L&LAE - is reversed to produce gross 0 2) Net amount rec from reinsurer: balancing item

CHFREIHAUT. Criteria for Risk Transfer

1) Reinsurer assumed significant insurance risk 2) Reasonably possible that the reinsurer may realize a significant loss THESE ARE VAGUE!

CH10 Reinsurance Assumed & Ceded - Reasons for note

1) Reinsurer is engaging in reinsurance contracts with commissions designed to manipulate surplus 2) Derive surplus impact if policies are canceled.

CHHamilton. Beach/Windstorm Plan Coverages

1) Reject new applicants when storm imminent. 2) Usual property coverages 3) 30-day notice to cancel with 3 exceptions: 1) NPC, 2) fraud, 3) arson

CHGovIns. Unemployment Insurance Evaluation

1) Replaced 1/3 of lost wages among those who qualified. 2) Can prolong unemployment spells 3) Only 2/3 bothered to collect. Raises social adequacy questions.

CHSSAP55. Est Liab Considerations

1) Reported Losses 2) IBNR a) Pure IBNR b) Reported but not recorded c) "bulk reserves" - deficiency in case 3) LAE a) DCC - internal and external b) AO - adjusters, etc

CHFeldblumLR. Extending out Prior Yrs Row

If 11th yr paid > 10th yr paid then cap at amount paid in 10th yr, excess is paid in 12th yr. Follow same pattern. Unlimited excess is paid in 16th yr.

Politically Inspired Insurance Laws

1) Reporting business written by zip 2) Reporting $ of adverts, which could reflect preferred markets 3) Report # agents by characteristics 4) HO pricing can not have minimum standard for AOI 5) Certain driver characteristics that cannot be considered

CHSSAP62. Characteristics of Reinsurance Agreements

1) Reporting responsibility - time schedules to report losses. Can be used as the due date for establishing overdue recoverables. 2) Payment terms - payment schedules, currencies, rights of parties to withhold funds. Can be used as the due date for establishing overdue recoverables. 3) Payment of premium taxes (usually ceding company) 4) Termination a) cut-off - reinsurer responsibility ends when contract is terminated b) run-off - reinsurer responsible for inforce pols at termination date 5) Insolvency Clause - reinsurer obligations remain if ceding company fails

CH30. Federal Insurance OFfice (FIO) (From Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010)

1) Reps US in IAIS. Coordinate federal efforts to represent US regulation. 2) Determine if state insurance measures preempted by covered agreements - agreements between US and Foreign entity to recognize insurance regulation that is substantially similar to the US. 3) Consult with states regarding insurance matters of nat'l importance.

NAIC Support and Service Office - Insurance Issues

1) Research economic, political, and social implications of insurance issues 2) Regulators consider effect of actions on market affordability and availability, insurer solvency, service, and LAE 3) Prepare reports on special subjects e.g.redlining, competition, risk-based capital, underwriting cycle

CHSSAP65. High Deductible Policies: Disclosures

1) Reserve credit from high deductible on unpaid claims 2) Paid claim amounts billed and recoverable

CH10 High Deductibles Note

1) Reserve credit insurer has recognized for unpaid claims 2) Amount billed but not collected

CHSSAP62. Retroactive Reinsurance Accounting

1) Reserves recorded on gross basis. Recoverables recorded as contra-liability (negative liability). 2) Surplus gain - recorded as special surplus fund (cannot pay out as dividends. has some restrictions). 3) Gain reclassified as unassigned surplus when actual recovered funds > consideration paid. a) Transfer limited to lesser of 1) amount recovered in excess of consideration paid, 2) initial surplus gain resulting from retroactive contract. b) when contract is eliminated, can transfer remaining balance to unassigned surplus 4) Special surplus reflects changes in ceded reserves 5) Initial gain recorded as write-in item in IS, called "Retroactive Reinsurance Gain". 6) Consideration paid reduces the assets

CH10 Retroactive Reinsurance Disclosure Details

1) Reserves transferred 2) Consideration paid or received 3) Paid losses reimbursed 4) Special surplus generated 5) Reinsurers involved

NAIC Overview

1) Responsibility is to coordinate regulation of insurers operating in multiple jurisdictions 2) Create uniform financial reporting that is more effective in stabilizing industry's financial stability

CHSSAP5. Essential Components of Liabilities

1) Responsibility to tfer/use assets in future based on occurrence of specified event or based on demand. 2) Entity has little/no discretion to avoid responsibility 3) Tx/event that obligates entity already occurred

CHASBESTOS. Changes in Litigation Environment

1) Restriction of nonmalignancy claims 2) Venue reform

CH15. Changes that Impact Schedule P

1) Retention 2) Claims settlement and reserving 3) Business mix 4) Underlying exposures (many of this disclosed in Interrogatory 7)

CHCOPLFR. Relevant Comments for Reinsurance

1) Retroactive 2) Financial (such as deposit insurance) 3) Reinsurance collectability (ask management about issues, review reinsurer ratings, examine Schedule F for paid losses > 90 days past due)

Federal Intervention in "Business of Insurance:"

1) Risk Retention Act 2) National Flood Insurance Act

CHCOPLFR. Reinsurance and SAO

1) SAO scope dictates necessity of opinion on net/gross reserves. Consider collectability of reinsurance. 2) Actuary must comment on retroactive/financial (but not classifications themselves). If determination is incorrect, actuary can state so in SAO and document impacts of adjustments. "$XX of L&LAE ceded to currently insolvent insurers. Provisions for reinsurance account for $YY. Difference recognized as uncollectable."

CHFREIHAUT. RTA and Interest Rates

1) SSAP62 says same discount rate per simulated iteration (no interest rate risk!) 2) AAA says same interest rate used in PV 3) SSAP62 says interest is "reasonable and appropriate". AAA says use risk-free rate (conservative view). 4) SSAP62 - use interest rate that reflects timing of payments to reinsurer and duration of investment.

CHFASB944. Prospective + Retroactive Contracts

1) Same contract may cover losses from prior year pols and in future years 2) Contract can be purchased in the middle of a term, and apply to the entire term.

CHHamilton. Joint Underwriting Associations (JUAs) Servicing Carriers

1) Selected by size/capability of providing services 2) Have greater control than insurer in ARP or reinsurance facility 3) Rates are based on xp of the pool, uniform for all servicing insurers, are higher than the voluntary market just like ARP.

Fact Finding Procedure

1) Several state regs examine insurer 2) Use judgment on top of stat ratios to determine sound vs unsound insurer 3) Insurer management uses accountants and actuaries to assist in process (actuarial reserve opinion needed)

Exceptions to States' Control over Insurance

1) Sherman act prohibits boycott, cocercion, intimidation 2) Federal antitrust laws apply if state law doesn't extend to these activities 3) When Federal law is designed to regulate insurance - they preempt state laws

CHFASB944. Short vs Long Duration

1) Short - provides protection for a fixed period of short duration, and allows insurer to cancel or change provisions at end of each period 2) Long - Not Discussed

CH18. UW Inv Gain (per LOB)

IGR * (mean net L&LAE reserves + mean UEPR * (1 - prepaid exp / written prem) - mean net agents' balances + ceded reinsurance premiums payable = IGR * (Investable LoB Funds - Prepaid Expenses)

CHNAICSMI. Reinsurer Certification

1) Show financial strength 2) Timely claims payment history 3) Must be domiciled and licensed in a "qualilfied jurisdiction" Benefit of certification is required collateral reduction for insurer to receive full credit for the reinsurance.

CHGAO. NAIC Licensing for Non-RRG Captives

1) Show meets minimum capital and surplus requirements 2) Identify whether it is affiliated with other companies 3) Submit biographical affidavits for its officers, directors, and key management

CHFASB944. Significant Loss Details

1) Sig loss is based on PV of cash flows occurring between ceding and reinsurer 2) Same interest rate must be used and reflect 1) expected timing, and 2) Duration cash flows are invested by reinsurer

CH10 PDR Note Disclosures

1) Size of deficiency 2) If investment income considered 3) If change in treatment of investment income, extra note made in "Accounting Changes and Correction of Errors"

CHCOPLFR. Ways You can be Exempt from SAO

1) Small companies less $1M D&A premiums in CY, and less $1M L&LAE reserves at year end 2) Insurers under supervision or conservatorship 3) Nature of business (eg?) 4) Financial hardships - if SAO cost exceeds lesser of 1% of capital&surplus and 3% of D&A premiums

CHWiening. Definition of Medicare

1) Social insurance covering med expenses 65+ peeps 2) Can extend to dialysis peeps or those getting social security disability benefits > 24 months 3) Part A Hospital, Part B Supplemental, and Part C is MediChoice

CHWiening. OASDI Characteristics

1) Social insurance program - easy to administer and fund by the gov 2) Compulsory - more easy to financially protect the population, and adverse selection is controlled since all people are covered 3) Supplement with your own income 4) Emphasis on Social Adequacy, not luxury 5) Benefit loosely related to earnings 6) Benefits prescribed by law 7) Financially self-supporting via payroll taxes, interest on trust fund 8) Full liab funding not necessary - program expected to operate indefinitely, so new incoming workers will support retirees. Plus the Fed can borrow 9) You have the right to benefit if meet requirements - no means test

CHGovIns. Crop Insurance Structure

1) Sold/serviced by private insurer, and then reinsured by the Federal government. 2) Losses not proportionally shared - Fed loses 3) The Risk Management Agency (RMA) subsidizes the premium and reimburses the insurers for the administrative costs ----- Improved in 2000 and 2005 where Fed paid more premium and offered more coverage. The reimbursement rate to insurers dropped.

CHHARRINGTON. 9th Century Compact

1) Some companies would defect 2) Anti-compact laws limited success 3) THese were repealed because unconstitutional or caused unfair price differences in market

CH10 Summary of Sig Accnt Pols

1) Source of accounting rules to construct annual statement (e.g. NAIC) 2) Exceptions to rules (either prescribed or permitted) 3) Additional details on significant accounting policies

CHIRIS. Low Inv Yields Considerations

1) Speculative investing: large cap gains in long run, but none in short run. High risk and illiquid. 2) Large investments in Affiliated Companies: appropriate considering the value and liquidity of these investments? 3) Large investments in Home Office Facilities 4) Large investments in tax exempt bonds 5) Significant interest payments on Borrowed Money 6) Extraordinarily high investment expenses

CH25. SCR calculation methods

1) Standard formula from regulator 2) Internal models (must demonstrate validated by 3rd party and documented appropriately) 3) Mix of Both 2 results in lower SCR

NAIC Budget Sources

1) State assessments - based on premium volume. Often funds are from dedicated funding and not dedicated funding. 2) Database fees 3) Publications/subscriptions 4) Meeting registration 5) Training and education

CHASOP41. Material Differences

1) State earlier results no longer valid 2) Why have results changed?

Reasons Model Laws Not Adopted

1) State may view as inappropriate or unnecessary due to coverage in other laws 2) Legislators might decide to modify law to meet their states' particular needs or better match other laws 3) Legislature may be busy and not give as much attention to NAIC model law

CHCOPLFR. CHCOPLFR. Main Purpose of SAO

1) State opinion about resonableness of insurer's reserves 2) Notify stakeholders on sig risks that may impact reserves 3) Disclose risks that can produce sig material adverse deviation

Annual Reports of Regulator: Required Contents

1) Statement of Income and expenses of the department 2) Exhibit summarizing financial status and business transactions of licensed insurers in state 3) Names of insurance companies in receivership or other official financial difficulty with a brief explanation of status 4) Recommendations by insurance commissioner about insurance laws and department's operations

CH21. Rating Agency Monitoring Process

1) Statutory fin statement filings 2) Interim management reports 3) Significant public announcements (earnings release)

CHASBESTOS. Continued Asbestos Exposure

1) Still legal to use in products 2) Poor tracking of old products with it 3) Poorly designed product labels

CHSSAP62. Exempt agreements from retroactive re accounting

1) Structured settlement annuities 2) novations 3) killing of reinsurance treaties entered into as normal business 4) intercompany reinsurance agreements with no surplus gain between affiliates 5) run-off agreements

Arguments for Elected IC

1) Subject to dismissal for cause 2) Appointed IC may not rock the boat 3) Appointed IC less aware of public opinion 4) Appointed IC might yield to interest of appointers

CH25. Solvency II Pillar 2 Overview

1) Supervisors identify firms with higher risk profile 2) Supervisors have power to intervene

CHSSAP62. Reinsurance ceded to Certified Reinsurer

1) sufficient collateral MUST be provided( based on reinsurer's rating) 2) Upgraded ratings apply after the rating change. 3) Downgraded ratings apply to all in-force contracts. 4) Ceding company has 3 month grace period to collect, unless commissioner determines uncollectable.

NAIC Staff Support of State Insurance Reg Officials

1) Support NAIC committees and task forces 2) Maintain databases to help regulators track financial adequacy of insurers 3) Scrutinizing alien E&S insurers seeking business in US 4) "friend of the court" supportive briefs in court cases 5) Valuing insurers' securities - through the Securities Valuation Office 6) Keeping track of insurance issues at federal level 7) Helping state insurance officials with info about pricing and coverage 8) Assist states in responding to federal reporting requirements 9) Produce publications on insurance issues 10) Statistical reports for financial and market matters 11) Giving expert advice about financial regulation, market conduct regulation, and computer usage

CH15. Schedule P Uses

1) Supports SAO: a) direct, gross, and net loss and expense reserves b) anticipated S&S booked in reserves (because the reserves included are already net of SS) c) tabular/nontabular discounts booked in reserves 2) Shows reserves development, by LoB or particular year 3) Shows source of payment patterns used in tax discounting 4) Shows split between case and IBNR 5) Hist claim count data (helps with trend and claims handling reviews) 6) Provides data to calc RBC loss sensitive disc

F Surplus. Adkinson & Dallas Surplus adjustments to get to Capital Invested

1) Surplus 2) Equity in UEPR = UEPR x Acq % 3) Equity in undiscounted reserves = LR * (1 - disount%) Capital = 1 + 2 + 3 4) DTA should be subtracted from 1 + 2 + 3. (note acq cost in tax accounting always assumes 20%)

CHBLANCHARD. Discuss the Impact to Ceding Company Financials

1) Surplus 2) Loss reserves 3) Unearned premium 4) Leverage ratios - P/S 5) IS

CH18. Allocating Surplus

1) Surplus Basis = Mean Net L&LAE Reserves + Mean Net UEPR + Net CY EP 2) Surplus Ratio_Tot = Mean Surplus_Tot / Surplus Basis_Tot 3) Surplus_LOB = Surplus Ratio_Tot x Surplus Basis_LOB

Surplus Lines State Laws

1) Surplus lines broker is accountable for placing business with eligible nonadmitted/nonauth companies 2) Domiciliary jurisdiction review the nonadmitted unauth insurers for solvency 3) Surplus lines licensing is typically only available to producers who already have P&C licenses 4) Insurer must have adequate capital/surplus and it often is licensed in > 1 state 5) Licensee must conduct "diligent search" of licensed market first, and then file affidavit with DOI saying unavailable coverage in it.

CH10 Two Types of Discounting for Unpaid Loss & LAE

1) Tabular - 2) Non-Tabular

CH22/23. S-K

1) Tabular analysis of changes in aggregate reserves for unpaid L&LAE for each of latest 3 years 2) 10yr loss reserve dev table - used to evaluate management's record of setting reserves. 3) Method to estimate effects of inflation 4) Reconciliation between SAP/GAAP reserves for L&LAE with explanation of key differences SEE SOURCE FOR EXAMPLES

CHFeldblumStatIncome. Adjustments to Statutory to get Taxable Income

1) Tax exempt income 2) Divs received deduction 3) Proration 4) Revenue offset 5) Reserve discounting

CH25. Solvency II Liabilities and Surplus

1) Technical provisions 2) SCR which includes the MCR 3) Free surplus (Assets - tech prov - SCR)

CH14. Derivation of Due Date (thus age) of recoverable

1) Terms of reinsurance contract specify when insurer needs to pay 2) Terms of contract specify when insurer needs to report claims to reinsurer 3) Date when recoverable > 50k, and is paid recoverable 4) Use currently due if no specific dates mentioned and rec < 50k (always use this for mandatory pools and assoc)

CHMcCarty. Weaknesses in Use of Credit Scoring

1) The credit reports themselves - 2000 Consumer Reports study showed 50% contained errors 2) Identify theft can change score at no fault of the individual 3) Excessive access to credit for mortgages, etc can worsen score 4) Can disproportionately affect a) recent divorcees, b) recently naturalized citizens, c) elderly, d) disabled 5) Economic downturns and vulnerable populations 6) Studies show no sig diff in severity, only frequency 7) Sound financial decisions can lower

Risk Retention Act (1981)

1) This addresses ratemaking and reserving practice problems for Product Liability Insurance 2) The Fed found that Product Liability insurance price/availability was in crisis due to 1) questionable ratemaking/reserving, 2) unsafe products, and 3) uncertainties in tort/legislation system 3) The risk retention act 1) enabled orgs to form their own risk retention groups to spread and assume their products and completed operations exposures, and 2) group is licensed in one state and permitted to operate in any 4) Eventually in 1986, risk retention groups could cover other commercial liability exposures

CH19. Risks excluded from RBC formula

1) Those associated with business plans & strategy 2) Management 3) Internal Controls 4) Systems 5) Reserve adequacy 6) Ability to access capital

ASOP20: Timing and Discount Considerations

1) Timing of recoveries (reinsurance, S&S) 2) Discount Rate based on a) Risk free rate (low risk/similar timing to losses/fixed income asset) b) Asset portfolio c) Rate requested by another party (must disclose as well)

CH19. Exceptions to RBC

1) Title insurance cos 2) Monoline financial guaranty insurance cos 3) Monoline mortgage guaranty insurance cos

CHCOPLFR. SAO Disclosures

1) Title should mention "statement of actuarial opinion" 2) Intended users of SAO 3) Intended purpose of SAO 4) Reserves opined upon 5) Basis of reserve presentation 6) Changes in accounting procedures since prior statement 7) Whether reserves are gross/ne 8) Est size of deficiency/redundancy (if so) 9) Items of qualification if a qualified opinion, reason for qualification, amounts of items. 10) If used another actuary's analysis, did you review it? 11) Is discounting used? What interest rate, and discount amount? 12) Collectability of reinsurance if net? 13) Risk margins used in reserve? Amount of risk margin?

CH14. Footnotes to Schedule F Part 3

1) Top 5 commission rates (of contracts where ceded premium exceeds $50k) a) Contingent commissions receivable b) Note to AS on reinsurance assumed and ceded

Intro III. Annual Statement contents

1. Jurat 2. Statutory financial statements 3. General interrogatories 4. 5year historical data 5. Schedules A, B, BA, D, DA, F, P, T, and Y.

CH1. Stakeholders of an insurance company?

1. Policyholders, 2. Claimants, 3. Investors, 4. Directors of the board, 5. Company management, 6. IRS, 7. Employees

CH21. Future Earning Referenced Sources

1) Trends in financial ratios 2) Large growth in WP during soft market (5yr hist data exh). Rate concessions or commissions? 3) Underwriting or Other Expense Ratios in U&IE or IEE 4) Increasing LR in 5yr hist data or Sched P. 5) Increased exposure to cats/large losses in Sched T, U&IE for LoB, Gen Interrogatories Part 2 has PML details. 6) Inv loss, inv asset mix, declining yields -> change in inv strategy or lacks control 7) Increase in provision for reinsurance in Cap&Surplus Section of IS => increased credit risk

CHKlann. Commutation Distortion Impacts

1) Triangles and LDFs 2) Reserve adequacy measures 3) Severity or Claim closure trends

CHHARRINGTON. Increased Regs in the 80s (Inc Claim Costs)

1) Tried to limit rate increases in the hard market 2) DOIs considered investment income 3) Limits on expenses 4) Restricted insurer exit of the markets (exit all lines and not just 1; permit gradual withdrawal; levy exit fees)

CHASBESTOS. Manville Personal Injury Trust

1) Trust created by largest manufacturer - to pay claims in equitable fashion 2) Rates increased over time due to a) change in Trust Distribution Process, b) greater awareness of risks, c) recent bankruptcies

CHASBESTOS. Attempted Solutions

1) Trust fund approach - federal reform 2) State tort reform - preserve right to claim on inactive docket 3) Restrictions on case consolidations and venue rules 4) Caps on noneconomic damages

CHIFRS. NAIC Concern about IFRS

1) Tx costs 2) Complexity of reserve calculations

CH 6/7. Schedule D Bond Info

1) Type of issuer (federal, state, corporate), 2) Maturity, 3) NAIC Class

CH13 Schedule D Bond Categories

1) US Gov 2) All other gov 3) US state, territories, possessions (direct and guaranteed) 4) US political subdivisions (direct and guaranteed) 5) US special revenue and special assessment and non-guaranteed gov/political oblications 6) Industrial & miscellaneous (unaffiliated) 7) Hybrid securities 8) Parent, subsidiaries, and affiliates

What is "Business of Insurance"?

1) US v SEUA - fixing rates by insurers is part of business of insurance 2) Robertson v California (1946) - Licensing of companies and agents 3) FTC v National Casualty Co (1958) - Selling and advertising of insurance policies 4) SEC v Variable Annuity Life INsurance Co (1959) - Variable annuities not part of business because no underwriting risk 5) SEC v National Securities (1969) - Insurance features are characterized by 1) relationship between insurer/insured, 2) types of policies that can be issued, and 3) reliability, interpretation, and enforcement of pols 6) Group Life and Health Insurance Co v Royal Drug Co (1979) - business of insurance companies not exempted from MF Act. Business of insurance is a) spreading and underwriting of risk, b) direct connection between insurer and insured, and c) exclusive activities within insurance industry

CHFeldblumLR. Statutory Accounting and Underwriting Losses

1) UW loss may be shown during the period the losses occur 2) Future periods will have positive investment income

CH19. R2 Concentration Factor - Fixed Income Subjec to Charge (StC)

1) Unaffiliated bonds (class 2 - 5) 2) Collateral loans 3) Mortgage loans

CH19. R2 Concentration Factor - R2 assets StC

1) Unaffiliated preferred stocks&hybrid secs (class 2-5) 2) Unaffiliated common stock 3) Investment in real estate 4) Encumbrances on invested real estate 5) Schedule BA assets (excl collateral loans) 6) Rec for secs 7) Agg write-ins for invested assets 8) Derivatives

CHFeldblumInvStrat. Optimal Tax Srategy - RIT v AMIT

1) Under RIT, tax exempt bonds preferable (avoid 35% tax, and just pay proration) 2) Under AMIT, taxable bonds are preferable

CH21. Items Impairing Future Earnings

1) Underwriting Strat 2) Pricing Strat 3) Investment Strat

CH22/23. SAP Retroactive Reinsurance

1) Undiscounted ceded reserves recorded as negative write-in liabs 2) Sched P not impacted 3) Gain when consideration paid < negative write-in liab. Gain is write-in called "other income". Surplus gain treated as "special surplus" until paid reinsurance recovery exceed consideration paid.

CHFeldblumLR. Determine Discounted Reserves

1) Undiscounted reserves (Sched P, 1. Gross up if necessary first) 2) Discount rate promulgated by Treasury 3) loss payment pattern by LOB

CH 8/9. Causes for Change in Surplus

1) Unrealized Cap gains - Inc 2) Unrealized Foreign Exchange Cap Gains - Inc 3) Net Deferred Income Tax - Inc 4) Nonadmitted asset - Dec 5) Provision for Reinsurance - Dec 6) Changes in Accounting Principles - Only impacts beginning surplus 7) Capital Changes/Surplus Adjustments a) Issuance of stock (paid in capital/paid in surplus) - Inc b) Return of capital - Dec c) Transfer from surplus to capital (no change) 8) Dividends to stockholders - Dec (paid from unassigned surplus)

CH10 Reinsurance Recoverables in Dispute - Reasons

1) Unwilling to pay because of a coverage disagreement 2) Unable to pay

CHHamilton. Residual Market Auto

1) Up rates -> state restricts -> tighten U/W guidelines -> unavailability persists 2) Residual market/shared market - intended to make auto more available/affordable who can't otherwise get 3) taxpayers share the costs

CH19. R4 Reserve Base RBC Adj for Inv Inc - Payment Pattern Methods

1) Use IRS disc approach applied to Sched P (excl WC and excess reinsurance) 2) Fit curve to data to estimate average payout over time (WC and excess reinsurance) (WC discount factor adjusted to reflect fact that a portion of reserve is already discounted for tabular discount.)

DOI Market Conduct Exams

1) Use NAIC Market Conduct Examiners Handbook 2) Review a) sales/adverts, b) UW, c) pricing, d) claims

CHKUCERA. Credit-Based Insurance Score

1) Uses items in credit report - # inquiries for new account, accounts 20 days or more past due

State Concerns of NAIC Accreditation

1) Usurps legislative authority 2) Continual need for new legislation via additional/revised model law

CH19. R2 RBC RAT/MCS

1/2 R1 RBC Charge

CH19. R4 Reinsurance RBC

1/2 RBC generated in R3 possibly allocated to R4 (if reserve RBC > reinsurance RBC + non-inv assets RBC)

CH15. Schedule P, Issues when Deriving LDFs from Part 2

1) Various allocations in the creation of Schedule P are based on interpretation of person completing it 2) Internal pooling / reinsurance arrangements that impact data may not be obvious. Can distort data. 3) Schedule P includes bus from participation in pools a) Pools record IBNR as case b) level of pool participation change over time 4) Schedule P 10 yrs not enough for long-tailed lines 5) Commutations distort reserves 6) Data in Schedule P combines L&DCC 7) Does not include managerial context. Need to discuss.

Domestic Insurer - Org Exam by Regulator

1) Verify min cap requirements is on deposit at approved financial institution 2) Verify management team in place 3) Corporate records in good order 4) Policy forms and rates have department approval 5) Gives employees chance to review with examiners the various DOI expectations for reporting

CHWiening. Part B - Supplemental Insurance

1) Voluntary program covering physician fees and most outpatient hospital services 2) Auto if enrolled in Part A 3) Not listing benefits

CHGovIns. WC and Medicare

1) WC is primary and M is excess 2) Medicare Secondary Payer Act - M is excess to liability insurance as well

CH14. Types of Credit Risk Security

1) WIthheld Funds (WF). 2) Letters of Credit. 3) Amounts of asset pledged or collateral held in trust (stays under control of reinsurer)

CHGovIns. Unemployment Insurance Eligibility and Benefits

1) Wage/time minimums in a 1 yr pd 2) Unemployed at no faultt 3) Actively seeking work 1) Benefit is usually 50% of earnings over 52-week pd 2) Subject to fed income taxes

CH10 Reinsurance Recoverables in Dispute - Questions

1) What is issue? 2) Disputed amount material to either reinsured or reinsurer? 3) Legal opinions available?

CHASOP43. Scope of Unpaid Estimate

1) What is the intended measure? (high estimate, low, median, etc). Discounted? 2) Reserves gross/net of recoverables? 3) Extent of reinsurance collectability risk? 4) Type of unpaid claim adjustment expenses included in estimate? 5) Types of claims covered by estimate (eg LoB, Time frame, Type of Loss)

CHPORTER3. State Laws May be Voidable

1) When state law contradicts federal law 2) When court determines state law implicitly interferes with purpose of federal law 3) State law imposes improper burden on interstate commerce, even though a federal law doesn't exist

CH10 Uncollectible Reinsurance - Questions

1) Why is it uncollectible 2) Other outstanding recoverables may also be uncollectible 3) How long has it taken company to write off uncollectible reinsurance previously disclosed?

CH10 Some questions if material credit risk exists

1) Why wasn't security provided? 2) Anything concerning about financial health of insurer/reinsurer? 3) Was large amount of recoverables caused by a catastrophe? 4) Are all of the unsecured recoverables concentrated with one reinsurer?

CH2. 7 ways actuary work areas impacted by accounting convention

1) Working with regulators to monitor financial health of an insurer 2) Pricing/product development (profit margins) 3) Determining capital requirements 4) Evaluating risk transfer of reinsurance contracts 5) Reserve adequacy for non-insurance entities (e.g. self insurer) 6) Preparing tax returns 7) Appraising/valuing companies in merger/acqs

F Surplus. Accounting Non-Admin Assets

1) Write off NMA as expense in IS 2) Classify asset as "nonadmitted" and charge surplus directly

CHFeldblumInvStrat. Stock/Bond Split Considerations

1) Yield - stocks have higher 2) Diversification - used to be difficult to do with bond portfolios. Now easier with mutual funds. 3) Asset liability management - P&C reserves are inflation sensitive and thus need stocks which are too 4) SAO - more so affects life because P&C SAO does not discuss assets 5) Management dislike of erratic income encourages bond ownership

CHCOPLFR. Factors that pose a risk of material adverse deviation

1) asbestos&environmental claims 2) construction defect 3) other mass torts 4) high excess layers 5) large deductible worker's comp 6) med mal legislative issues 7) rapid growth 8) lack of data

CHCOPLFR. Actuarial Report Mandatory Contents

1) description of actuary's relationship to company. What is their role in advising management about reserves? How often does actuary present analysis to board, and method? 2) Exhibit tied to AS comparing actuary's conclusions to booked amounts. (consistent groupings between both) 3) Exhibit reconciling and mapping to Schedule P 4) Exhibit listing changes in estimates from prior report, and explanation of drivers (grouped by reviewed segment and AY). Discuss material expansion/contraction of a range change. 5) More on trends that create risk/uncertainty resulting in material adverse deviation 6) More on drivers behind unusual IRIS ratios, and how drivers have been addressed in the past and now.

CHIFRS. IFRS Disclosures not in GAAP

1) judgments made by management in applying accounting policies 2) key assumptions about future 3) key sources of uncertainty at BS date

CHPreamble. Users of Accounting Info

1) management 2) investors 3) potential investors 4) lenders 5) investment analysis 6) regulators 7) customers

CH15. Adv to closing claim early

1) minimize adverse dev 2) allow insured to more quickly recover from loss

CHKlann. Commutation Premium Differences

1) parties calc different discount factors because they may view the risk associated with the claims differently.

CHWiening. Social Security Covered Occupations

1) private section - most 2) self-employed make >= 400 bucks 3) nonprofit make >= 100 bucks 4) State/local gov employees covered if state/fed make agreement

CH15. Possible reasons for reduction in settlement rates

1) reduction in staff 2) growth in book without inc in staff 3) surge in claims from cat event Recall this will understate LDFs so rpt/paid dev and BF methods understate IBNR, but exp method still accurate.

CHWiening. Social Security - Retirement Benefits Background

1) requires fully insured status 2) full benefits paid at full retirement age 3) benefit based on worker's primary insurance amount (PIA)

CH19. R3 RBC Criticism

10% was judgmentally selected. Does not differentiate by 1) reinsurer strength, 2) whether there is collateral. NAIC maintained conservative pick because 1) uncollectible balances have historically been responsible for several insurance failures, and 2) Reinsurance has been used to overstate surplus

CH19. R2 RBC Preferred Stock Class Factors

1: Highest .003 2: High .01 3: Med .02 4: Low .045 5: Lowest .1 6: In/Near default .3

CH19. RBC R1 Bond Classes and Factors

1: US gov backed by gov: 0 1: US gov not backed by gov: .003 1: All other 1s: .003 2: High credit: .01 3: Med credit: .02 4: Low credit: .045 5: Lowest credit: .1 6: In/near default: .3

Ch19. R5 Loss WP RBC Charge Ex

2.25 WP * (.89 x .967 + .385 - 1) = .553665 where .967 = 1.013 x (.618 / .679) .89 = LR, .385 = UWE Ratio, .618 = company LR, and .679 = industry LR Then .553665 * (1 - .002 x .3) = WP Reserve RBC (post loss-sensitive discount)

CH14. Provision for Reinsurance (Not Slow Paying Reinsurer)

20% for undisputed paid L&LAE rec over 90 days overdue + 20% all disputed paid L&LAE rec

CH 8/9. Underwriting and Investment Expenses - Overview

24 types in 3 groups. On Part 3 of U&IE. Grouped by operational function: 1) LAE, 2) Other Underwriting Expenses, and 3) Investment Expenses Organized by LoB in Part 2A.

Sources of State Insurance Law

3 branches of government and State insurance regulatory systems

CH14. IRIS Threshold for NWP to PHS

300%. Some insurers use high fixed commissions in order to reduce this ratio and conceal high operating leverage.

CHWiening. MediChoice - Part C

4 other options alternative to medicare 1) Original Plan + Supplemental Policy (Medigap) that you buy 2) Medicare Managed Care Plan (HMO, PPO, PSO) 3) Private Fee for Service Plan - can buy private health policy if want, medicare pays premiums towards that for covered medicare services. 4) Medicare Medical Savings Account - high deductible plan, where beneficiary is charged above MSA

CH19. Allocation for MCS and RSATs

50% to R1 and 50% to R2 (assume half equity and half debt)

CHCOPLFR. Responsibilities of Actuary - Retention

7 years - Actuarial Report and underlying workpapers supporting SAO Documentation should describe sources of data, assumptions, methods, any material changes in those (can be evaluated by another practicing actuary)

CHWiening Social Security Disability Income Benefit Requirements

<24 -> 6 credits in 3 yr period 24-30 -> work half the time between 21 and disabled 31+ -> 20 of the credits past 10 yrs 1) worker must satisfy 5 month waiting period 2) Disability - physical/mental condition that prevents from doing any substantial gainful work, and expected to last 12+ months or kill you

CHIRIS. Chg in Net Writings

= (Current NWP - Prior NWP) / Prior NW Measures stability in insurer's operations X >= 33% or X <= -33%

CHIRIS. GWP:PHS

= (DWP + Total Assumed Reinsurance) / PHS Measures adequacy of surplus on a direct&assumed basis, excl effects of ceded premium X >= 900%

CHIRIS. NWP: PHS

= (NWP + Total Assumed Reinsurance) / PHS X >= 300%

CHIRIS. Inv Yield (Ratio 6)

= 2 * (Net Inv Earned) / Sum Cash & Inv Assets between Curr and Prior Denominator = Current Yr Cash&Inv Assets +Prior Yr Cash&Inv Assets +Current Yr Inv Income Due&Accrued +Prior Yr Inv Income Due&Accrued -Current Yr Borrowed Money -Prior Yr Borrowed Money -Net Inv Inc Earned X < 3% or X > 6.5%

CHIRIS. 2-YR OPR (Ratio 5)

= 2yr (LR + UWE Ratio - InvR) LR = L&LAE & Pol Divs / EP UWE Ratio = (UWE - Other Income) / WP InvR = Net Inv Inc / EP X >= 100%

CHFeldblumLR. Discount Rate Details

= 60mnth moving average of "federal mid-term rates" (avg rates of Treasury securities 3 to 9 yrs remaining maturity), ending 12/1 of Prior AY. Rates "vintaged" (applied to all CYs for a given AY). e.g. 12/1/03 to 12/1/08

CHIRIS. Liabs to Liquid Assets (Ratio 9)

= Adj Liabs / Liquid Assets Adj Liabs = Liabs - Liabs equal to Deferred Agents' balances Liquid Assets = Liquid assets - inv in PSA e.g. bond, stock, cash, cash equivs, short term investments, rec for secs and inv income due&accrued Measures ability to meet financial demands X >= 100%

CHIRIS. Net Chg in Adj PHS (Ratio 8)

= Chg in Adj PHS / Prior PHS Chg in adj PHS = CY PHS - Change in Surplus Notes - Capital Paid-in or Tferred - Surplus Paid-in or Tferred - PY PHS Measure chg in financial condition based on op results and not considering capital injections from owners X < -10% or X > 25%

CHIRIS. Gross Chg in PHS (Ratio 7)

= Chg in PHS / Prior PHS Measure of change in financial condition X < -10% or X >= 50%

CHIRIS. Est Current Reserve Deficiency: PHS (Ratio 13)

= Est Deficiency / PHS X >= 25%

CHIRIS. Gross Agents' Balances to PHS (Ratio 10)

= Gross Agents' Bal in Course of Collection / PHS Agents' Bal not liquid so look for high ratio X >= 20%

CH19. R4 Average Growth Rate Factor

= Min ( Max ( Avg growth over 3 yrs, .1), .4) - .1

CHIRIS. One (Two) Yr Reserve Development to PHS (Ratio 11 and 12)

= One Yr Reserve Dev / Prior PHS Reserves are net of S&S and gross of discounts X > ?

CH 8/9. Current Year Surplus

= PY Surplus + CY NI + Other Surplus Changes + Addt'l Cap Cont's + Stockholder Divs

CHFeldblumStatIncome. Adjusted Regular Income Tax (ARIT)

= RIT - prior year's minimum tax credit If ARIT > AMIT, tax liabiity is ARIT If ARIT < AMIT, tax liability is AMIT and next year's tax credit is excess of ARIT over AMIT.

CH15. Interrogatory 4

Are reserves net of non-tabular discounts? Reminds of following 1) Disclosure of non-tab discounts included in Notes to FS 2) Disc only allowed if company received permission from state reg 3) Sched P prepared gross of non-tab discounts 4) Support for disc size available upon reg request

Ch19. Adjusted Capital Formula and Notes

= Surplus - Non-tab discounts (Schedupe P, Part 1) - Tabular discount on medical reserves. Removing impact of discounting because the discounting results in an increase to surplus. So we take out the surplus benefit from the non-tab discount. We do this because the discount is only implemented by a few companies, so this puts all companies on the same playing field. Then we take out the medical reserve discount, which again isn't frequent. Make sure you pay attention to if question says it's a medical or regular reserve. Safe to assume tabular discounts do not apply to medical reserves if the problem doesn't tell you.

CHIRIS. Surplus Aid Ratio

= Surplus Aid / PHS x >= 15%

CH4. Net Worth (Equity)

A - L; measures a company's ability to use A to satisfy L. For insurance company reporting under SAP, Net Worth = Statutory Surplus (Policyholder Surplus)

CH14. Provision for Reinsurance

A minimum reserve that is booked as a liability and represents uncollectible reinsurance. Changes recorded directly to surplus. This is unique to SAP.

CH15. Part 7 Sections

A) Primary (direct) b) Reinsurance contracts (assumed) Come back to the parts at the end

F Surplus. Adkinson & Dallas Insurer Premium Charge for Double Taxation (% investment yield)

AD Premium Charge = AD DT CoC / (1 - Corp Tax Rate) / (1 + yield)^.5

CHFeldblum Tax Mix. Bond Shift: Taxable -> Tax Exempt

AMTI -> more than RTI ->

CHFeldblumStatIncome. Alternate Minimum Taxable Income

AMTI = RTI + 75% Income that escapes taxation AMTI * 20% = Alt Min Income Tax

CH21. UEP Reserve Check

AY L&LAE ratios > 100% => UEP insufficient to cover future losses that emerge.

CHFeldblumStatIncome. Statutory Accounting: Double Counts of Acq Costs

Accounted for in 1) expense item and 3) UEPR item.

CH6. Permitted Practices

Accounting practices permitted by the state that differ from NAIC SAP.

Ch19. Purpose of written premium RBC

Accounts for the risk that future business may be unprofitable. We base this on CY premium because future year premium not known. Calculated for the same lines as the reserve RBC charge.

F Surplus. Debit v Credit

Accounts increased with a debit 1) Dividends 2) Expenses 3) Assets Accounts increased with a credit 1) Gains 2) Income 3) Revenues 4) Liabilities 5) Stockholder's Equity 6) Surplus

CHPreamble. Consistency

Accurate financial condition indication require consistency. Accuracy also means change accounting principles as new issues emerge.

CHASOP41. Actuarial Document

Actuarial communication in any recorded form. Can deviate from ASOP as long as you disclose rationale and effect.

CH19. Bond Size Factor

Additive factor reflecting amount of bond diversification. Considers non-gov 1s and 2-6 (non-affil). Based on # bond issues. Zero if more than 1300 bonds.

CH14. Schedule F Part 8 Liability Adjustments

Adjusted to 0!! 1) Ceded reinsurance prem payable 2) Funds held by company under reinsurance treaties 3) Provision for reinsurance Adjusted to gross 1) L&LAE: adj by ceded amount (tie back to Schedule P, P1 if no intercompany pooling. Schedule F treats intercompany pooling as reinsurance, and P is net of pooling) 2) UEP: adj by amount ceded (Schedule F, Part 3, Col 13)

CH14. Schedule F Part 8 Purpose

Adjusts BS net accounts to gross basis

CHCOPLFR. Definition of Material Adverse Deviation

Adverse deviation causing insurer to reach an "adverse" condition. There is a risk of material adverse deviation if there is a reasonable possibility of this happening. "I have identified major risk factors for company as x, y, and z" "I believe these cause risk for material adverse deviation" "Absence of factors does not imply additional risk factors will not be identified in the future"

CHIRIS. Gross Chg in PHS Considerations

Affected by 1) Net gain or loss 2) Unrealized capital gain/loss 3) Change in surplus notes, capital pain in, surplus pain in 4) Dividends to stockholders 5) Chg in nonadmitted assets 6) Chg in surplus aid from reinsurance 7) Accounting chg and corrections of errors 8) Chg in DTA 9) Chg in ownership

CHKlann. Definition of Commutation

Agreement providing for valuation, payment, and complete discharge of all obligations between parties of reinsurance contract

CH19. RBC for Investment in Indirectly Owned Alien Insurance Affiliates

Alien = inc outide of US. Not subject to RBC themselves. RBC = carrying value * .5

CH19. RBC for Investment in Direct Owned Alien Insurance Affiliates

Alien = inc outside of US. Not subject to RBC themselves. RBC = Book/adjusted carrying * .5

CH15. A&O

All other expenses eg 1) fees of adjusters 2) LAE for pools rpt CY 3) fees & salaries for people working in capacity of adjuster 4) attorney fees when determining coverage

CHKlann .Commutation: Allocation of Distortions

Allocate to LOB and AY if it impacts those.

CHSSAP62. Reinsurance Agreement with Multiple Cedents

Allocation agreement must be in writing with fair terms of the allocation

CH19. Inv Affiliates Definition

An entity existing to invest funds of the parent. Does not include brokers or fund managers that manage investments for other parties.

CH15. Interrogatory 7

Any changes or special circumstances that user should be aware of when relying on Sched P

CH19. R3 Health Credit Risk

Applied to cos where Acc&health premiums > 5% of total WP in any of last 3 yrs. Typical when insurer transfers risk to HMO.

CH19. R4 Health RBC

Applied to firms whose acc&health prem > 5% of total wp for last 3 years

CH15. Interrogatory 6

Are claim counts per claim or claimant?

DELETE ME

DELETE ME

CHNAICSMI. Principle 2 - Off-site analysis

Assess financial condition of insurer on an ongoing basis. Assess current and prospective risks. Examine 1) financial ratios, 2) IRIS Ratios and FAST In addition to financial statements and FAST, can review a) CPA audit report b) results from recent on-site exam c) SEC filings d) market conduct reports e) rate/form filings f) consumer complaints g) Independent rating agency reports h) correspondence from agents and insurers Each qtr NAIC Financial Analysis Working Group (FAWG) will look at: a) Market valuation and rating of insurer's debt b) Short sales of insurer's stock c) financial statements

CHSSAP62. Retrospective rating: Amount of coverage adjustment

Asset or laibility established by adjusting premium for change: e.g. extra month of coverage -> Premium / 12 = Asset. Put in period of loss event.

CHNAICSMI. What is NAIC's role?

Assist regulators in protecting consumers and maintaining financial stability

CHSSAP62. Deposit Accounting: Upward Adjustment at Eval Date

Assuming: record an interest expense Ceding: inc deposit inc outstanding loss liability inc interest income inc incurred loss

CHSSAP62. Definition of Reinsurance/Retrocession

Assumption by an insurer of all or part of a risk undertaken originally by another insurer. Retrocession is where reinsurer cedes all/part of business it has assumed.

CHNAICSMI. Hazardous Financial Condition - Supervisory Plan

At least yearly, regs develop supervisory plan that outlines 1) type of surveillance planned, and 2) Resources dedicated to oversight. This is documented at the end of the financial exam. The plan includes 1) earlier statutory exams, 2) Limited scope exams, 3) Key areas for financial analysis monitoring.

CH19. R4 Excessive Grower Check

Average growth rate in GWP (capped at 40%) > 10%, and using up to last 4 years

CH 6/7. BS Item - Amounts recoverable from reinsurers (Schedule F)

Balances due on paid losses. Balances on unpaid losses are not included. The unpaid loss liability has already been reduced to net recovery.

CH14. Letters of Credit

Bank says will pay if reinsurer cannot

CH19. R4 Reserve RBC Process

Base RBC adjusted by 1) loss sensitive contracts, and 2) loss concentration

CH14. Contingent Commissions

Based on the profit of ceded business

CHCOPLFR. Responsibilities of Actuary - Preparation

Become familiar with qualification standards, NAIC instructions, COPLFR, SSAPs, ASOPs

CHIFRS. IFRS Importance to US Insurance Industry

Benefits 1) Multinationals with US subsidiaries 2) US headquartered companies entering foreign markets

CHFeldblumInvStrat. Optimal Tax Strategy

Blend of taxable/tax-exempt bonds to achieve RIT = AMIT. RIT = 35% RTI = AMIT = 20% AMTI -> AMTI = RTI * 175%

CH6/7. Primary Asset for Insurers

Bonds

CH 8/9. Investment Bond Asset Classes

Bonds - largest asset class for insurers a) US gov bonds b) Bonds exempt from US tax c) Other bonds (unaffiliated) d) Bonds of affiliates

CH18. Prepaid Expenses (used in Gain on ins funds formula)

C&B + T&L + Other Acq + Gen * .5 Ratio this to Net Written Premium

Ch19. Action Level Table

CAL - 1.5-2 - company should submit action plan to commissioner with explanations of how it will 1) obtain the needed capital, or 2) reduce its expenses RAL - 1-1.5 - company still does the CAL and then regulator also has authority to take corrective action. ACL - .7-1 MCL - 0-.7

CH1. Purpose of financial report?

CH1. Enable stakeholders and regulators to 1) track financial performance, 2) make comparisons, 3) make in formed financial decisions.

CH10 PDR Grouping

Calculation for PDR should group the policies consistent with marketing, servicing, and measurement strategies.

CHCOPLFR. Actuary Reports on Scope Items

Can be oral, full Actuarial Report, or summary of actuarial report. Done annually. If insurer is member of group, separate report presented to board of each company.

CHCOPLFR. Intercompany Pool Materiality Standard

Can be standard for entire pool allocated to each member. Members need to have own unique opinions.

CH15. Importance of monitoring closure rates

Can distort loss projections depending on the method used. Think exam 5 distortions.

CH 8/9. Opportunity for Investment Income

Can invest the initially collected premiums until the losses are paid out at a later date.

Definition of Capital

Capital is based on par value of shares issued. Surplus is then the xs share value over that par value.

CHKlann. Commutation: Tax Accounting

Ceder and reinsurer have different impacts due to different discount factors (diff payment patterns)

CHIRIS. Surplus Aid

Ceding Commissions Ratio * Sum of UEP (Non Affiliates)

CHSSAP62. Reinsurance Treaty: Funds Held

Ceding company must est liability for this.

CHSSAP62. Retrospective rating: Premium adjustment

Ceding company needs to accrue liability when premium is adjusted upward. Put in period of loss event.

CHSSAP62. Commutations: Ceding and Reinsurer tx

Ceding company: eliminate reinsurance recoverable, cash received as negative paid loss. Gain/loss recorded as UW income. Reinsurer: eliminate reserves, record payment made to ceding. Gain/loss as UW income Commuted balances written of exhibits initially recorded

CHSSAP62. Deposit Accounting: Amounts Paid

Ceding: "deposit". Admitted asset if a) assuming is licensed, and 2) there are funds held by ceding. Assuming: liability

CHKlann. Commutation: Disclosure

Ceding: Reinsurance Notes to AS: disclose existence of commutation. Not detailed by year or LOB. Reinsurer: No dislosure

CHSSAP5. Definition of Liability

Certain or probable future sacrifice of economic benefit arising from present obligations of a particular entity to transfer assets or provide services to other entities in future as a result of past transactions/events

F Surplus. Nonadmitted Assets Exhibit - Change for Year

Change for year = prior value - current value (this is only for nonadmitted assets).

Discrimination Acts

Civil Rights Acts, Age discrimination in Employment, Americans with Disabilities Act

CH15. Claim Frequency

Claim count / EP. Can be distorted by RCs. Best to use exp but NA in Schedule P.

Ch 6/7. Underwriting & Investment Exhibit, Part 3 Expense categories

Col1: LAE Col2: Other underwriting expenses Col3: Investment expenses Insurer must allocate expenses to above groups. Can impact BS because of impacts reserves.

CHFeldblumLR. Company Payment Pattern

Comes from Sched P complete before the beginning of the AY. Thus 2 year delay. Patterns updated each AY.

CH30. Comfram

Common framework (for A/L valuation) for internationally active insurance groups. Proposed IFRS, and if accepted US companies with lots of int'l presence need to create AS using IFRS and US rules.

CHMateriality. Accountant vs Actuary Standards

Communicate differences in standards established by these people to stakeholders.

CH10 Commutation of Ceded Reinsurance

Commutation - settlement between insurer/reinsurer to discharge all remaining obligations

SEUA

Compact of almost 200 insurers operating in the Southeast.

CHFeldblumStatIncome. Indirect is Simpler

Companies first calc stat income and then can make adjustments to reflect tax accounting

Ch19. Company Adjustment

Company average L&LAE R / Industry average L&LAE R Comes from Schedule P, Part 1, Col 31. Calculated over 10 AYs. First cap each year's ratio at 300% before taking the average.

CH19. R4 Base RBC Company Adj

Company dev factor = Sum(IL&DCC from 9 prior AYs eval ao CY) / Sum(initial valuations of same AYs) (capped at 4.0) Adj for Co XP = Company Avg Dev / Industry Avg Dev Data from Sched P, 2 (Col 10 and diagonals)

CH14. Protected Cell

Company made up of separate components, each of which has separate assets and liabilities, but has access to the group surplus. (protected by group surplus)

CH11. Gen Int Part 1 Board Section

Company operations oversight 1) In approving investment purchases/sales 2) Conflict of interests notification plan 3) Permanent records are retained?

Ch19. Underwriting Expense Ratio

Company's actual ratio of other underwriting expenses in the current year to the total net WP in current yr. Capped at 400%. We use the same expense ratio for each line of business. We are computing this on an all-lines basis.

CHCOPLFR. Actuarial Opinion Summary (AOS) Contents

Confidential supplement to SAO (due 3/15 to DOI) x 1) Actuary's range of reasonable estimates for L&LAE, net/gross x 2) Actuary's point estimates for L&LAE, net/gross y 3) Company booked L&LAE reserves, net/gross x 4) Difference between booked and actuary point estimate/range, net/gross 5) How did management decisions contribute to excessive adverse development (> 5% of surplus in at least 3 of 5 past years)?

CHPreamble. Conservatism

Conservatism helps meet policyholder obligations when financial results adversely vary from estimates. Creates a margin of protection. Valuations should not sharply fluctuate surplus.

CH 8/9. Compare investment between companies

Consider 1) Size of investable assets 2) Level of risk in the investment portfolio 3) Taxes Note: investment income / premium and size of investment income do not accurately reflect performance because they do not consider invested asset base. ***Can use ratio of income to average invested assets. Does not reflect risk.

CHASOP43. Recoverables

Consider impact of these on each other

CH 8/9. Exhibit of Capital Gains

Contains details of net realized capital gains by asset class. Separates losses due to impairment.

CH 8/9. Derivative

Contract between two parties where the value depends on the value of a particular asset. Schedule DB, 1: Derivatives owned Schedule DB, 2: Derivatives sold Schedule DB, 3: Derivatives terminated during year Schedule E: Has derivative counterparty exposure open at year-end

CH11. Gen Int Part 2 Finite Reinsurance

Contract which does not transfer underwriting or timing risk

CHSSAP62. Purpose of Ceding Commissions

Cover Acq Costs. If ceding > acq costs, liability for difference created, and amortized pro rata over effective period of reinsurance agreement.

Ch19. RBC for R5 - WP

Covers charge for risk associated with 1) Net written premium (written premium RBC) 2) Excessive premium growth 3) Health Premium RBC 4) Health stabilization

F Surplus. Reconciling BS and IS Surplus

Credits/Charges to surplus in IS are applied for each transaction that does not flow through the IS.

CH22/23. Regulation S-K Criticisms of 10yr loss reserve dev table

Critics say 1) reserve setting process may not have been consistent and 2) is distorted by market cycles

CH15. Prior Years Row, Part 3

Cum payments made on L&DCC reserves ao earliest valuation date in table. Previous AS: Incr Cum 2001/Prior + Incr Cum 2001 = Incr Cum 2002/Prior

CH15. DCC

DCC eg: 1) surveilllance 2) med cost containtment 3) litigation management (bill audit) 4) LAE for pools if rpt by AY 5) fees & salaries for people working in defense for claim 6) same for rehab nurses 7) fees for defending attorneys 8) cost of engaging experts

CH15. LAE expense allocation

DCC: assigned to AY with associated loss A&O: "any justifiable way" and "preferred to allocate in proportion to # claims rpt, closed, or outstanding"

F Surplus. Formula for Cost of Double Taxation

DT Cost of Capital (to investor) = DT CoC = Indirect Taxes - Direct Taxes = Investment Yield x Corp Tax Rate x (1 - Personal Tax Rate). This is on an after-tax basis. DT CoC = yield * corp tax rate (pre-investor tax)

CHCOPLFR. SAO Scope Review Date

Date through which material information known to the actuary is included in forming the reserve opinion. List this explicitly if different from the signing date.

CHCOPLFR. Loss Reserve Methods Depend On

Depends on nature of claims, claim development characteristics, applicability of methods to data

CH19. Replication Tx (RSATs)

Derivatives combinations replicating investments. Consists of derivative and cash instrument

CH Webel. Summary of TRIA of 202

Designed to a) Temporarily help cover terrorism losses while private market stabilizes (does not apply to war times) b) Ensure avail and afford of terrorism insurance c) Preserve state regulation of insurance

CH13 Schedule E

Details on cash/cash equivalents Part 1: a) cash at the bank, trust companies, savings, and loan associations, b) total cash held at company offices, c) CDs maturing in a yr or less Part 2: cash equivalents Part 3: special deposits like bail bonds or collateral

Ch19. Premium RBC - Adjustment for Investment Income. How does it differ from the reserve RBC inv income adjustmetnt?

Differs from the reserve inv income adjustment is that with the premium adjustment, the years entering the calculation are different, because we are discounting the written premium. So the years we are looking at are future business. The factor is provided by the NAIC

CHFeldblumStatIncome. Direct vs Indirect - Bonds

Direct - 15% of municipal bond income Indirect - Statutory income - 85% municipal bond income

CHFeldblumStatIncome. Direct vs Indirect: Common stock divs

Direct - 40.5% of unaffiliated common stock divs Indirect - Stat income - 59.5% of divs

CHFeldblumStatIncome. Direct vs Indirect: Revenue Offset

Direct - WP - 80% change in UEPR Indirect - Statutory EP + 20% Change in UEPR

CHFeldblumStatIncome. Direct vs Indirect - Losses

Direct Basis - IL: -1 * (Paid Loss + Chg discounted reserves) Indirect Basis: Stat income + Chg in reserve discount

F Surplus. Unrealized Cap Gains

Direct credit to surplus. No impact on IS. Note DTL from these gains is direct charge to surplus.

CHNAICSMI. Market Discipline

Discipline imposed by public who can view the transparent financial statements

CHCOPLFR. Relevant Comments for Risk of Material Adverse Deviation

Disclose 1) Materiality standard 2) how standard derived 3) potential for material adverse deviation from significant risk (not general) or uncertainty? 4) If 3) is true, describe causal factors

CH10 Asbestos/Environmental Reserves Note

Disclose if potential asbestos/environmental exposure because a) reserves developed adversely over last few decades b) Lot of uncertainty with these reserves

CHCOPLFR. Reliance on Others for Supporting Analysis

Disclose work completed by others and extent used to form final opinion Consider 1) amount of reserves covered by other actuary compared to total reserves 2) nature of exposure and coverage 3) Is it likely that variations in other actuary's analysis impact overall reserves? 4) Credentials of the other actuary

CH22/23. SEC 8-K

Discloses certain material events 1) Change in principal officers 2) Change in company's certified accountant 3) Enter/terminate material definitive agreement

CH11. Reinsurance Summary Supplemental Filing

Discloses if yes to prior interrogatory: 1) Impact to BS and IS if contracts were excluded 2) Summary of applicable terms of the contract(s) meeting 1 and 2 above 3) Reason for contract, including expected financial gain.

CHCOPLFR. Insufficient Information: No Analysis

Disclosure required. Must qualify opinion.

CHFeldblumLR. Loss Reserve Discount Factor

Discounted % Unpaid / Undiscounted % Unpaid

CH10 Tabular Disounting for L&LAE

Discounting based on interest rate and mortality assumptions from life tables. Applies to annuity claims that pay pension benefits (e.g. WC). Most common. Usually applied to specific outstanding annuity-type claims.

CH15. Interrogatory 1

Discuss Extended Reporting Endorsements from DDR. (tail coverage for DDR). 1) Do you offer for free or reduced rate? 2) How is the DDR reserve reported?

CH15. TIA LAE expense allocation example

Distributes A&O using # of outstanding claims for last 10 yrs

CHFeldblumStatIncome. Common Stock Dividends

Dividends subject to double taxation. To mitigate, company is partially exempted from paying taxes on the dividends via the "dividends received deduction". a) taxpayer owns 20% of firm -> 70% exempt (assume this if not told) b) taxpayer owns 20-80% -> 80% c) taxpayer owns > 80% -> 100%

CHSSAP65. Discounting

Do not discount. Exceptions for fixed and reasonably determinable payment patterns (e.g. tabular discounts).

CHFREIHAUT. Reinsurance Attestation Supplement (RAS)

Document that requires CEO and CFO to document the existence and the quantity of risk transfer. This is for contracts with no "reasonably self evident" risk transfer.

CHIFRS. IFRS Insurance Risk

Does not include timing risk, only underwriting. Also insurer has to "compensate" and not "indemnify" according to definition of insurance contract.

CHFREIHAUT. RTA and Estimating Duration of Cash Flows

Duration_Cash = Duration_Prem - Duration_Loss

CH 6/7. Cash and Short Term Investments

E-P1 - cash details E-P2 - cash equivalent (maturity under 3 months) DA - short term investments (maturity under 1 year)

Consumer Groups can Influence Congress

E.g. residual markets for crime and flood insurance

CHNAICSMI. Purpose of NAIC Accreditation?

Encourage DOI to meet minimum standard of solvency regulation: 1) Adequate solvency laws 2) Effective financial analysis and exam process 3) Cooperation/information sharing 4) Timely and effective action for troubled insurers 5) Appropriate personnel and org practices 6) Effective process for company licensing

CHFeldblumLR. Determination Yr

Ends in 2 or 7. COmpany uses own payment pattern or industry's

CH19. Definition of Affiliate

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

CH22/23. SAP Statutory Merger

Equity of one entity exchanged for equity of another (equity in 2nd cancelled)

CHSSAP62. Transfer of Risk

Essential ingredient in reinsurance contract. Insurance risk involves uncertainty about 1) ultimate amount of net cash flows (UW risk), and 2) timing of cash flows (timing risk), and 3) Reasonably possible for reinsurer to realize a significant loss Note investment return not an element of insurance risk

CHIRIS. Steps to Get Est Reserve Deficiency

Est Deficiency = Reserve Required - Current Reserve Reserve Required = EP * Ratio of Reserves to Premium Ratio of Reserves to Premium = Average(LY Reserves+Dev to EP Prem of Prior Yr, 2YR Reserves+2YrDev to Prem of 2nd Prior Yr) Reserves to Premium from Prior Yr = (Reserves from Prior Yr + 1yr loss dev) / EP in Prior Yr Reserves to Premium from 2nd Prior Yr = (Reserves from 2nd Prior + 2yr Loss Dev) / EP in 2nd Prior Yr

CHSSAP5. Purpose

Establish accounting principles for 1) Liabilities 2) Contingencies 3) Impairment of assets

CHSSAP5. Contingency Guarantee Disclosure

Even if remote possibility of guarantee, disclose 1) Nature/amount of guarantee 2) approximate term 3) how guarantee arose 4) events that would require guarantor to perform under guarantee 5) current status

CH19. R3 RBC Split

Even split between R3 an R4 (correlation between reinsurance rec and reserve risk). If R4 RBC < R3 RBC for Non-Inv Assets and Reins Rec, total allocated to R3.

CH19. R2 RBC Ins Affiliates

Excess of amount allocated to R0 is allocated to R2

CHFREIHAUT. RTA and Reinsurer Expenses

Exclude from RTA. They are not a cash flow between ceding and reinsurer.

CH13 Schedule T

Exhibits of premiums written, allocated to states Part 1: Exhibits of Premium Written Part 2: Interstate compact - Exhibit of Premium Written (for insurers that also write life insurance, annuities, disability income, long term care) Part 1 allocates these balances to states (allocation described in the footnotes): WP; EP; pol div; Paid losses; Incurred losses; Unpaid losses; Finance & service charges, Direct WP for federal purchasing groups Importance of this schedule: 1) actuaries can examine insurance laws in states where business is written (especially for WC), 2) changes in geographic exposure (by looking at historical schedules), 3) if industry reserving factors are used, can use loss distribution to apply weights to industry development factors, 4) this reconciles with the Insurance Expense Exhibit

CHSSAP5. Definition of Loss Contingency/Asset Impairment (LC/AI)

Existing condition, situation or set of circumstances involving uncertainty as to possible loss to enterprise that will ultimately be resolved when one or more future events occur or fail to occur

CHGovIns. Details on why Gov Insurance can be Convenient

Existing program may provide insurance type services (e.g. loss mitigation development)

CHCOPLFR. SAO Data requirements

Expected senior executive responsible. Can be the opining actuary if the actuary is that senior executive.

CH18. IEE Part 1 Allocation

Expenses allocated to 22 categories, and fall in 1) LAE 2) Other UWE (Acq, Field Sup/Collection, Taxes) 3) Investment Exp

CHCOPLFR. Relevant Comments for IRIS ratios

Explain the reason for exceptional values to following 1) 1yr reserve dev to surplus 2) 2yr reserve dev to surplus 3) Est current reserve deficiency to surplus

Ch19. Excessive Premium Growth

Extra risk involved if company is growing excessively -> company may be undercharging The factor is .225 (half of what we used in reserves), and is based on loss ratio of companies with excessive growth relative to the industry. Adjusted for a discount factor of 90% Add any charge here to the charge above for the total R5 Charge for Underwriting Risk

CHNAICSMI. Hazardous Financial Condition - Financial Analysis

FAST - collection of solvency tools/databases to assist DOIs in reviewing financial condition of insurers. The Analyst Team System (ATS) prioritizes state resources based on data from FAST. They'll utilize the NAIC handbook below. 1) IRIS - insurance regulatory information system ratios are calculated and analyzed to identify insurers that require immediate regulatory action 2) Scoring system for the ratios 3) Insurer Profiling - annual/qtrly profiles that include 5yr summary of financial position. Helps identify unusual trends or fluctuations in surer assets/liabs. The NAIC "Financial Analysis Handbook" recommends "stair step" approach using the following tools: 1) Ratio analysis & review of SAO 2) Audited statements 3) Holding company filings 4) Management discussion and analysis filings

Federal Agencies Affecting Insurers

FBI - investigate fraudulent activities EPA - Risk Retention on environmental policies will have language created by EPA. ICC - a) minimum policy limits and conditions for insurers, b) policy forms and endorsement must be in ICC approved forms, c) Insurer must notify ICC 30 written notice before canceling policies

CHSSAP62. NFIP Accounting

FEMA treated like reinsurer: balances due recorded as ceded reinsurance balances receivable/payable Commissions treated like regular reinsurance commissions

SSAP 9. Type 1 Event

FS must be adjusted to reflect impact of material Type 1 event

CH19. Bond Size Factor Formula

Factor = Weighted Issuers / Issuers - 1 eg for 500: Sumproduct / 500 - 1

CH18. Total Investment Gain

IGR * Total Investable Funds

CH4. Capital and Surplus Statement

Reconciles ending surplus with beginning surplus for a reporting period.

CHCOPLFR. Materiality Standard (IE when is it "Adverse"?)

Factors to consider: 1) % of surplus 2) % of reserves 3) amount of deviation causing drop in financial strength ratings 4) amount of deviation causing surplus to fall below minimum capital requirements 5) amount of deviation causing RBC to fall to next action level 6) multiples of retained risk

CH5. Fair value vs historical cost

Fair value - value the asset could be bought or sold for in the open market. Historical cost is original purchase price less depreciation. Historical cost is more reliable; fair value is more accurate.

CH25. Solvency II Technical Provisions

Fair value of liabilities, including reserves & risk margin. Using method similar to P-GAAP: R - i = 6%.

CH1. FASB/GASB

Federal Accounting Standards Board which has authoritative accounting guidance for nongovernmental entities./Governmental Accounting Standards Board is over govermental entities.

CH30. Dodd-Frank and SIFI

Federal government can regulate systematically important financial institutions. Been criticized as inappropriate for insurers.

CHCOPLFR. Sufficient Clarity

Findings/methods/assumptions should be stated such that another qualified actuary can make an appraisal of reasonableness of work

CH19. Bond Size Factor Weights

First 50 issuers: 250% Next 50: 130% Next 300: 100% Rest: 90%

Intro III. Jurat

First page of Annual Statement. Provides basic information on reporting entity.

CHSSAP53. Flat Fees

Flat fee service charges included in "other Income section" of U&IE. NOT recorded as premium.

CH14. Benefits of WF Security

For ceding company: 1) Reduces Credit Risk 2) Reduces admin burden of having to continually collect money from reinsurer to make payments For assuming company: 3) Reinsurer gets paid interest (pass risk transfer test)

Administrative Supervision (Must get IC approval before these)

From NAIC Model Supervision Act. Must get the IC permission before: 1) Sell/transfer assets 2) Withdraw/lend/invest funds 3) Incur debt 4) Accept new premiums 5) Merging with another insurer 6) Entering into reinsurance 7) Increasing management compensation

CH15. Avg Claim Sev

From parts 2 to 4 and claim count in part 5. Avg Sev = Net Paid L&DCC (P3) / CWP (P5,S1) Avg Case = Net Case OS (P2 - P3 - P4) / Open Counts (P5,S2) Avg Rpt = Net Rpt Loss (P2 - P4) / Rpt Count (P5,S3)

CH 6/7. Net Deferred Tax Assets

Future tax benefits that arise due to temporary differences in income recognition between tax and statutory accounting. This may be due to the accelerated recognition of income under tax accounting. Usually book a DTA net of DTL.

CH30. Financial Assessment Program

G20 companies peer reviewing financial services regulatory regimes (FSAP). Benchmarked insurers against Insurance Core Principles (ICPs), developed by International Association of Insurance Supervisors (IAIS).

CH22/23. Deferred Acq Costs (DAC)

GAAP only asset used to defer recognition of expenses to match recognition of earned premium. Can only defer direct costs from successful acq/renewal. Sometimes can defer direct marketing advertising.

CH22/23. GAAP and SEC

GAAP rules are SEC responsibility, who established FASB to establish the standards

CH22/23. SAP&GAAP treatment of DTA

GAAP: fully recognize, with valuation allowance if more than likely than DTA not be recognized SAP: strict admissibility test to recognize DTA. (come back later if want to know rules)

CH22/23. Goodwill

Generated in a business combination SAP: Can account as 1)Statutory Purchase 2) Statutory merger

NAIC Support and Service Office - Regulatory Advice

Get info on different states regulatory activities and focus on solutions to regulatory problems

Sherman Antitrust of 1890

Give states motivation to pass own antitrust laws. These will apply to insurers.

Ch19. Adjustment for premium concentration

Giving partial credit for the diversification, and reflecting the fact that some years may be unprofitable but it's offset by the other years when you are profitable. Factor = .3 * NWP in largest line / NWP all lines + .7

CH22/23. SAP Treatment Goodwill from Statutory Purchase

Goodwill = purchase price - statutory surplus. Capped at 10% of acquiring firm's capital & surplus (excl goodwill, electronic data processing equipment and net DTAs). Goodwill amortized to unrealied capital gains while acquiring firm benefits economically (10 yr max)

CH15. Intercompany Pooling Mechanism

Gross/Net Loss combined then distributed to company based on pooling %.

CHIFRS. Investment Strategy

Held to maturity: historic cost less amort AforS: marked to market. Changes recorded in reserves Held for Trading: marked to market. Changes recorded in income. Similar to GAAP.

CH21. AAA study on SAO indicator of Fin Health

Helped identify companies in trouble, but 1) Just 1 SAO qualified. Rest "reasonable" 2) Half concluded risk of material adverse deviation. 37% no risk. Remainder did not comment. 3) Materiality standards were based on % of surplus

CH14. Intention of Footnotes to Schedule F Part 3

Highlight companies using reinsurance to conceal high operating leverage.

CHIFRS. Cat Reserves

IFRS does not allow. Neither does GAAP.

CHIFRS. Product Design

IFRS unbundle insurance contracts from investment features.

CHIFRS. Using GAAP instead of IFRS

IFRS4 allows option to use other accounting policies effective before IFRS4. Should change to IFRS4 version if the change 1) Makes FS more relevant, same reliability 2) Makes FS more reliable, same relevant GAAP is similar: can change if justifiable

CHCOPLFR. SAO Identification Paragraph

Identifies 1) appointed actuary 2) relationship to company 3) qualifications 4) date of appointment

CHSSAP5. Requirements for Disclosure

If LC/AI not recorded because only 1 of 2 conditions met, or if there is exposure to loss higher than amount accrued, disclose 1) Nature of contingency 2) Estimate of possible loss/range of loss or statement that estimate cannot be made

CH10 Reinsurance Accounted for as Deposit

If a contract does not meet specific risk transfer criteria, then make note saying accounted for as a deposit. Deposit accounting will flow into deposit asset or liab, and not flow into the underwriting income.

CHASOP43. Constraints on Analysis

If constraints lead to materially different result, 1) notify principal of risk, and 2) communicate constraints to principal.

CH30. Solvency II and Equivalency

If country's regulatory regime considered equivalent to Solvency II's approach, then treated as if EU member state. USA not considered equivalent.

Mandatory Corrective Action

If fact finding shows that company is engaging in activities that put policyholders at risk of harm, or if insurer fails a financial exam, then insurer is deemed in "Hazardous Condition". From NAIC Hazardous Condition Regulation: 1) Perform certain actions to reduce liabs 2) Limit new/renewal business on products that are not guaranteed renewable 3) Reduce general/commission expenses 4) Increase capital/surplus 5) Suspend/reduce div payments 6) Eliminate/reduce investments 7) File reports concerning assets 8) Document adequacy of its premium rates

CHSSAP62. Reinsurance Disclosures (heavy ceding compared to surplus)

If gain > 5% of surplus or ceding > 5% of surplus, then If ceded written prem >= 50% of direct/assumed WP of reinsurer or If 25% or more of ceded prem is retroceded back in separate reinsurance contract Then disclose 1) a summary of applicable terms of contract 2) managements objectives in entering the contract. 3) Agg impact gross of all contracts on BS and IS

CHCOPLFR. Data Errors Impacting Opinion

If material error discovered before follow up opinion, actuary must alert audit committee within 5 business days. Also include amended opinion. Insurer forward amended opinion to IC within next 5 days and copy actuary.

CHSSAP62. Reinsurance disclosures: GAAP v SAP

If one says reinsurance accounting, and the other says deposit accounting, disclose reason for differing treatment

CHCOPLFR. Intercompany pooling and overlapping SAOs

If participate in pool and another SAO written on behalf of pool, actuary can 1) conclude reserves associated with pool are immaterial. No need to qualify. 2) Use the word of pool actuary, and make disclosures. No need to qualify opinion. 3) Qualify opinion to exclude the business

CH10 Note for Unsecured Reinsurance Recoverables

If recoverables exceed 3% of surplus, disclose: 1) Name 2) Paid losses billed but not collected 3) Ceded reserves 4) Ceded unearned premiums

CHIFRS. IFRS4 Insurance Risk Standard

If sig insurance risk is not transferred, then account as financial risk.

CHSSAP62. Substantially All Exception

If substantially all of reinsurance risk related to reinsured portion is assumed by reinsurer, then contract is treated as reinsurance contract (i.e. reinsurer is in insurer position)

CHSSAP65. Policies with coverage >= 13 months

If term >= 13 months and insurer can't cancel or raise premium, then establish liab for expected future benefits.

CHCOPLFR. Company LOB Mapping

If used for reserves analysis, must document mapping to schedule P in Actuarial Report. Must perform reconciliation that illustrates and elaborates differences

CHSSAP65. Policyholder Dividends

Immediately a liability when declared by board.

CHFREIHAUT. RTA and Evaluation Date

Impacts 1) Interest rate and 2) losses considered

CH12 5yr Hist Data Exhibit

Important Sections: 1) WP 2) BS 3) RBC 4) Operating % 5) 1,2 yr loss dev

CH 22/23. Value In-Force

In P-GAAP, no DACs. Asset called value of business in force (VBIF) is created, valued at fair values of liabs in connection with UEP reserves.

CHIFRS. Potential for Improved Matching

Inc disclosures and transparency -> easier to assess matching of duration of A and Liabs.

CH22/23. S-X and Notes to FS

Include 1) Basis of assumptions (or interest rates) 2) DACs amortized during period 3) Statutory stockholders equity

CHSSAP62. Ceding Company: Premium paid before effective date

Include prepaid item as admitted asset. On effective date of policy, IS gets bucket "Reinsurance Premium". Must recognize impairment.

CH10 Reinsurance Assumed & Ceded

Includes information about the ceded commissions related to ceded unearned premium reserve.

CHIFRS. IFRS Impact on Volatility

Increase due to non-smoothing of revenue or expenses. There is concern over decreased agency ratings. Fitch Ratings disagrees, citing increased transparency of IFRS.

CH15. Tabular Reserves

Indemnity reserves calculated using discounts from actuarial tables. Tables consider interest, mortality, remarriage, inflation, recovery from disability. This def excludes med loss reserves or LAE reserves

CH 8/9. Schedule E Contents

Information about counterparties for all derivatives open at year end.

CH6/7. Coupon Bond

Instrument that makes interest payments during the term, returns principal at maturity.

Ch 6/7. Stocks

Instruments that represent an ownership share in a company. Provide voting rights, and possible dividends. Preferred stocks do not offer voting rights, but do guarantee dividends. These stock owners hold priority on investment returns over common stock owners during liquidation

CH4. Liquidity issues

Insurance companies collect premiums at policy inception, and therefore are less burdened by illiquid assets.

CHPORTER8. Supreme Court and Rate Regulation

Insurance is "affected with public interest". State regs protect consumers from "improper" insurance rates

CHSSAP65. Structured Settlement

Insurer may purchase annuity to make the payments If insurer is payee, 1) no reduction to loss reserves, 2) annuity recorded "other than invested asset" at PV, and 3) income recorded as misc income If claimant is payee, 1) reduce loss reserves, 2) cost recorded as paid loss

CHGovIns. Extended Reporting for Medicare (2007)

Insurer must now report to CMS the medicare eligibility of the claimant 1) May increase claim closings, and lump-sum payments in 2008 to 2010. Also can increase WC medical loss trends. 2) 3yr statute on medicare conditional payment recovery (from date of settlement notice)

Ch19. Trend Test

Insurer must undergo a trend test if it meets the following criteria 1) RBC Ratio between 200% and 300% 2) Combined ratio > 120% this is an early warning of companies who might drop below 200% threshold. We are trying to catch them before this happens. If this occus, company must comply with requirements at the CAL.

CH10 High Deductibles

Insurer pays claim, seeks reimbursement for portion in deductible layer. Reserves net of ded.

HNAICSMI. Principle 1 - Regulatory Reporting, Disclosure, and Transparency.

Insurer provide standardized financial reports to regulators to help assess risk and financial condition. AS Qualitative Disclosures to help with off-site review and on-site exams: 1) Interrogatories 2) Notes to FS 3) Management discussion/analysis 4) SAO 5) Annual Audit Opinion from the CPA

CH10 Structured Settlement

Insurer purchases annuity on behalf of claimant to settle.

CH19. Securities lending program

Insurer receives collateral from borrower that is then reinvested

CHFeldblumLR. Reason for Vintaging

Insurer uses premiums to buy fixed income securities to fund future loss payments, at the period the loss occurs.

CHFeldblumStatIncome. AMIT vs RIT for Insurers

Insurers hold a lot of tax free instruments, such as municipal bonds, so often they pay AMIT (difference between RTI and AMTI added to RTI)

CH25. Pillar 3: Supervisory Reporting/Disclosure

Intended to increase transparency of insurer risks and capital position to supervisor and financial market. Lets market exercise disciplinary function.

CH19. R1 Types (Charge for Fixed Income Investments)

Interest/Default risk from: 1) Holding Company 2) Upstream affiliate (parent) 3) Insurance subsidiaries that are not subject to RBC (excl alien insurers bc covered by R0) 4) Investment affiliates 5) Non-insurance subsidiaries 6) Unaffiliated bonds (PRIMARY COMPONENT) 7) Mortgage loans 8) Miscellaneous assets (incl cash, cash equiv, short term investments, nonadmitted collateral loans) 9) Replication (synthetic asset) tx and mandatory convertible securities 10) Off-BS sheet collateral

CH25. Own Risk & Solvency Assessment (ORSA)

Internal assessment of solvency need based on risk profile. Entirety of process and procedures employed to identify/assess/monitor/manage/report short/long term risk.

CH15. Interrogatory 2

Is LAE defined as DCC/AO

CH11. Finite Reinsurance Interrogatory 2

Is ceded premium 50% or more of gross premium, or at least 25% of ceded premium is retroceded back to insurer (excludes captives)

Ch19. Adjustment for loss-sensitive business

Just like the reserve risk, less risk involved if dealing with the loss sensitive business Differs from reserve risk adjustment because we're looking at the % of WP that is loss sensitive, as opposed to the reserves.

CH14. Sliding Scale Contingent Commission

LR(2) - LR(1) = X -> Comm(2) = Comm(1) - X

CHIRIS, Historical Large Surplus Prior to Insolvency

Large chg in surplus prior to insolvency, so high ratio is concerning (shift capital from affiliates, growing to pay claims, reinsurance tx)

CHIRIS. Causes for Chg in Net Writings

Large increase 1) abrupt entry into new line or territory? 2) Insurer attempting to increase cash flow to meet loss payments? Large decrease 1) Exiting line 2) Reducing writings due to large losses in certain lines 3) Loss of market share 4) Higher amounts of insurance

CH14. Formula for definition of slow paying

Late loss recs / (Total loss recs + amount received in 90 days) > 20% Excl amounts in dispute! Numerator - Col 4 Denom - Col 5 and Col 6

CH14. Assumption behind Provision for Unauth Reinsurance

Late payers and those that dispute balances are more likely not to pay than other unauthorized reinsurers.

CHIRIS. Analyst Team Categories

Level A: requires immediate attention and financial analysis Level B: not immediate attention but possible poor results Reviewed: No level, and in good standing. Reports made available only to insurance regulators

CH10 Retroactive Reinsurance

Liabilities that occurred prior to effective date of the policy

CHSSAP53. UEPR

Liability established created when premium is recorded. Represents portion that has not expired. Net impact of surplus only affected by EP.

CH11. Gen Int Part 1 Other Section

List names of orgs who got > 25% of total payments to various groups

CH13 Schedule Y

Lists activities of insurer members of a holding company group Part 1: Organizational chart Part 1A: Details of the relationship between entities and parents. Names controlling entity and type of control. - Upstream direct parent - Upstream indirect parent - Downstream subsidiary - Insurance affiliate - Non-insurance affiliate - Other Part 2: summary of insurer's transactions with affiliates, such as 1) shareholder dividends, 2) capital infusions, 3) purchase/sale of loans or real estate , 4) management agreements and service contracts, 5) income incurred under reinsurance contracts Regulators like to see this schedule to monitor cash flows between affiliates

CH13 Schedule DB

Lists derivatives owned by insurer Part A - positions in options, caps, floors, collars, swaps, and forwards Part B - positions in futures Part C - Positions in replication (synthetic assets) transactions Part D - Describes counterparty exposure (credit risk) for derivatives open 12/31

CH13 Schedule B

Lists mortgage loans (secured by real estate) owned by the insurer. Part1: Owned as of 12/31 Part2: Acquired during yr Part3: Ending during yr (including repaid) Segmented into: good standing, restructured due to delinquency, those with interest > 90 days overdue, in foreclosure process

CH13 Schedule DL

Lists securities lending collateral assets (added in statement in 2010) Part 1 - Collateral assets not in other investment schedules Part 2 - lists collateral assets that are in other investment schedules Securities lending - company lends security that it is not actively trading to another party for a fee. Borrower short sells asset, then returns the rebought asset to lender. Borrower must post collateral since there is inherent credit risk. The collateral can be invested in short-term, low risk, highly liquid

CH13 Schedule D Part 1 (Stocks and Bonds)

Long-term bonds and CoDs (mat > 1 yr) owned by 12/31. Schedule list bond maturities and the book/adjusted carrying value, fair value, actual cost, and par value of bonds Part 1 has summary 1A - Section 1 classifies by NAIC rating class 1A - Section 2 classifies by a) issuer obligations, b) residential MBS, c) commercial MBS, and d) other loand-backed and structured settlements.

CH19. R4 Reserve Base RBC Adj for Loss Concentration

Loss Concentration Factor = (.3 * Net L&LAE reserves in largest line / Net L&LAE all lines + .7) * Loss Sensitive RBC Can do L / L Total to get %, then pick out largest line. Then Net Loss and LAE RBC = Loss Concentration Factor x Loss & LAE RBC Afer Loss-Sensitive Discount x 1000

CHCOPLFR. SAO Exhibit A

Loss Reserves A. Unpaid Loss B. Unpaid LAE C. Unpaid loss - D&A D. Unpaid LAE - D&A E. Retroactive reinsurance assumed F. Other items Premium Reserves (long duration contracts) G. Reserve for D&A UEP H. Reserve for net UEP I. Other items

CH19. R4 Reserve Base RBC Loss-Sensitive Business Adj

Loss Sensitive RBC = Base RBC * (1 - Loss Sensitive Disc)

CHGovIns. Medicare Conditional Payments

M pays retroactively while coverage is being determined. Will request reimbursement if insurer determined primary.

CH25. Solvency II MCR vs SCR

MCR < SCR. < MCR - can't operate < SCR - subject to regulatory intervention

CHMateriality. AAA Disclosure of Materiality Standard

Make user aware (NAIC requires in SAO) and consider 1) sophistication of user, and 2) importance of concept to user.

CHCOPLFR. Management/Actuary Collab Benefits

Management sets reserves analyzed by actuary. 1) Management can benefit from analysis to help make best decision 2) Avoids management pressuring actuary to widen reserves range to include booked figure.

CHSSAP53. MGAs/TPAs

Managing General Agents and Third Party Administrators If premiums > 5% of surplus, disclose following for each MGA/TPA 1) name&address 2) Federal employer ID No 3) Exclustive Contract? (Y/N) 4) Type of business written 5) Type of authority granted 6) Total premium written

CH19. Mandatory Convertible Securities (MCS)

Mandatorily convertible at specified prices (diff to market). Eg bond convertible to fixed # of shares. In AS at pre-conv status

F Surplus. Insurer Premium Charge for Double Taxation (% investment yield)

Marginal Prem Charge = Capital x [DT CoC / (1 - Corp Tax)] / [Premium x (1+yield)^.5] * Assume premium paid at inception and tax paid mid period (mid year)

CHNAICSMI. Analysis of Market Share

Market share indicates the degree of concentration in a market 1) Four-firm concentration ratio - if share of largest 4 firms < 50%, then pass 2) HHI = sum of squares of all groups in market. > 1800, 1000-1800, and <1000 are high, moderate, and low.

CHMateriality. AAA Materiality

Material if impacts user's decision/conclusion. Consider 1) purpose of item, and 2) intended user's of item.

CH14. Provision for Reinsurance (Slow Paying Reinsurer)

Max (20% unsec total, 20% paid L&LAE rec over 90 days overdue) - Incl amounts in dispute

CHASOP41. Responsibility to Other Users

Max clarity to reduce risk of misinterpretation or misquotation. Language limits distribution to intended users.

CHSSAP62. Reinsurance ceded to Unauthorized reinsurance

May generate Provision to Reinsurance. Provision reduced for collateral held by ceding. Change to the provision is direct charge or credit to surplus.

CHCOPLFR. Mass Tort Exposure

May need to issue qualified opinion if not estimating. Document the following 1) Is there material exposure? 2) Aggregate money held 3) Sig variability and uncertainty inherent in estimate 4) Is liability actuarially estimable? 5) Difficulties in providing actuarial estimate of liabs? 6) Liabs being handled by dedicated/experienced claims unit?

McCarran-Ferguson Act (1945)

McCarran-Ferguson - ruling endorsed state regulation (in public interest) and exempted the business of insurance from federal antitrust law provided that relevant activities were regulated by the states and did not involve boycott, coercion, or intimidation. Impact: Bureau ratemaking was allowed as long as it was regulated by the states. Most states passed prior approval regulation.

CH18. Total Investable Funds

Mean net L&LAE reserves + Mean net UEPR + Mean Ceded Re premiums payable + Mean PolH Surplus - Mean net agents' balances

CH10 Intercompany Pooling

Members fully cede all business to pool leader, who retrocedes portion to each member.

F Surplus. Adv/Disadv of NMA Methods

Method 1: Insurer must keep separate set of books for GAAP & Statutory accounting Method 2: GAAP books only and derive SAP by subtracting out the nonadmitted column.

CHNAICSMI. Principle 4 - Reserves, Capital Adequacy

Method: RBC System (states can also impose min cap req to be licensed) Insurer must keep sufficient reserves and surplus to provide margin of safety to be able to pay due obligations. Surplus is held in addition to reserves for two reasons: 1) Sufficient resources to cover obligations in adverse economic scenarios 2) Sufficient resources to be put into play if demanded so by regulator who detects an adverse trend Thus SAP is CONSERVATIVE!

CHIFRS. IFRS implication to non-public companies

Most private companies use GAAP to remain competitive. Private insurers cannot use the simplified IFRS for private companies. Reasons private companies understand/use IFRS because: 1) Competitive reasons 2) Raising capital in foreign market 3) Conducting tx with int'l company

CHFeldblumInvStrat. Tax Table for Personal Investor and Insurers

Muni Bonds - 5.25 v 0 Corp Bonds - 35 v 35 Dividends - 14.18 v 15 Capital Gains - 25 v 9.92

CHFeldblumInvStrat. Munis and Corp bonds - Yield Comparison

Munis yield 70-80% of pretax corp yield. Expected to yield 65% (assumed 10% yield ad 35% tax rate)

CHFREIHAUT. RTA and Risk Load

Must account for the risk load used in pricing if you're borrowing expected loss assumptions from pricing models 1) Implicitly added to expected loss ratio 2) Explicitly disclosed in rate calculation

CHCOPLFR. 3rd Party Reserve Analysis: No Analysis

Must be material portion. No analysis because reasonable. Disclose extent of the review by actuary. No qualified opinion

CH22/23. SEC Reporting in GAAP

Must file 10-Q, 10-K, and 8-K. Purpose of these is provide quantitative and qualitative info to investors about company's business and ops.

CHCOPLFR. Business Outside Review Scope: No Analysis

Must give qualified opinion.

CH11. GenInt Part 1 Gen Section CPA Disclosure

Name & address of CPA and Appointed Atuary

CH1. NAIC?

National Association of Insurance Commissioners is an org. of state regulators that coordinates governance in the US, but does not impose law (states do).

CH15. Prior Years Row, Part 4

Net bulk & ibnr reserves for prior yrs gross of tab discounting Current AS Prior Yrs Row (Part 1): Gross - Ceded + Tabular Discount is used to get Current AS Prior Yrs Row Part 4 (right most column)

CH15. Schedule P Part 1 Claim Count Info

Net claim = equal direct & assumed counts Col 12 - # rpt, direct and assumed Col 25 - # outstanding, direct and assumed Version of freq = claim count / premium (if exp info is NA). Claim count are not developed.

CH18. Investment Gain Ratio (whole company)

Net investment gain / Total investable Funds

CH18. Net Investment Gain

Net investment income+ Net realized cap gains. Unrealized gains excluded.

CH 14. Schedule F 2012 Changes: Reasons

New category of reinsurer created: "Certified reinsurer"

CH14. Schedule F Part 8 Surplus Adj

No adjustments. Recorded as "XXX"

CHFREIHAUT. 10-10 Rule

No risk transfer if less than 10% chance of 10% or greater loss

F Surplus. DT UW Profit Margin

Non Ad: DT CoC / PtoC Ratio AD: AD DT CC / PtoC Ratio

CH 6/7. Premium over 90 days overdue

Nonadmitted and treated as a bad debt (impairment)

F Surplus. Nonequivalence of BS and IS

Nonadmitted assets will reduce the surplus according to BS definition, but no change to IS Surplus.

CH10 Type2 Event Note

Nonrecognized Subsequent Events - evidence with respect to conditions that did not exist on BS date.

CH 6/7. Receivables from Parent, Subsidiary & Affiliates

Not as liquid as other asset classes.

CHCOPLFR. Actuarial Judgment and Reserves

Not enough justification for decisions. Provide more descriptive reasoning.

CHCOPLFR. Immaterial Business: No Analysis

Not material to overall reserves. No analysis performed. Disclosure is optional. No qualified opinion.

SSAP9. Type 2 Event

Not required to disclose impact. Should disclose nature and estimate of financial impact or statement that it can not be made.

CH10 Structured Settlement Note

Note mentions 1) Amount of structured settlement for which insurance company could be held liable 2) If payments from single life insurer exceeds 1% of surplus, then name of life insurer and remaining payments are disclosed.

Ch 6/7. Loss & LAE Reserve

Note: Booked at Management's best estimate. Midpoint is booked in cases where management has only a range of estimates. 1) Reinsurance payable on L & LAE 2) Other expenses incurred but not paid. Taxes, Licenses, Fees not included.

Federal Regulation of Securities

Obligations under Securities Exchange Act of 1934 says stock companies provide annual reports including 1) 5 years of fin data, including income and total assets 2) Management discuss liquidity and planned use of capital 3) Industry information for prior 3 yrs 4) IS and Statements of Cash Flow for 3 yrs, and BS for 2 yrs.

CH15. Part 1: Loss aggregation

Occ: AY CM: RY (often for med mal, other liab, products liab) Tail policy: PY Fidelity & Surety Policy: Discovery Year

CH10 Events Subsequent

Occur between accounting date and the date of issue. Actuaries check for events not explicitly included in financials. Actuary signing SAO must decide whether events are material to the estimates.

CH 8/9. Impairments

Occur when insurer believes it won't collect all amount due. Treated as realized capital loss.

CHSSAP53. EBUB

Occurs when final premium is determined by audit. EBUB = adj to prem due to exposure changes. 1) Prior to audit EBUB is estimated 2) Post audit EBUB is adjusted. Adjustment is recognized as revenue immediately. Note 10% of EBUB excess of collateral held is nonadmitted. Also write off EBUB not anticipated to be collected.

CH 8/9. Bond Amortization/Accretion

Occurs when purchase price of bond differs from face value. Treated as investment income. Can happen when coupon rate differs from market interest rate when bond is purchased. The premium or discount is amortized over the life of the bond. Thus the maturity amortized cost = Face value. Overall effective yield in each period equals market rate

CH13 Schedule BA

Other long term assets owned by insurer. Examples include: 1) Real estate not directly owned by insurer, 2) Joint ventures, 3) Partnership interests, 4) Surplus debentures Part 1 - Owned as of 12/31 Part 2 - Purchased during yr Part 3 - Sold during yr Actuary should make sure these long term assets match some longer term liabilities

F Surplus. PDR Example

PDR = Unreported + DPAC - UEPR

CHIFRS. IFRS Revenue

PV premium, expenses, claims booked on contract signing. Unlike GAAP with progressive recognition and DACs.

CHFeldblumLR. Economic Income

PV(prem) - PV(loss)

CH15. Part 1 Contents

Part 1 Summary of all lob combined Part 2 Schedule by line 10 AYs + Prior Years row (may only display 2 years for short-tail) Net of Reins and S&S Case&IBNR are net of tabular discount. Col 1-31 are gross of non-tab disc. Col 35-36 are net of non-tab disc. Col 32, 33 are non-tab disc. Net of intercompany pooling

CH 8/9. Schedule DB Parts

Part 1: Derivatives owned Part 2: Derivatives sold (written) Part 3: Derivatives terminated during the year

CH13 Schedule A - Real Estate

Part 1: Owned as of 12/31 Part 2: Purchased during yr Part 3: Sold during yr Valued at dep hist cost less encumbrances. Real estate held for sale is minimum of that and fair value. Insurer should not hold large portion of assets in real estate, especially if it writes short tailed lines.

CH13 Schedule D Other Parts

Part 3: bond/stock acquired during year, and owned on 12/31 Part 4: owned and sold during year Part 5: Acquired and sold during year Part 6: preferred and common stocks in affiliates

CH15. Part 5 Reasonableness Test and FS Ultimates

Part 5 can be used with FS Method #1 to derive ult losses. Also, can compare AS claim ratios to compare to unpaid claim estimates

CHWiening. Financing Medicare

Part A - payroll tax % from employee and employer. Self-employed pay double (suckers). No cap - applies to earned income Part B - financed via premium paid by insured and government revenue

CHIFRS. IFRS 4

Part of IFRS specifically for insurance contracts, defined as "a contract under which insurer accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder"

CH11. Gen Int. Parts

Part1) Common Int: general questions for all insurers Part 2) Specific to type of insurer

CHGovIns. Medical Set-Asides

Parties need to set aside money to be primary over medicare for the period where individual is eligible for medicare. Initially no incentive to do this.

CHGovIns. Work Comp Insurance Structure - State Programs partner with Private Insurers

Partner ship with Private Insurers 1) State law prescribe benefit 2) Employer can buy private insurance, state fund, or self insurance

CHIRIS. Liabs to Liquid Assets Considerations

Past insolvent insurers had high Ratio 9 when insolvent. 1) Focus on reserve adequacy 2) Excess of market over book value of bonds 3) Assets are valued right, have a good mix and liquidity

CHFeldblumLR. Industry Payment Pattern

Patterns are vintaged and only updated in determination years.

CHSSAP62. Commissions Payable / Receivable

Payable on ceded: Offset Agents' Balances Receivable on ceded: Offset Ceded Reinsurance Balances Payable

CHCOPLFR. Data Check

Perform reasonableness checks, but don't have to exclude normal points due to random variations in claims experience.

CH5. Liquidation vs going concern

Perspective of viewing a company as either an ongoing business, or a collection of assets being sold or traded. GAAP - presents results that closely measure financial performance during reporting period SAP - presents results that measure asset value during runoff.

CH25. Solvency II Pillars

Pillar 1: Quantification: solvency capital req (SCR) and minimum capital req (MCR) Pillar 2: Governance: Internal control, risk management, supervisory review process Pillar 3: Transparency: Supervisory reporting and public disclosure

CH14. WF Mechanic

Portion of premium due to reinsurer is withheld by insurer to pay claims

CHFASB944. New Context on Indemnification to Ceding

Possibility of significant loss to reinsurer applies to an entire scenario, not just particular assumptions used. Must test separately 1) significant insurance risk applies, and 2) significant risk applies to timing and amount of reinsurer's payments

CH19. Definition of Control

Power to direct, via ownership of voting securities / contract / common management. Entity must own at least 10% of voting interest (measured at holding company level)

CHFeldblumInvStrat. Tax Deferral: Value Considerations

Pre-tax equiv = f(pre-tax stated, tax rate, length of deferral period) Partial derivative of function with respect to each variables, is positive.

CH18. Pretax Profit Excl Investment Gains

Prem - IL - LAE - UWE + Other income less expenses - PolH Divs

CH15. Part 7 Overview

Prem and Loss information on loss sensitive contracts (PY basis). Only used by companies using loss sensitive adj to RBC.

CHKlann. Commutation Accounting: Reinsurer

Premium = paid loss. Eliminate the loss reserves.

CHKlann. Commutation Accounting: Ceding

Premium = recovery of paid losses. Then eliminate reserves ceded to reinsurer.

CH 6/7. Ceded reinsurance premiums payable

Premiums owed to reinsurers for ceded business. Record these net of any commission

CHSSAP62. Assumed Reinsurance and Agents' Balances

Premiums receivable are added to direct receivables, and sum goes into Agents' Balances

CHNAICSMI. Details on Assessing Hazardous Financial Condition

Purpose of the assessment (as stated above), is to more quickly locate indicators of adverse financial condition to more swiftly understand problems and develop corrective actions Three surveillance tools: 1) Financial analysis 2) On-Site Financial exams (principle 3 from earlier) 3) Supervisory plan development

CHNAICSMI. Principle 3 - On-Site Risk-Focused Exams

Purposes: 1) Evaluate the solvency of insurer based on the view of strengths and weaknesses of the organization (board, risk management, audit/internal reviews, IT, compliance with laws, etc) 2) Develop prospective view of insurer's risks (business growth, earnings, capital, management competency, etc) Evaluations: a) Corporate Governance - how is company controlled/directed b) Management Oversight c) Financial Strength d) Risk ID and mitigation such as 1) effectiveness of board and management, 2) ERM adequacy, 3) verification of portions if financial statements, and 4) limited scope reviews Regulators may perform one coordinated exam of a company holding group to avoid duplicate work, or rely on the domiciliary state to perform the on-site exam for insurers that operate in multiple states. Can target the area of greatest risk, based off an earlier performed off-site analysis. Results: Results are public! Publish 1) assessment of financial condition, 2) details about any material adverse findings, and 3) any corrective actions/recommendations

CHSSAP62. Ceded reinsurance and the AS

Put in the LOB associated with the cession or retrocession

CH19. Asset Risk Categories

R0: Subsidiary Insurers R1: Fixed Income R2: Equity R3: Credit

CH19. Underwriting Risk (Predominant P&C Risk)

R4: Reserve risk (assuming adequate reserves) R5: Net Written Premium

CH19. RBC R1 Bonds

RBC = (Base Factor + Diversification Adj) * book/adj carrying value

CH19. RBC R1 Mortgage Loans

RBC = .005 * book/adj carrying

CH19. R3 RBC Non-Inv Assets

RBC = .05 * net admitted value (use .01 for inv income due & accrued bc assume comes from class 2 bonds).

CH19. R3 RBC Reinsurance Recoverables

RBC = .1 * reinsurance rec Note rec are reduced by provision for reinsurance

CH19. R2 RBC Unaffiliated Common Stock

RBC = .15 * book/adj carrying of stock Include non-gov MM using .003 factor (same as cash)

CH19. RBC R1 Holding Company

RBC = .225 * (Holding company value - carrying value of indirectly owned insurance companies)

CH19. RBC R1 Insurance Subs not subject to RBC

RBC = .225 * book/adj carrying value of bonds

CH19. RBC R1 Non-Ins Subsidiaries

RBC = .225 * carrying bond value

CH19. RBC R1 Upstream Affiliates

RBC = .225 * carrying value of bonds (regardless if parent is subject to RBC)

CH19. R4 RBC Excessive Prem Growth

RBC = Avg Growth Rate Factor * .45 * net L&LAE. NAIC provided the 45% factor (50% * 90% average discount factor for all LOBs) via a study.

CH19. R4 Reserve RBC

RBC = Company LOB RBC * Net L&LAE (before non-tab discount to be consistent)

Ch19. Base Net Written Premium RBC by Line

RBC = Current yr NWP * (Company RBC loss ratio * Adjustment for inv income + UWE Ratio - 1) The investment income adjustment reflects the safety margin from the undiscounted value in the BS.

CH19. R2 RBC Preferred Stock

RBC = Factor * book/adj carrying

CH19. RBC R1 Misc Assets

RBC = Factor * book/adj carrying Factor = .003 for cash/short term, or .05 for admitted collateral loasn

CH19. R3 RBC Health Credit Risk

RBC = Factor * uncollateralized portion of recoverables

CH19. RBC R1 Off-BS Collateral/DL P1

RBC = Factor of asset * book/adj carrying

CH19. RBC R1 Replication Tx

RBC = Factor of equiv investment * AS value (taken from Sched DB) Reduced for R1 already applied to cash instruments

CH19. R2 RBC Real Estate/ Schedule BC and Misc

RBC = Factors * book value Real Estate: .1 (incl encumbrances) Other long term inv other than collateral: .2 (Pull from Sched BA) Rev for sec: .05 Agg write-ins: .05 Derivatives: .05

CH19. Covariance Adj (Sq Root Rule)

RBC = R0 + (R1^2 + ... + R5^2)^.5

CH19. RBC R1 Inv Affiliates

RBC = same as if insurer owned investments directly

CH19. R4 Reserve RBC - Base Formula

RBC = {[(Company RBC% + 1) x Adj for inv income] - 1} x (Net L&LAE reserve + "Other discounts not in reserves") L&LAE reserve from Sched P, 1 (gross of non-tabular, net of tabular)

CHFeldblum Tax Mix. Bond Shift: Tax exempt -> Taxable

RTI -> more than AMTI ->

CHFeldblumRating. Rating Agencies and Material Benefit to Policyholders

Rating agencies can influence capital structure, reinsurance arrangements, and business volume

CH15. Claim Closure Rate

Ratio of all closed/cwp to total rpt Note inc in CWP ratio could be due to reopens.

Degree of Rate Regulation by Line

Read through Printout

CH14. Unsecured Recoverables

Rec - Security - Ceded Balances Payable - Misc adjustments

CH15. Intercompany Pooling v Reins

Recall intercompany reinsurance treated as traditional 3rd party reinsurance. Pooling separate

CHNAICSMI. Principle 7 - Exiting the Market & Receivership

Receivership intended to 1) prevent insolvency and 2) minimize losses during event of insolvency Regulator alternatives to insolvency: a) Merger/acquisition b) Reinsurance arrangement c) Non-renewal of part/all of business d) Placing insurer into run-off mode Laws dictate priority of payments to policyholders, annuitants, beneficiaries, and 3rd party claimants

CHNAICSMI. Hazardous Financial Condition

Regs use the NAIC financial reporting databases maintained by the NAIC. Actuarial opinions area major component. The sooner regs can identify potential adverse indicators, the sooner they can develop corrective plan (more below) 1) Adverse findings financial analysis, or actuarial opinion, or audit, or cash flow analysis 2) Insolvency of insurer's reinsurer, or within insurer's holding system 3) Finding of incompetent or unfit management 4) Failure to provide (accurate) information 5) Any other finding that is hazardous to policyholders, creditors, or public

CH22/23. Regulation S-X & S-K

Regulations which outline SEC reporting requirements S-X. Form and Content of financial statements S-K. Integrated disclosure rules

CHNAICSMI. Stage 2 - Financial Oversight and Intervention Powers

Regulators can order insurer into receivership for the following: a) Impairment, insolvency, or hazardous financial condition (more below) b) Concealed, altered, or destroyed financial books c) Best interest of public, creditors, and policyholders d) Management who is dishonest, incapable, or improperly experienced

CHNAICSMI. Future changes to RBC

Regulators developing explicit cat risk and operational risk charge Regulators are not allowing modeled approaches to supplement factor based approaches. Fully replacing the factor based approach could be 1) more expensive 2) harder to compare across companies 3) misused by companies 4) give certain companies a competitive advantage At this time, the benefits do not outweigh the costs (according to SMI regulators)

1923 NIC Repeal of Anticompact Laws

Reinstatement of compacts and rate bureaus would allow for more adequate rates and help avoid unfair discrimination.

CHIRIS. Ceding Commissions Ratio

Reinsurance ceded commissions (incl contingent commissions) / Reinsurance premiums ceded (to affil and non affil)

CH10 Big Reason for Reinsurance Disclosure

Reinsurance generates large credit risk Also, reinsurance impacts FS in big way since liabs and income are net of reinsurance.

CH22/23. 10-K Schedule IV

Reinsurance including amounts ceded and assumed

CH14. Schedule F, Part 4 Disputed Balances

Reinsurance recoverables include balances which are being disputed

CH14. Fronting carrier

Reinsurer not licensed to do business in state, so asks insurer to write and cede all business to them. Insurer gets fronting fee. Schedule F lists the fronting carriers where more than 75% of the premium is being ceded in individual contract. Regulators watch closely because reinsurer may be avoiding regulatory oversight. Common in WC due to strict licensing requirements.

CHSSAP62. Deposited Funds

Reinsurer's funds held at ceding company are admitted if 1) they don't exceed liabilities they secure, and 2) reinsured is solvent Interest earned is in bucket write-in "miscellaneous income"

CH14. Certified Reinsurer

Reinsurers, once unauth, who received cert from state. Insurer must separate ceded balances to pre/post cert periods (for separate provisions of reinsurance).

CH6/7. Non-invested Assets

Relatively illiquid assets and are largely not allowed (nonadmitted) on the BS.

CH6/7. Cash & Invested Assets

Relatively liquid assets and are largely allowed (admitted) on the BS.

CHIFRS. Definition of Relevant/Reliable

Reliable - item info is representationally faithful, free of material errors, and free of bias Relevant - item can make a difference in user's decisions

CH22/23. S-X and 10-K

Requires Schedules III, IV, VI

CH2. Tabular Discounted Reserves/What's not Included?

Reserves discounted for things like mortality, remarriage, inflation. Does not include medical loss reserves or LAE reserves.

CHSSAP65. High Deductible Policies: Reserves

Reserves established the entire policy period. Risk is present at inception date. Reserves are net of deductible if normal, and gross if uncollectible deductible.

CH19. R4 Excessive Premium Growth Issues

Reserves more uncertain when growing rapidly a) less insight into new business (relative to current book) b) Average writings skewed toward end of PY. Traditional techniques won't capture lag in loss emergence, and understate reserve need. Difficult to implement an adjustment even if shift is recognized.

CH4. Definition of Asset

Resources obtained or controlled by a company as a result of past events that have a probable future economic benefit to the company

CH19. RBC Purpose

Risk Based Capital System is tool that gives early warning (report filed confidentially by 3/1) of potential insurer insolvency

CHKUCERA. ASOP12 Input

Risk characteristics must be correlated with expected outcomes

CHIFRS. Financial Risk Definition

Risk of change to 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 Insurance risk is all other risk transferred to insurer.

CH19. R4 Loss-Sensitive Business

Risk sharing between insurer and insured. Less protection required. Thus becomes a discount for RBC. Discount applied to loss sensitive reserves: 30% for direct, and 15% for assumed (lower to reflect loss sensitive commissions)

CH19. R4 (Reserve Risk) Data and Risk Sources

Risk sources: 1) Reinsurance Rec (reins RBC) 2) Unpaid L&LAE (reserve RBC) 3) Excessive premium growth 4) Acc&Health reserves (health RBC) Data sources: Schedule P 10 yr history (by LoB)

CH19. R3 Reinsurance Recoverables Risk and Exclusions

Risk that reinsurer is unwilling or unable to pay what is due. Excluding the following reinsurers: 1) Cessions to US parents, subsidiaries & affiliates 2) State-mandated involuntary pools & associations 3) Federal insurance programs

CHFREIHAUT. Reasons to Deviate from Pricing Assumptions for RTA

Risk transfer testing focused on tail, where pricing models try to project all possible loss results

CH22/23. GAAP Invested Assets

Rules based on purpose: Available for sale, held to maturity, or held for trading AforSale:intent to sale after a yr and before maturity: fair value, with changes in fair value recorded as "other comprehensive income" HeldtoMaturity: amortized cost HeldforTrading: fair value Most insurer securities held as AforSale

CH22/23. Prospective Reinsurance

SAP - net of anticipated reinsurance recoveries. Gross liabs in Sched P. GAAP - asset recognizing ceded reins recs. Does not allow offsetting of assets and liabs

CH2. SAP/GAAP Loss Reserves and Reinsurance

SAP - recorded net of reinsurance GAAP - recorded gross of reinsurance

CH22/23. Structured Settlements (signed release of liability)

SAP and GAAP are the same: 1) Purchase price of annuity is recorded as paid loss 2) claim is closed

CH22/23. Nonadmitted Assets

SAP does not consider these not highly liquid assets for calculating surplus, but GAAP will.

CH1. GAAP DAC

SAP expenses are not deferred, but GAAP expenses are deferred in effort to match expenses with earnings over time.

CH1. SAP Conservatism

SAP has conservative rules which provide early warnings of solvency problems. They also lower the surplus measure relative to other accounting systems.

CH1. US Business Taxable Income and SAP

SAP income used for insurance companies as starting point for Federal income tax.

CH22/23. Anticipated S&S

SAP: option to record reserves in Sched P gross or net of S&S GAAP: Sched P must be net

CH22/23. Loss Reserve Discounting

SAP: rarely allowed, except some lines where tabular discounts permitted. 1) typical discount of 3.5% used (but not rate specified) 2) non-tab discount capped at min(inv yield - 1.5%, yield of US treasury debt with similar duration to loss duration) GAAP: Option to pick reasonable discount

CH22/23. SAP/GAAP Intended Users

SAP: regulators who focus on surplus adequacy (BS) and ability to pay claims. Conservatism employed to create margin of safety during liquidation. GAAP: investors and creditors focused on earnings emergence. (IS)

CH22/23. Structured Settlements (no signed release of liability)

SAP: same accounting, with disclosure by insurer of contingent liability in Notes to FS GAAP: treated like reinsurance contract, so create reinsurance recoverable asset

CHNAICSMI.Purpose of SMI

SMI strives to continually improve US insurance financial regulatory framework by 1) Documenting the us reg system 2) examine international devs for potential use in US 3) apply lessons from global financial crisis

CHFREIHAUT. RTA Frequency

SSAP62 - do not test per renewal unless major changes.If so, retest at date of major change.

OSHA and Insurance

Safe workplace to employees

CH19. R2 Items 1-6

Same as R1 RBC Charge using bonds instead of stocks

CH22/23. 10-K Schedule VI

Same as Sched III but total across each of the last 3 yrs.

CHSSAP65. SAP vs GAAP structured settlements

Same if insurer is payee or claimant has released insurer from obligation Else GAAP defers gains from purchase of annuity, and SAP recognized gains immediately.

CH 6/7. Real Estate and Schedule A

Schedule A has details of real estate transactions and holdings 1) Properties occupied by company (50% or more of property): Orig Cost - Dep - Encum. 2) Properties held for production of income: Orig Cost - Dep - Encum 3) Properties helf for sale: Min(Dep Cost, Fair value)

CH 8/9. Details about held bonds

Schedule D, Part 1 (long term bonds owned) Schedule D, Part 4 (long term bonds sold, redeemed or disposed of) Schedule DA, Part 1 (bonds with mat 1 yr or less)

CH14. Schedule F 2012 Changes: New Part 6

Section 1: Provision for cert reins due to collateral deficiency: e.g. rated 6 cert reinsurer will post 100%. if post 75% instead of 100%, provision = 25% of recoverables is generated. Section 2: Provision for Overdue Reinsurance ceded to cert reins = Min ( Max ( .2 * Overdue + .2 * Dispute, .2 * Net Unsecured rec for slow payers for which Credit is Permitted), Credit permitted for Net Rec)

CHNAICSMI. Focus of SMI

Self-assessment of the regulatory framework in the US, focusing on 1) capital requirements, 2) governance and risk management, 3) group supervision, 4) statutory accounting and financial reporting, and 5) reinsurance

Regulatory Philosophy

Set of beliefs, concepts, and attitudes concerning relationship of state government to regulation of insurance

CHIRIS. Analyst Team System

Set of financial examiners and analysts from NAIC who identify companies needing immediate attention, using IRIS ratios, RBC, etc.

CH13 Schedule DA

Short-term investments/cash equivalents This includes investments such as: 1) Bonds 2) Mortgage loans & other short-term invested assets for PSAs 3) Mortgage loans 4) Exempt money market mutual funds 5) Class 1 money market mutual funds 6) Other short-term invested assets Part 1 - Lists the short term investment assets held as of 1231

CH 8/9. Allocating Expenses

Should be based on pertinent factors (premium, claim count, or headcount)

CH15. Part 6 Overview

Shows cum premium earned for last 10 years in LOBs that tend to have adjustments Prem may change in future due to 1) premium audits 2) retrospective rated pols (adj booked as "accrued retrospective prem") 3) Lags in reporting/accounting for premiums

CHIFRS. Sig Insurance Risk Definitino

Sig iif insured event could cause insurer to pay sig addt'l benefits in any scenario, excluding scenarios that lack commercial substance. GAAP requires reasonably possible that insurer may realize a sig loss.

CH21. Qtrly Statements

Similar format to AS, except no Sched P. Instead has "Part 3", which has L&LAE dev for qtr for latest 3 AYs. Does not have LoB

CHGovIns. Details on why Gov Feels obligated

Some people can't afford mandatory coverage and they would still need the protection, so government feels obligated to provide, or may feel industry should be restricted to lower profits.

Ch19. RBC Model ACt

Some states issue minimum cap reqs on insurers. They are usually too low. They don't account for unique characteristics/risks of the insurance company. Thus RBC is helpful and reflects speficic information of insurance industry in the minimum capital requirement. Note that the RBC req is NOT the target level surplus. Can help identify insurers in financial trouble.

CH1. IFRS 4

Standards for recognition and measurement of insurance contracts. IFRS 4 says insurance company can report under local accounting rules. Mod ex: establish PDR.

CHIFRS. IFRS

Standards issued by IASB. SEC recognizes IFRS as legitimate global standard. More judgment based than GAAP. More transparent than GAAP b/c more footnote disclosures about how company interpreted IFRS.

CHMateriality. AAA Tasks vs Practices

Standards more consistent between tasks than practices. Should have constant materiality standard for all aspects of a given task (data -> final answer).

CHFeldblumLR. Statutory IL/Tax IL

Stat: Paid + Change in Full Value Reserves Tax: Paid + Change in Discounted Reserves

CHMcCarty. Insurance and Rating Factors

Statistical justification alone is insufficient - are they fair and valid?

CHFeldblumStatIncome. Revenue Offsetting in Statutory and Tax Accounting

Statutory EP = WP - Chg in UEPR (gross if acq costs) Tax accounting removes acq costs from UEPR (assumed 20% of premium) and adds it back to income.

CH22/23. SAP Statutory Purchase

Statutory Purchase creates parent-subsidiary relationship. Assets and liabs from purchased company are recorded at historical SAP carrying values.

CHFeldblumStatIncome. Tax Exempt Income

Statutory includes, but tax does not include. e.g. municipal bond interest income

CHFeldblumLR. Investment Income and LR over Time

Statutory: Company earns positive investment income. No change in reserves to offset this. Tax: Investment income on assets backing loss reserves offset the interest discount amortization (accelerates the recognition of tax).

CH13 Schedule D Part 2

Stocks owned by 12/31 Sched D, Part 2, Section 1 has Preferred Stocks: a) Industrial/Misc (unaffiliated) b) Parents, subsidiaries, affiliates (PSA) Sched D, Part 2, Section 2: Common stock, mutual funds & money market funds

CH19. R4 Reserve RBC - Company RBC

Straight average of 1) industry reserve RBC % and 2) industry reserve RBC % adjusted for company experience Purpose is to provide a surplus cushion against company adverse development

Ch19. Company RBC L&LAE Ratio

Straight average of the NAIC provided 1) industry RBC L&LAE ratio, and 2) Industry RBC L&LAE ratio that is adjusted for company experience

CHCOPLFR. Errors in AOS

Submit revision in 10 days. Mention revision, explain the change, and a revision date.

CH 8/9. Problems with Bad Expense Allocation

Subsidies may arise and cause problems: 1) Can distort profitability measures 2) Inefficient allocation of resources 3) Adverse selection

Annual Reports of Regulator to Legislator

Summarizes activities of department, and status of insurance industry in state

CH22/23. 10-K Schedule III

Supplementary insurance information for each reporting segment: deferred policy acq cost, Unpaid L&LAE, UEP, Other policy claims payable, prem revenue, net inv income, L&LAE expenses, Amortization of DACs, other opex, WP

CH 8/9. Unassigned Surplus

Surplus not assigned to par value of stock, special surplus funds, surplus notes, or treasury stock.

CHFeldblumInvStrat. Capital Gains Tax Deferral

Taxes not paid until gain is realized. Thus tax rates are effectively reduced.

Intro III. The Blank

Template that insurance companies use to report under SAP, for all states.

CHCOPLFR. Long Duration Contract Definition

Terms > 13 months where insurer cannot cancel/increase premium. Exclusions: financial guaranty, mortgage guaranty, and surety contracts. Actuary consider UEP reserves.

CHSSAP65. Gross UEPR tests

Test 1: Management's best estimate of amounts refundable to contract holders at rpt date Test2: Gross premium * (Future Term L&Expenses / Projected total L&Expenses) Test3: Future L&Expenses - PV future guaranteed gross premiums UEPR (latest 3) >= max(above annual) UEPR (prior yrs) >= max(aggregate tests for latest 3)

CHIFRS. Adequacy of Ins Liabs

Test at rpt date. Based on current estimates of future cash flows, cost of claim handling. Deficiency reported in current earnings.

CHIFRS. Reinsurance Asset Impairment Test

Test each rpt date. Impairment = objective evidence suggests may not receive amounts due. Must be a reliable measurementf.

CHSSAP62. Run-Off Agreements

Tfer almost all risk of a LoB not actively marketed by the (re)insurer. Ceding co is primarily liable still. Affiliate agreements excluded from this treatment.

CHNAICSMI. FAWG

The Financial Analysis Working Group peer reviews regulator's solvency monitoring efforts. They also identify market trends and emerging financial issues. Each jurisdiction in which insurer is licensed has the authority to act on FAWG recommendations. FAWG mission 1) Identify nationally significant insurers possibly trending towards financial trouble 2) Assist regs with strategies and actions 3) Coordinate multi-state efforts to address solvency issues FAWG activities: 1) Identify companies that are outliers compared to industry benchmarks 2) Develop communication for the staff and IC of the state of the insurer 3) Review domestic reg's response to identified issues and questions 4) Determine if review indicates need for further recommendations or FAWG intervention 5) Decide whether to form FAWG subgroup for specific insurers.

CHNAICSMI. ORSA

The NAIC has adopted the international solvency assessment called ORSA. Insurers over a premium threshold must 1) Maintain a risk management framework 2) Regularly conduct ORSA 3) Submit ORSA summary report to lead state commissioner

F Surplus. Equivalence of BS and IS

The balance sheet and income statement are equal as long as all transactions flow through both exhibits.

CH15. Schedule P, Part 5 Use

The claim counts can be used to identify trends or changes in claim settlement and reserving

RANDOM. Admitted Insurer

The company has submitted their applications, policy forms, endorsements, and rating structure for approval by the DOI. Typical for personal lines or insurers writing large homogeneous groups of business.

CH4. What is unique to the insurance company's BS?

The larger than typical uncertainty inherent in the estimation of the liability of unpaid claims and claim adjustment expenses.

CH 6/7. Premium Deficiency Reserve (PDR)

This is included in BS as a separate liability when premium is insufficient to cover losses and expenses.

CHGovIns. Details on Gov Social Purpose for Insurance

This is the main reason for government involvement - attempting to benefit society via financial protection

CH NFIP. Purpose of NFIP

This program was designed to a) provide flood coverage to property owners, b) reduce the repair costs post cat event, and c) improve mitigation through floodplain management and flood hazard maps

CH18. Inv Gain on Surplus

Total Inv Gain - UW Inv Gain

Ch19. RBC Ratio

Total adjusted capital / ACL ACL = RBC after covariance * 50%

CH11. Finite Reinsurance Surplus with Regular Accounting

Traditional reinsurance accounting could yield a surplus: decrease cash, and decrease loss reserves.

CH10 Transfer of P&C Runoff Agreements

Transfer to 3rd party of a risk from line/segment that is not actively pursued anymore by insurer

CHSSAP62. Types of reinsurance contracts

Treaty - Tfer whole class/type of business Facultative - Tfer individual risk

CHHamilton. Beach/Windstorm Plans - Eligibility

Typical FAIR plan. Single servicing carrier for LA/MS. Eligibility ------------- 1) Designated coastal area 2) Recent building codes met 3) Not insure poor physical condition, unrepaired previous damage, subject to poor housekeeping, or violation of law or public policy

CHIRIS. Sum of UEP (Non Affil)

UEP from: 1) Auth and Unauth Unaffil US Insurers 2) Auth and Unauth Non-US Insurers 3) Auth & Unauth Mandatory & Vol Pools

CH 6/7. UEPR Components

UEPR = Amount Unearned (1yr or less + 1yr or more) + Earned but unbilled (EBUB) + Reserves for rate credits & retrospective adjustments

CH1. Pressure for US GAAP -> IFRS

US will not likely convert directly. FASB may slowly convert by endorsing IASB standards.

CHMAYER. DF Allows Covered Agreements

USTrade Reps and Sec of Treasury can negotiate covered agreements

CH 6/7. Uncollected/Deferred Premium & Agents' Balances

Uncollected:Premium due before the financial statement date Deferred: Premium due after the financial statement date

Ch14. Provision for Reinsurance (Unauthorized Reinsurer)

Unsecured total rec + 20% All amounts in dispute + 20% (Paid L&LAE rec over 90 days overdue less disputed bals) Capped at total recoverables

CHIRIS. Non-Alarming Increase in NWP

Up NWP not alarming if accompanied by: 1) Low NWP:PHS (Ratio 2) 2) Adequate reserves (Ratios 11, 12, 13) 3) Profitable operations (Ratio 5) 4) Stable product mix

CHFeldblumLR. Two-Yr Lines

Use 3 yr payment pattern, where paid in 12-24 is difference in Ratios for 12 and 24 months. Then split % unpaid @ 24 months half to 3rd yr and half to 4th yr.

CH22/23. Fair Value in L&LAE

Use mark-to-model process since market quote unavailable: To do so need 1) Expected value of nominal future cash flows 2) Reduction to reflect time value of money at risk free rate plus load to reflect illiquid nature 3) Risk adjustment (computed with cost of capital approach)

CHIRIS. IRIS Ratio Tests

Used by regulators to identify 13 insurer ratios outside of a "normal range". Rounded to neartest % except Investment Yield is nearest .1%.

CH14. Aging of Ceded Reinsurance (Schedule F, Part 4)

Used to analyze collectibility of reinsurance recoverables. Includes disputed balances.

CH10 Non-tabular Discounting

Used when insurer receives permission from regulator. Primarily used for WC and Med Pro Liab. Usually applied to agg reserves.

CH22/23. GAAP Goodwill Accounting

Uses purchase accounting: 1) Assets and liabs recorded at fair value 2) Goodwill = purchase price - fair value of net assets (implied capital). 3) Goodwill maintained as same level and recognized as operating gain but regularly monitored for impairment (instead of amortized)

CH14. Part 1 - Data Reconciliation to Other Parts of AS

WP Assumed = Col 2 + Col 3 in Part 1B of U&IE Reinsurance Rec on Paid L&LAE = BS Reinsurance payable on paid L&LAE Reinsurance Rec on known case L&LAE = LAE + Reported Losses from U&IE, Part 2A, Col 2 Cont comms payable = Reinsurance Note in FS "Reinsurance Assumed and Ceded" Assumed premiums receivable -> BS "Agents' Balances" Unearned Prems -> IS UEP = Reinsuranec Note to FS "Reinsurance Assumed and Ceded"

Ch19. RBC in the Annual Statement

We post 1) total adjusted capital, and 2) the ACL in the Annual Statement

CH10 PDR

When UEPR < L + LAE + Maintenance Expenses.

F Surplus. Double Taxation

When income is taxed as revenue and again as investment income/dividend.

Ch 6/7. Funds held under reinsurance treaties

When insurer holds funds from a reinsurer as collateral

CHPreamble. Materiality

Will accounting decision influence stakeholders? Consider 1) Does change violate regulations? 2) Error in basic financial statements may not be material, but may trigger a material event under RBC requirements 3) Changes from abnormal events may be material even though immaterial normally 4) Increased precision lowers materiality standard

CHSSAP62. Uncollectible Reinsurance

Write off from schedule it was originally recorded

CH 8/9. Investment Income from Bonds

a) Interest received during year (must modify to accrual basis in order to calc net income) b) Interest due & accrued c) Current year's amortization/accretion d) Interest paid for accrued interest on dividends (insurer pays seller for time seller held bond between coupon dates)

Current Definition of "Business of Insurance"

a) spreading and underwriting of risk, b) direct connection between insurer and insured, and c) exclusive activities within insurance industry

CHIRIS. IRIS Other Tests

e.g. NAIC Analyst Team System used to monitor financial condition of insurer

CHSSAP62. Ceded retroactive reinsurance and the AS

exclude from all schedules!

CH19. RBC R1 MCS

max(0, Charge for converted - Charge for original)