OC2: Assignments 1-4

Tenancy in partnership

This is concurrent ownership by a partnership and its individual partners of personal property used by the partnership. - Rights to survivorship - Combined interests > property value but payouts made only to first named insured

Tenancy by the entirety

This is joint tenancy between a husband and wife. As with a joint tenancy, if spouses jointly own a property, each of them owns the entire property. If one dies, other becomes sole owner (and accordingly has insurable interest equal to full value of property)

Insurance expense

This is the liability for expenses incurred but unpaid in conjunction with the insurance policy, other than loss / LAE

Unpaid adjusting expense

This represents the cost of settling or defending claims on policies for events that have already occurred.

What is the bulk reserve? How is it different from the additional case reserve?

This reserve represents the estimated deficiency in the aggregate of case reserves for known claims. The additional case reserve is for individual claims.

Coinsurance formula for amount payable

"Did over should times loss," where "did" is the amount of insurance carried (the policy limit) and "should" is the minimum amount that should have been carried to meet the coinsurance requirement.

UIM endorsements: triggers

"Limits Trigger" - when the negligent driver carries liability limits below the limits provided by the UIM coverage of the injured party "Damages trigger" - when the negligent driver carries liability insurance limits that are lower than the injured party's actual damages.

Impairment and example

- Accounting information may be different for income statement purposes and for balance sheet purposes. We use impairment tests to prevent inconsistencies. - e.g. framework that requires an asset to be reported at FV but locked in at historical cost for income statement purposes... you might reflect a permanent impairment in income stmt if permanent shortfall does exist between the two valuations

Recognition Versus Measurement

- Accounting rules distinguish btwn when to recognize an asset and how to measure when recognized. Probability threshold for recognition may vary from the one used for measurement. - May also have different triggers for initial measurement and re-measurement - Initial measurement may be based on "reasonable certainty" of financial benefit

Manuscript forms

- Customized for unique coverages - Not contracts of adhesion - Language adapted from other standard forms, not from scratch

Differences between a deductible and an SIR

- Deductible: insurer defends, pays all losses, then seeks reimbursement from insured - SIR: insurer pays only losses that exceed retention & organization is responsible for adjusting and paying losses up to SIR amount - SIR: full policy limit is payable on top of SIR while a deductible reduces policy limit

Deductibles and liability policies

- If a liability policy has dedl, insured may not report minor incidents. Insurers want to control liability from outset, so they want to be involved in small claims. - Deductibles don't reduce premiums that much for liability policies - Even w/ a deductible, insurer still usually pays all costs w/out contribution from insured for defense & investigation

Extended reporting endorsements: Definite vs Indefinite periods - How does US require the liability to be booked?

- If extension is for definite period into the future, liability can be booked as UEP - If extension is for an indefinite period, liability is booked as loss reserves

[PAP] Othe rinsurance

- If other auto policies cover a liability claim, insurer pays pro-rata based on proportion of liability limits - If other liability insurance is available on a nonowned vehicle, PAP is excess over that

Two basic accounting transactions for losses

- Payment of claims - Changes in claim reserves

Recording premium amounts earned before they're written

- Recording the estimated EP as WP ... requires slight deviation from true defn of WP b/c you're not actually charging customers - As actual audits are performed --> actual WP booked and estimated amt reversed -

Change in Accounting Principle vs Change in Accounting Estimate

- Reporting requirements may be very different for changes in accounting principles vs changes in accounting estimates - Typically, w/ a chg in principle you have to provide disclosure, with recalculation of prior periods. Not so with a chg in estimate, since only affects current period

The IASB has discussed using an asset-liability approach for insurance contracts. What would change for insurers?

- Revenue recognized up front - No UEP - Liabilities must be established for expected losses and expenses for unexpired policy term - Income statement or other performance measures that rely on EP would have to be adjusted

Standard vs non-standard forms

- Standard forms: developed by insurance service and advisory organizations, typically easier to evaluate during policy analysis and consistently interpreted - Nonstandard is a company-specific or proprietary form, usually for unique coverages or high-volume lines (most companies use their own)

Retrospective reinsurance - what does it require with regards to recording

- generally requires that the recoveries under the contract be held on a present value basis. - disclosures of the benefits or effects of such contracts

When does UM apply?

- hit and run - BI limit nonexistant or less than minimum - insurance company denies coverage or is insolvent - cannot be a vehicle that insured has available for regular use, a self-insurer (unless insolvent), or a government agency, or vehicles operated on rails or crawler threads, designed for use off public roads, or while located for use as a residence.

Variations of UM/UIM by state

- mandated on all auto liability policies - allow insureds to reject but must formally do it in writing - limits vary.. UIM may be equal to UM which may be equal to BI

Limits for Med Pay

1 to 10k.. paid to each injured person regardless of the number of insured persons, claims made, vehicles or premiums shown on the policy

Examples of premium earned before it's written

1. Audit premium - Amount of additional premium generated by audits may be estimable but you can't actually bill customers for it 2. Reinstatement premium - reinstatement may be likely or nearly certain but actual payment is not due until paid losses breach attachment point

General approaches to deposit accounting

1. Bank deposit approach - Initial deposit grows with interest - The ending deposit for a reporting period is dependent solely on the beginning balance, the credited rate for the period, and any deposits or withdrawals during the period 2. Prospective approach - the current value of the deposit is set equal to the present value of future payments, irrespective of the initial deposit or past payments. 3. Retrospective approach - the deposit is a function of the initial deposit, past payments, and the current estimate of all future payments - the interest rate is the rate for which the discounted value of past payments and estimated future payments would equal the initial deposit. - focuses on all the flows since inception, past and future - deposit value/discount rate subject to change whenever projected cash flows are changed

[PAP Part A - Liability] Supplementary payments that do not reduce limit of liability

1. Cost of bail bonds—The insurer agrees to pay up to $250 for the cost of bail bonds (bail bond premiums) required because of an accident that results in bodily injury or property damage covered by the policy. 2. Premiums on appeal bonds and bonds to release attachments. 3. Interest accruing after a judgment (postjudgment interest). 4. Loss of earnings up to $200 per day because of the insured's attendance at a hearing or trial at the insurer's request. 5. Other reasonable expenses incurred at the insurer's request.

Six examples of written premium transactions

1. Deposits (the initial premium) 2. Estimates (true exposure may not be known at time) 3. Audits 4. Endorsements/cancellations 5. Reinstatement premiums 6. Retro premium adjustments

Six purposes of policy exclusions

1. Eliminate coverage for uninsurable loss exposures 2. Assist in managing moral and morale hazards 3. Reduce likelihood of coverage duplications 4. Eliminate coverages not needed by the typical insured 5. Eliminate coverages requiring special treatment 6. Assist in keeping premiums reasonable

Two transactions that may be considered premiums

1. Policyholder dividends - treatment may be negative prem or positive expense - varies by rules of jurisdiction/mgmt preference 2. Tax surcharges - In some jurisdictions, insurer is used as a tax collector for special taxes levied on PH - In US: surcharge is shown separately on premium bill and insurer is not liable if PH doesn't pay

Reporting Segment: 1. How are GAAP financial stmts typically produced? 2. When might the above not be produced? 3. What is a reporting segment? 4. Are reporting segments consistent by company? Are all items required to be reported for each segment?

1. GAAP requires financial statement to be produced on a consolidated basis for the reporting entity 2. May be on a nonconsolidated basis if reporting is done at legal entity level to match to legal authority of the regulator 3. Reporting segment is generally how operations are managed (e.g. geographic region, line of business, etc.) 4. Reporting segment is based on the way a particular company operates, not consistent. No, not all items are required to be reported by segment.

How are installment premiums treated with respect to the accounting for premium?

1. Installment premiums are not considered written premium transactions under certain accounting frameworks. 2. Instead, under those frameworks, the full policy premium is recorded up front in a written premium transaction. 3. The decision as to whether to collect this full amount up-front or via installments is treated solely as a billing issue and does not affect written premium

[PAP Part A - Liability] Exclusions

1. Intentional stuff 2. Property owned by insured (includes rented to, used by, or in the care of insured) 3. Employed people 4. If vehicle is used as public or livery conveyance (basically delivery drivers) 5. Garage business use (if insured is selling, servicing, storing, parking vehicles for use on public highways) 6. Other business use (not farming/ranching) 7. Insured's use of a vehicle w/out a reasonable belief that they are entitled to do so 8. if a nuclear energy liability covers loss 9. auto has fewer than four wheels / off-road 10. Other vehicles owned by insured/family member or available for insured's regular use? 11. Racing vehicle

Who are the users of accounting information and what is the corresponding framework for each?

1. Investors, creditors, and owners — GAAP 2. Regulators and supervisors - regulatory accounting 3. Tax authorities - Tax accounting

Pro Rata and Non-Pro Rata approaches to earning premium

1. Most common is a pro rata method, which assume that insurance protection is evenly spread over the policy term 2. In a lot of policies, risk is not evenly spread: --- Policies that cover seasonal risks, aggregate excess policies, warranty policies, financial guarantee policies

Additional sources of recovery

1. Noninsurance agreements - credit cards, home/auto warranty, etc. - HO policy is excess over these 2. Negligent 3rd parties - party who is injured/whose property is damaged has right to recover from 3rd party - solution: subrogation provisions 3. Other insurance in same policy - one loss may be covered by multiple coverages 4. Other insurance in similar policy - e.g. two HO policies when moving to new house cover personal belongings 5. Other insurance in dissimilar policies - liability claims involving a trailer may fall under both HO and personal auto

GAAP hierarchy

1. Organization in "top" position defers rule setting to another organization but retains veto power (SEC retains veto power over FASB) 2.

UM Exclusions

1. Owned but not insured vehicle 2. Duplicate UM coverage in another policy 3. Claim settlement that prejudices insurer's right of recovery— Eliminates coverage of claims that the insured settles without the insurer's consent if such a settlement prejudices the insurer's right to recover payment. 4. Public or livery conveyance 5. Vehicle used without reasonable belief of being entitled 6. No benefit to workers compensation or disability benefits insurer. 7. Punitive damages

Legal bases for insurable interest

1. Ownership interest in property - If you own property, you have an insurable interest. Applies to both tangible (property) and intangible items (copyrights, patents, etc.) 2. Contractual Obligations - Regarding people: A contract may give 1pty the right to bring a claim against 2nd party w/out entitling lien - Regarding property: some contracts allow one party to bring a claim against property (mortgages) 3. Exposure to Legal Liability - e.g. contractor has insurable interest in a building under construction 4. Factual Expectancy - don't need to establish bases for insurable interest above; just financial harm resulting from event to be insured 5. Representation of another Party - e.g. agent, trustee, bailee. Can obtain insurance on their behalf.

Coverages [PAP]

1. Part A—Liability Coverage protects the insured against claims or lawsuits for bodily injury or property damage arising out of the operation of an auto. 2. Part B—Medical Payments Coverage compensates for reasonable and necessary medical and funeral expenses because of bodily injury to the insured caused by an auto accident. 3. Part C—Uninsured Motorists Coverage pays damages if an insured is injured by an uninsured motorist, a hit-and-run driver, or a driver whose insurer is insolvent. 4. Part D—Coverage for Damage to Your Auto compensates for physical damage to a covered auto and to certain nonowned autos. Also referred to as physical damage coverage, Part D includes other than collision and collision coverages. 5. Part E—Duties After an Accident or Loss outlines the duties required of an insured after an accident or a loss, such as requirements for notifying the insurer of the details of any losses that happen. 6. Part F—General Provisions contains information such as how changes to the policy can be made, provisions for cancellation and termination of the policy, and descriptions of the policy period and territory

Three exceptions to indemnity principle (which is to pay the whole loss)

1. Policy limits, deductibles, etc. 2. Insured is not indemnified for inconvenience, time, other nonfinancial expenses 3. Some policies pay a pre-established dollar amount that may be different from the insured loss

Earned premium implications for when WP transactions occur at weird points in time

1. Portion of WP from transactions that relate to past coverage periods is earned immediately 2. Portion that relates to future coverage periods is established in UEPR 3. A retroactive endorsement generating additional WP is earned immediately for past period and UEPR is established for future

Two trade-offs of accounting criteria (criteria that may be at odds with one another)

1. Relevance and reliability - e.g. Fair value vs depreciated cost (FV is more relevant, less reliable) 2. Lack of bias and reliability - if uncertainty exists in information, some amt of prudence is necessary (e.g. risk margins) - different users also have different risk tolerances, which requires

Actual Cash Value (ACV) - three methods for determining

1. Replacement cost less depreciation - economic depreciation, not accounting depreciation 2. Market value 3. Broad evidence rule - Courts required that insurers consider more than just depreciation/market value when determining ACV

To be considered reliable, accounting information should embody what four criteria?

1. Representational faithfulness - info represents what it claims to represent (e.g. if info is supposed to represent expected total amt of ultimate claim pmts, discounting it would not be faithful 2. Verifiability—Another person or entity should be able to recreate the reported value using the same information as the reporting entity. 3. Completeness—The reported information should not omit any material fact or consideration. 4. Neutrality—The information can be used for economic decision making without regard to how it may affect economic, political, or social behavior.

Approaches to take if billed amounts for recoverables are determined later to be unrecoverable

1. Reversal of original recoverable entries 2. Write-off of the recoverable in a different income statement account

Self-contained vs Modular policies

1. Self-contained - contains, within one document, all the provisions needed to make up a complete insurance policy. - endorsements can be added - appropriate for insuring similar exposures with many insureds - can be either monoline policy or package policy 2. Modular - created by combining a set of individual components, such as one or more coverage forms, one or more causes of loss forms, and one or more conditions forms - used in commercial insurance b/c unique exposures - can also be either monoline or package

Three reasons for lags in filing / receiving of reinsurance reports

1. The lags can result from the time necessary for the ceding company to accumulate the data required. 2. Lags may also result from the need to coordinate input from multiple parties. 3. Multiple handoffs and consolidations

[PAP] Broadly, what does the declarations page include?

1. The name and mailing address of the insured 2. The name of the insurer issuing the policy and the name and address of the producer, if applicable 3. The policy period, a description of the covered autos, limits of liability, premium and rating information, and any endorsements that may apply to the policy

Possible approaches for handling discounting of reserves in an accounting framework

1. Treat discount as asset 2. Just record discounted reserves as liability 3. Record discount as contra-liability 4. Unwinding of discount will have to be recorded over time in the income stmt... in many jurisdictions this is just recorded as an increase to incurred loss`

Accounting criteria (URRCLC)

1. Understandability - can be evaluated in terms of both the intended users and intended uses of the information - information must be transparent, intelligible, and clearly disclosed 2. Relevance - accounting info should help its users make decisions: timely, have predictive value, and provide feedback about prior decisions 3. Reliability - Representational faithfulness, verifiability, completeness, neutrality 4. Comparability and consistency - comparisons between time periods and among entities 5. Lack of bias - useful only if users understand the bias, it's consistent over time, and users can adjust to remove - adjustments need to be made for potential adverse deviation 6. Cost-benefit effectiveness - The cost of producing accounting information should be reasonable in relation to the expected benefit of the information

[PAP Part B - Medical Expenses] Exclusions

1. vehicle w/ <4 wheels 2. public or livery conveyance (delivery/taxi) 3. Injuries that occur while the vehicle is located for use as a residence or premises. 4. if WC applies 5. Injuries sustained by an insured while occupying, or when struck by, another vehicle owned by the insured or furnished or available for the insured's regular use. 6. ^but for family (not a covered auto) 7. injuries sustained by insured while using a vehicle they're not supposed to (does not apply to a family member using a covered auto owned by insured) 8. business stuff 9. bodily injury from nuclear weapons or war, insurrection, rebellion, or revolution 10. nuclear reaction, radiation, or radioactive contamination 11. racing cars 12. vehicle sharing program

Sandi purchased a $130,000 home three years ago and took out a $100,000 mortgage. Today her home is worth $150,000 and she still owes $55,000 on the home. The mortgage holder has an insurable interest of how much in Sandi's home?

55k

As an incentive for insuring to value, many policies include insurance to value provisions that reduce the amount payable for both partial and total losses if the insured has not purchased adequate limits of coverage. Coinsurance clauses, one such type of provision, are found in many commercial property insurance policies. The most common coinsurance percentages for buildings and business personal property are 90 percent, 100 percent, and

80%

Jared had a Personal Auto Policy (PAP) with a single limit of $100,000 for bodily injury and property damage liability. He was found to be at fault for an accident by a court and a $95,000 judgment was entered against him. In addition, prejudgment interest of $10,000 was awarded. Since entry of judgment, $1,000 in postjudgment interest has accrued. Jared earns $150 a day in salary and missed five days of work to attend the trial. His insurer spent $25,000 defending the lawsuit against Jared. Which one of the following is the total that should be paid by Jared's insurer under his PAP?

95k judgment + 5k prejudgment interest (capped @ 100k) + 150x5 + 25k (defense)

Accounting frameworks designed for a broad range of users may be referred to as Select one: A. Generally accepted accounting principles. B. Regulatory/supervisory accounting. C. Management accounting. D. Statutory accounting principles.

A

Because accounting information must allow for comparisons between time periods and among entities, it must be, above all else, Select one: A. Consistent. B. Neutral. C. Complete. D. Transparent.

A

In general, to be understandable, information contained in financial reports must be intelligible, clearly disclosed, and Select one: A. Transparent. B. Relevant. C. Reliable. D. Consistent.

A

What is one disadvantage to having one set of accounting rules for insurers? Select one: A. Compromises must be made that are suboptimal to one or more sets of users. B. Data collection may become less precise as users become lax in rule application. C. There is an increased lag time between the need for a change in rules and its implementation. D. There are increased costs in complying with the one, more-encompassing framework.

A

Which one of the following statements is true regarding the agreed value method of property valuation used in some property insurance policies? A. If a total loss occurs, the insurer will pay the agreed value specified in the policy. B. The agree value method in property insurance policies illustrates the principle of indemnity. C. The agreed value method stipulates what the agreed value has to be relative to the true value of the property. D. At the time the policy is written, only the insurer must agree to the value specified in the policy.

A

Management accounting frameworks are usually based on modified versions of generally accepted accounting principles and Select one: A. Regulatory accounting rules. B. Tax accounting rules. C. Statutory accounting rules. D. Going-concern accounting rules.

A (statutory accounting is only a thing for insurance)

Deferred revenue

A liability created when a business collect cash from customers in advance of completing a service or delivering a product... for insurers this is the UEPR

Agreed value method

A method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss. Partial losses valued at ACV, repair cost, w/e

Punitive damages (exemplary damages)

A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages

Functional valuation method

A valuation method in which the insurer is required to pay no more than the cost to repair or replace the damaged or destroyed property with property that is its functional equivalent. Permits insurer to use common construction methods and materials.

[PAP] Specifically, what does the declarations page include?

A. Insurer - name, maybe agency or brokerage that sold along with contact information B. Named insured - name + mailing address. Party responsible for premium payment, can request cancellation, receives any notices issued by insurer C. Policy Period D. Description of Insured Autos - Vehicle year, make, model, and VIN - Body type, annual mileage, use of vehicle, date of purchase, etc. E. Schedule of Coverages - Coverages, limits, deductibles and premium F. Applicable Endorsements G. Lienholder - Whether it is owned or leased. Name of lender. H. Garage Location - If auto will be garaged somewhere other than mailing address I. Rating information - Rating class and any credits/discounts J. Signature - signature of an authorized legal representative of insurer. - countersignature date (when policy was signed by legal rep)

EBUB and EBNR

Earned but unbilled (EBUB) and Earned but not reported (EBNR) These two terms represent premium that has been earned but not yet billed

The depreciation amount used in calculating actual cash value (ACV) under property insurance policies is based on

Economic depreciation

Changes in accounts receivable: income statement vs balance sheet

An increase in accounts receivable is reflected as revenue on the income statement, but an increase in the value of a stock investment would not be reflected as a gain on the income statement unless the stock is sold

What is a binder premium?

An initial deposit premium. - Policies may be bound before all contract details are finalized. - May not have good idea of exposure - Also used in reinsurance treaties

Nontransferable

An insurance policy is a contract between two parties. The insured cannot transfer the contract to a third party (such as a buyer of the insured's property) without the insurer's written consent.

When are assets/liabilities booked under an asset-liability approach?

Asset is booked if right to future CASH flows exists at reporting date. Liability is booked if firm has commitment that will lose future CASH flows.

What are interim premium audits?

Audits that modify the premium and are performed before policy expiration

[PAP declarations] Newly acquired auto for PD coverage

Automatic PD coverage on a newly acquired auto for 14 days for insured who carries collision or other than collision (OTC) The coverage is equal to the broadest coverage (that is, that with the smallest deductible) on any vehicle currently shown in the policy declarations. If no collision coverage, newly acquired auto receives PD cvg for four days, subject to $500 deductible In both cases, insured must ask insurer to add additional auto to extend coverage

In many cases, a trade-off exists between relevance and Select one: A. Neutrality. B. Reliability. C. Transparency. D. Completeness.

B

Which one of the following is a specific characteristic of relevant accounting information? Select one: A. It is consistent. B. It is timely. C. It is comparable. D. It is widely disseminated.

B

Which one of the following statements regarding the extent of damages in liability claims is true? Select one: A. Unlike property damage claims, evaluation of bodily injury claims considers a narrow range of damage elements for the claimant. B. A claimant in a bodily injury or property damage liability claim has a duty to mitigate loss after an accident. C. A claimant generally may not recover damages to compensate for loss of use of damaged property. D. The insured/defendant usually has the burden of proof regarding bodily injury and property damage proximately caused by his or her acts.

B

Four steps to Post-Loss Policy Analysis

DICE (declarations, insuring agreements, conditions, and exclusions) Step 1: See if declarations page precludes coverage. If not, proceed to next step Step 2: See if insuring agreement precludes coverage. Step 3: See if any of following conditions are true: • Fulfillment of certain conditions is required for there to be an enforceable policy. • Coverage will be denied if an insured party breaches a policy condition. • Coverage triggers and coverage territory restrictions affect the loss. ...and many others Step 4: look at exclusions or endorsements

[PAP declarations] - Bodily injury - Business - Family member - Occupying - Property damage - Trailer

Bodily injury—Bodily harm, sickness, or disease, including death. Business—Includes a trade, a profession, or an occupation. Family member—related to the named insured or spouse by blood, marriage, or adoption and who resides in the named insured's household. Includes a ward or a foster child. Occupying—In, upon, getting in, on, out, or off. Property damage—Physical injury to, destruction of, or loss of use of tangible property. Trailer—A vehicle designed to be pulled by a private passenger auto, a pickup, or a van, including a farm wagon or farm implement towed by a vehicle included in the definition of a trailer.

Information that can be used for economic decision making without regard for how it may affect economic, political, or social behavior embodies the characteristic of reliability known as Select one: A. Completeness. B. Verifiability. C. Neutrality. D. Representational faithfulness.

C

Leased vehicle [PAP declarations]

Deemed to be an owned auto if it is leased under a written agreement for a continuous period of at least six months.

Deferral-Matching Versus Asset-Liability

Deferral-matching - Focus on income statement, not B/S - Prems are recognized when earned (creation of UEPR) - Deferred acquisition cost (asset used to defer upfront expenses) Asset-liability approach - Focus is on value of assets/liabs that exist as of balance sheet date

Revenue Recognition: deferral-matching vs asset-liability approach

Deferral-matching - revenue is recognized only as service is rendered - for insurance, as premium is earned / cvg provided Asset-liability - Revenue is recognized up front, once insurer gains control over asset resulting from revenue

Pre-Loss Policy Analysis

Determines what losses would be covered. Relies on scenario analysis to determine what losses might occur under different scenarios and then to compare the provisions of the policy against those possible losses. The sources used for an insured's scenario analysis include: 1. the insured's past loss experience 2. the experiences of friends and relatives 3. insurance producers. (theoretically infinite # of possibilities)

With most types of property insurance policies, premium credits tend to encourage the use of A. Small deductibles. B. Percentage deductibles. C. Medium-sized deductibles. D. Large-sized deductibles.

C. Medium-sized deductibles.

Large deductible plans: How are premiums booked?

Different accounting systems may choose to treat premium reduction due to the large deductible credit differently

What do the standards for regulatory/supervisory accounting consist of?

Can consist of an independent set of standards, produced by or with the approval of the regulator, or can consist solely of additional specialized accounting schedules filed in addition to GAAP financial reports.

Cash flow statement: Insurers vs other companies

Cash flow statement typically less important for insurers. Insurers receive their payments in advance, whereas other businesses must expend cash before they receive their revenue.

What to do if accounting framework does not dictate how EP should be earned?

Choose an approach that focuses on the total earned premium, with as simple an approach as possible for the types of revenue that contribute to the total premium

Exception to fortuitous losses requirement

Finite risk contracts covering losses that have occurred but have not been settled

Other than collision (OTC) coverage

Coverage for physical damage to a covered auto resulting from any cause of loss except collision or a cause of loss specifically excluded.

A business wishes to cap large insurance claims of a given business unit when evaluating the annual results of that unit. This would be an example of which one of the following accounting frameworks? Select one: A. Generally accepted accounting principles B. Regulatory/supervisory accounting C. Tax accounting D. Management accounting

D

Investors and creditors are users who would need which one of the following accounting framework to provide useful information? Select one: A. Tax accounting B. Statutory accounting principles C. Management accounting D. Generally accepted accounting principles

D

Regarding the valuation and settlement of liability claims, which one of the following statements is true? Select one: A. Juries are bound to confine an award to the limits of the applicable policy. B. Most liability claims go to a formal trial. C. Most liability insurance policies give the insured/defendant the right to prohibit the insurer and the claimant from reaching a settlement within policy limits. D. With liability claims, both the claimant and the insurer have an incentive to reach an out-of-court settlement because of the uncertainty, time, and expense involved in a formal trial.

D

Which one of the following statements is true regarding the relationship between the size of the property policy deductible and the premium reduction? Select one: A. The premium credit increases much more rapidly than the size of the deductible. B. The premium reduction is directly proportional to the size of the deductible. C. The premium credits tend to encourage the use of small deductibles and the practice of dollar trading. D. The premium credit increases much more slowly than the size of the deductible.

D

Finite risk insurance policies

Finite risk insurance policies involve an exchange of amounts closer in value than other types of policies because finite risk insurance involves little or no actual risk transfer and often functions as a loan.

The expensive and inefficient process of insuring low severity small claims is referred to as

Dollar trading.

How is a deferred acquisition cost reported under an asset-liability approach?

DAC is not recognized as an asset because it cannot be transferred or translated as cash.

When bodily injury results in a claimant's death, the claim is generally categorized into what two categories?

Either a survival action (how much would have been recovered if the claimant had lived) or a wrongful death action (monetary loss to the survivors). Will affect valuation.

Tom is insured under a Personal Auto Policy (PAP). He recently purchased a used car from an individual. Shortly after purchasing the car, it was stolen and Tom filed a claim with his insurance company. During the investigation, the claim representative discovered that the person from whom Tom purchased the car did not have legal title, and therefore Tom did not have legal title to the car. The insurer denied the claim based on the lack of an insurable interest. Many courts would hold that Tom did have an insurable interest in the value of the car based on the legal basis of ...?

Factual expectancy

Five basic assertions of accounting

Financial information is... 1. Complete 2. Valued correctly 3. Exists 4. Belongs to company 5. Is properly classified, described, and disclosed

[PAP declarations] Newly acquired auto for coverages except PD

For all PAP cvgs except PD cvg, newly acquired auto receives cvg equal to the broadest coverage indicated for any vehicle An additional auto is automatically covered for fourteen days after the named insured becomes the owner. The insured must request coverage beyond fourteen days. A replacement auto is covered for the remainder of the policy period, even if the insured does not ask for coverage.

Aaron finds 10 new laptop computers in the basement of his office building. The attached invoice indicates that each laptop was worth $1,500 four years ago. Hoping to sell them, Aaron was disappointed to learn he could obtain only $500 per unit. This discrepancy in valuation of the laptop computers is most likely due to

Functional depreciation... not market value lol what a dumb question

Management accounting

GAAP, SAP, tax accounting frameworks may not meet needs of users. e.g. BUs that experience large claims or the discounting of reserves

Generally, it is difficult to establish market value on property when the property

Has had few recent transactions involving comparable property.

What is the loss cycle?

How incurred losses are reported in financial statements 1. Initial estimate of incurred loss for most recent period 2. Changes in estimate of incurred losses for prior periods

Utmost good faith

Ideally, insurance contracts involve transactions of utmost good faith, in which parties act with complete honesty and disclose all relevant facts Insureds must provide information without concealment or misrepresentation, and insurers must fulfill promises as outlined in the contract.

Liability adequacy test

If expected liability for unexpired policy term > booked based on this test, establish a PDR

[PAP] Out of state coverage

If state requires higher limits or new coverage, PAP automatically provides it

Conditions [policy provision]

If the insured does not comply with the conditions, then the insurer may be released from any obligation to perform some or all of its otherwise enforceable promises.

Definition of indemnity

In the event of a covered loss, to pay an amount directly related to the amount of the loss. The insured should be "made whole" but should not make a profit.

[PAP] Endorsements

Includes - state-specific endorsements used to adapt PAP to state laws - optional endorsements

[PAP declarations] Your covered auto

Includes four classes of vehicles: 1. Any vehicle shown in the declarations. 2. A newly acquired auto. 3. Any trailer you own. 4. A temporary substitute auto or trailer—A vehicle that is used as a short-term substitute for another covered auto that is out of normal use due to breakdown, repair, servicing, loss, or destruction. These vehicles are covered under all PAP coverages except damage to your auto (physical damage), which treats them the same as other nonowned autos.

[PAP declarations] Newly acquired auto

Includes two types of vehicles that become owned during the policy period: (1) A private passenger auto. (2) A pick up or van—Certain weight and usage restrictions apply.

Why are insurance policies considered conditional contracts?

Insurance policies are conditional contracts because the insurer is obligated to pay for losses only if the insured has fulfilled all of the policy conditions. The insurer may be willing to waive some policy conditions, such as requiring the policyholder to make the damaged property available for inspection. In some cases, the insurer may pay the claim without making an inspection.

Provisions of PAP Part A - Liability Coverage

Insuring Agreement, Supplementary Payments, Exclusions, Limit of Liability, Out of State Coverage, Financial Responsibility, and Other Insurance

Stu is a high school student. Stu and three of his friends decided on a car-pool arrangement to get to school instead of taking the bus. Stu would drive his mom's car, and each friend would chip in towards gas. Stu did not inform his parents of his plans. While driving to school on the first day of the car-pool arrangement, Stu and his passengers saw a science teacher who had recently given Stu a low grade. In an attempt at revenge, Stu drove his mom's car into the teacher's car, causing moderate damage to both vehicles. The teacher pressed charges and also made a property damage claim against Stu, who turned the claim over to the family's Personal Auto Policy (PAP) insurer. The insurer denied coverage based on an exclusion in the PAP. Which exclusion applies to this incident?

Intentional injury lmao @ this scenario

In a jewelry purchase, buyer Connie told her sister Jennifer to purchase three dozen gemstone bracelets. Jennifer bought bracelets and necklaces from George who was a well-known silversmith. George, counting on the income, purchased silver from Tom, but when Connie refused to pay for the necklaces and returned them, George could not pay Tom. In this situation, the agent is whom?

Jennifer

All of the following represent potential sources of accounting frameworks, EXCEPT: a. Laws and regulations b. Legal precedents c. Internal management d. Professional associations

Legal precedents

Insurable interest: difference between life and P&C

Life insurance, the beneficiary must have an insurable interest in the life of the insured when the policy is purchased, but not necessarily at the time of the insured's death. Property-casualty: must be present at the time of the loss.

Regulators in the US have developed a complete set of accounting rules, combining elements of both ___ and ___.

Liquidation accounting and going-concern accounting.

Mark-to-model vs Mark-to-market

Mark-to-model: The valuation of an asset based on financial models instead of market price, because market price may not be available Mark-to-market: using market price

Endorsements

May be a line, paragraph, sentence on 1+ pgs attached to policy - An endorsement takes precedence over any conflicting terms in the policy to which it is attached. - Handwritten > computer-printed or typewritten one (reflects true intent better)

PDR: excessive vs inadequate

Most accounting frameworks accept the booking of a liability that is expected to be excessive, but do not accept the booking of a liability that is insufficient

Definitions [policy provision]

Most insurance policies or forms include a section that contains definitions of certain terms used throughout the entire policy or form. Undefined words interpreted as below: a. Everyday words are given their ordinary meanings. b. Technical words are given their technical meanings. c. Words with an established legal meaning are given their legal meanings. d. Consideration is given to the local, cultural, and trade-usage meanings of words.

Preprinted forms

Most policies are assembled from preprinted forms and endorsements - No customization - Limited paperwork - Contracts of adhesion

We, us, and our [PAP]

Refer to the insurer providing insurance under the contract, generally the company named in the declarations.

Paid loss vs cash payment

Paid losses are not equivalent to cash payments. When an adjuster writes a check to a claimant, a paid loss transaction may not be recorded. The pmt is registered to a suspense account if a payment has been made but not recorded. - May be a backlog in clearing claims - May need addl details to record as paid - Booking lags can also generate differences between what's a "paid loss" and a "true cash transaction"

What insurance policies are the insurer's payments for defense costs and supplemental payments typically applied to reduce the policy limits?

Pollution liability

Exchange of Unequal Amounts

Premium vs loss payments is unequal most of the time.

Principle-based vs Rule-based

Principle-based - Flexible with new and changing products/environments - Require less maintenance - Difficult to audit relative to compliance - Concern with consistency / judgment / manipulation (less so than rule-based) Rule-based - Easier to audit - Better for consistency and comparability - Lack of flexibility - Also concern with manipulation if firms adhere to literal wording

What sort of documents are included in the insurance policy?

Rating manual, premium notes (promissory notes that are accepted by the insurer in lieu of a cash premium payment), inspection reports, and specification sheets or operating manuals relating to safety equipment or procedures, bylaws

Ella, the owner of a dry cleaning establishment, maintains insurance on customers' clothing and other property. She does so because she is acting as a bailee of customers' property while it is in her possession. In the event that a customer's property becomes damaged while in her care, Ella will pay any insurance proceeds to the customer. What is the legal basis for insurable interest demonstrated by this example?

Representation of another party

Multi-year policies with regards to the recording of premium

Risks are not spread evenly over policy term, especially in high inflation environment -- use non-pro rata method

Split-limits basis

Separate coverage limits that allow one limit for bodily injury to each person; a second usually higher limit for bodily injury to all persons in each accident; and a third limit for all property damage in each accident.

Financing: premiums vs service charges

Some premium payment plans allow for multiple premium payments over time. Might be a higher amount than if paid in full. Depending on framework and jurisdiction, additional payments may be recorded as additional premium, service charges, or as financing charges.

Reinsurance lags in reporting of premium/losses

Some reinsurance contracts result in material lags in the reporting of premiums/losses - Correction: Require companies to book estimates

[PAP] Financial responsibility

States require insureds to demonstrate proof of financial responsibility after accident has occurred. The PAP can be used to demonstrate this. If financial responsibility law changes to require higher limits, PAP complies.

[PAP Part A - Liability] Insuring Agreement

States the insurer's duty to pay damages and defense costs and defines the persons and organizations insured under Part A 1. Damages and Defense Costs Covered - Insurer agrees to pay compensatory and punitive damages for BI or PD for accident that insured is legally responsible for - Includes prejudgment interest (amt to put the payment on same basis as if clmt received that amt on day of accident).. subject to applicable limits 2. Persons and Organizations Insured - Part A - Provides liability for four classes: (1) Named insured and family members (2) Any person using named insured's covered auto (3) Any person legally responsible for the acts of a covered person while using a covered auto (4)Any person legally responsible for insured's use of any auto

In the United States, tax accounting rules for insurers are based on

Statutory accounting, with modification

Which one of the following best describes the framework for tax accounting rules? Select one: A. Tax accounting rules are based on GAAP accounting rules. B. Tax accounting rules are based on statutory accounting rules. C. Tax accounting rules are determined independently. D. Tax accounting rules can be based on GAAP or statutory accounting rules, or can be determined independently, based on the tax laws for the jurisdiction in question.

Tax accounting rules can be based on GAAP or statutory accounting rules, or can be determined independently, based on the tax laws for the jurisdiction in question.

Replacement cost - principle of indemnity

Technically, replacement cost coverage violates the principle of indemnity. An insured who sustains a loss to old, used property and receives insurance payment for new property has profited from the loss.

Effect of premium tax surcharges on B/S

Temporary entry in cash asset account and in the non-insurance liability account, which remains as is until payments are remitted to taxing authority

Alva and Mehmet are married and own their home, which is valued at $250,000. The combined interest of Alva and Mehmet is $500,000. In the event of loss, the insurer would pay no more than the value of the property. This type of ownership is referred to as ...?

Tenancy by the entirety

In the United States, the top organization in the rules hierarchy for Generally Accepted Accounting Principles has designated which one of the following organizations as the accounting standard setter (although its rules are subject to veto)?

The Financial Accounting Standards Board (FASB)

UIM - stacking

The application of two or more limits to a single auto accident - may involve 2+ policies .. stacking the UIM limits - may allow stacking within a policy if more than one vehicle is covered - in some states, insured can choose between stacking or nonstacking but must pay a higher premium for a policy that allows stacking - some states prohibit stacking (limit = UIM limit)

Who has the burden of proof in a bodily injury / property damage claim?

The claimant

Commutations - how to record

The final payment or series of payments is typically accounted for as a paid loss. a. Consistent with the finalization of all remaining obligations, all other balance sheet entries are removed. b. As the final payment is typically based on the economic value remaining in the contract, it generally reflects the TVM; therefore, it would normally be less than a full undiscounted loss reserve.

Legal costs in addition to policy limits [PAP]

The insurer is obligated to pay defense costs in addition to the policy limits

Who is considered an insured under UM coverage?

The named insured and family members while occupying a covered auto or a vehicle that they do not own. They are also covered as pedestrians. b. Any other person occupying a covered auto. c. Any person legally entitled to recover damages because of bodily injury to a person in the two previously described classes.

For Generally Accepted Accounting Principles (GAAP), the hierarchy is generally led by

The organization in charge of securities regulation for the jurisdiction in question (the organization may defer rule setting to another organization but retains ultimate power muhaha)

Definition of PDR + what does it specifically not include?

The premium deficiency reserve is an estimate of expected deficiency in the unearned premium liability at the balance sheet date. Includes only marginal expenses directly related to the contract, not fixed expenses/general overhead expenses

Bordereaux reporting

The reporting for certain reinsurance contracts is only in a summarized, aggregated form. Such summarized reports are called bordereaux. May include product line detail or type of loss.

Risk transfer - does it apply to all contracts?

The risk transfer rules may apply to accounting for all reinsurance contracts, or only to the ceded reinsurance portion and not the assumed reinsurance portion of the same contract.

For Generally Accepted Accounting Principles (GAAP), second position in the hierarchy is held by

The standards set by the specified accounting standard setter for the jurisdiction in question.

What is the primary focus for proponents of deferral-matching approaches?

The timing of profit emergence. Absent changes in estimates, under D-M, profit is steady over life of policy period.

You and your [PAP]

These words refer to the named insured shown on the PAP Declarations page as well as an unnamed spouse of the named insured—provided that the spouse is a resident of the same household. If unnamed spouse moves out of household but remains married to insured, still considered "you" for another 90 days or until policy expires, whichever comes first

Tenancy in common

This is a concurrent ownership of property, in equal or unequal shares, by two or more owners. - NO survivorship rights - Insurable interest is limited to that owner's share of the property. Insurance payouts made to first named insured who's responsible for distributing.

What is the purpose of rule hierarchies within accounting frameworks? A. To determine which accounting framework should be used B. To resolve conflicts among rules that preparers of financial statements may encounter when applying those rules C. To resolve differences between the United States and the European Union D. To resolve differences between the accounting rules that apply to private versus publicly traded companies

To resolve conflicts among rules that preparers of financial statements may encounter when applying those rules

Purposes of accounting

Track and organize all the activities that affect an organization financially and to provide information useful for decision making

Ultimate premium revenue for policy/underwriting year

Unearned premium liability is not recognized. It's just total written premiums to date with any possible adjustments to WP later for that year. Note that this is only ultimate. When policy/UW year prem revenue to date is desired, take WP - UEP for that year as of X date.

When and why insurable interest is required

What: An insurable interest arises as the result of a relationship with a person or a right with respect to property. When: Requirement by law for an insurable interest (exists even if nothing in policy) Why: a. It supports the principle of indemnity. b. It prevents the use of insurance as a wagering mechanism. c. It reduces the moral hazard incentive that insurance may create for the insured.

Post-Loss Policy Analysis

When an insured reports a loss, the insurer must determine whether the loss triggers coverage and, if so, its extent

[PAP] What does the agreement and definitions page include?

a general agreement stating that the insurer is providing the coverage subject to payment of premium and to the terms of the policy.

Two alternative approaches for an accounting framework's treatment of ceded reinsurance

a. Ceded reinsurance entries are recorded in the same place as, and as offsets to, the corresponding direct or assumed reinsurance entries. (SAP?) b. The purchase of reinsurance is recorded as the purchase of an asset. (I think this is like GAAP)

Two categories of insuring agreements

a. Comprehensive insuring agreements provide an extremely broad grant of unrestricted coverage that is both clarified and narrowed by exclusions, definitions, and other policy provisions. b. Limited insuring agreements restrict coverage to certain causes of loss or to certain situations. Exclusions, definitions, and other policy provisions serve to clarify and narrow coverage but may also broaden the coverage.

Two examples of retrospective reinsurance

a. Loss portfolio transfer b. Aggregate loss cover purchased for an existing portfolio of liabilities

Deposit accounting - when to use it

a. No risk transfer exists. b. Timing risk exists, but the transfer of amount risk is negligible. c. The reinsurance is considered to be retroactive reinsurance, subject to exceptions.

Why is maintaining insurance to value difficult?

a. The AOI necessary to meet coinsurance requirements is based on property's value at the time of the loss but the policy limit is selected when the policy is purchased. b. When selecting insurance limits, an insurance buyer has to typically estimate property value. c. The insurable value at the time of the loss often cannot be precisely measured until the property is actually rebuilt or replaced. d. Values change over time.

In addition to covering the claimant's damages, insurers also agree to pay defense costs and various supplementary payments, such as...

a. The cost of surety bonds required in connection with claims b. Court costs taxed against the insured c. Interest on judgments

Rules for deposit accounting

a. The decisions as to whether deposit accounting applies and, if so, how the deposit accounting rules are applied are handled on an individual contract-by-contract basis, not on a portfolio basis. b. The amount(s) received for a contract is recorded as a deposit liability, with no revenue or expense effect. c. The deposit liability is increased by additional receipts and usually by investment income credits of some kind. It is decreased by payments. d. The deposit generally represents a present value of future payment obligations.

The insurer benefits in what two ways from insuring to value? How does insured benefit?

a. The premium is adequate to cover potential losses. b. It simplifies the underwriting process by reducing the need to determine exact values during underwriting. The insured benefits from insurance to value because sufficient funds are available in the event of a total loss, and the uncertainty associated with large retained losses is reduced.

How can insurance professionals help consumers minimize problems associated with valuations?

a. hire appraiser regularly b. review and revise limits regularly c. consider appropriate additional coverage options like agreed value optional cvg, inflation guard protection, etc.

Joint tenancy

each of two or more persons owns an undivided interest in the property, but a deceased joint tenant's interest passes to the surviving joint tenant or tenants

[Part C - UM] Insuring agreement

insurer pays damages that insured is legally entitled to recover from owner of uninsured vehicle because of bodily injury. - Punitive or exemplary damages not covered - Some UM coverage applies to PD - Insureds do not have to sue uninsured driver. -

Contract of adhesion

the insured must accept the entire contract with all of its terms and conditions and courts interpret ambiguities in favor of insured

Declarations [policy provision]

the policy number, the policy period, the insurer's name, the insured's name, the insured's mailing address, the policy limits, the deductible(s), and the policy premium

What is the reason that many policies with replacement cost provisions give the insured the option of settling the claim based on actual cash value (ACV), and then allowing the insured 180 days to refile the claim on the replacement basis?

this provision gives the insured the opportunity to obtain funds from the insurer at the time of the loss and collect full replacement cost upon completion.

Does PAP - Part A include property damage?

yes, and bodily injury for accidents for which insured is legally responsible

The six policy provisions

• Declarations • Definitions • Insuring agreements • Exclusions • Conditions • Miscellaneous provisions

Advantages of modular policies

• Minimal coverage gaps and overlaps (compared to using several monoline policies) • Consistent terminology, definitions, and policy language ease interpretation • Fewer forms to meet a wide range of needs • Simplified underwriting • Reduced adverse selection • Potential for package discounts

Under most circumstances, the maximum amount the insurer pays is the lesser of what two amounts

• The compensable amount of the claim • The applicable policy limit(s) why did i create a flashcard for this

Purpose of reporting requirements in reinsurance contracts

• To effect the necessary payment transactions under the contract, including ceded premiums and losses according to the policy terms. • To provide the assuming company sufficient data to perform its own reserve analysis. • To enable the assuming company to meet its own accounting and financial reporting requirements