Exam 6

IEE interrogatories #4

-4.1: are there any items requiring special comment or explanation? -4.2: are items allocated to LOB in parts 2 & 3 using methods not defined in the instructions? -4.3: if yes, explain

Adjustments for Gross of Reinsurance

-Assets: reinsurance recoverable to gross amount of 0, net amounts recoverable as balancing item -Liabilities: ceded reinsurance premiums payable, funds held by company under reinsurance & provision for reinsurance adjusted to 0; Loss&LAE adjusted by amount ceded; unearned premiums adjusted by amount ceded

Other sources of accounting rules

-Government Accounting Standards Board (GASB) -IRS -Canadian GAAP (CGAAP) -Inernational Accounting Standards Board (IASB)

SAP Preferred Stock Valuation

-Highest 2 ratings of redeemable: purchase price + acquisition costs -Highest 2 ratings of Perpetual: fair value -else: min(book value, fair value)

SAP Real Estate Valuation

-Properties Occupied by Company & Properties held for income: depreciated cost - encumbrances -Properties held for sale: min(depreciated cost, fair value) - encumbrances

RBC Mandatory Control Level

-Ratio <70% -Company Action: none -DOI Action: commissioner of domiciliary state must rehabilitate or liquidate the insurer

4 Categories of Bonds

-US Government bonds -bonds exempt from US tax -other bonds (unaffiliated) -bonds of affiliates

SAP Common Stock Valuation

-at purchase: actual cost + commissions & taxes -after purchase: fair value -changes in fair value recorded as unrealized valuation changes

RBC Hard to Quantify Excluded Risks

-business plans & strategies -management -internal controls -systems -reserve inadequacy -ability to access capital

Common Aggregate Write-ins for Miscellaneous Income

-gain or sale of equipment (when sale price is different from depreciated cost) -retroactive reinsurance -gain on foreign exchange -corporate expenses -fines & penalties of regulatory authorities -dividends to policyholders (both declared & paid) -federal & foreign income taxes (excludes any portion deferred for future years)

Investment gain consists of:

-investment gain on funds attributable to insurance transactions -investment gain attributable to capital & surplus

Most common sources of DTA

-loss reserves discounted in tax accounting, but undiscounted in SAP -carry forward net operating losses from prior years

Hedge Accounting

-qualify if derivative has significantly reduced a particularly risky exposure ("highly effective" hedge) -the derivative receives the same accounting treatment as the hedged asset

Schedule Y

Activities of insurer members of a holding company group -Part 1: organizational chart -Part 1A: detail of insurance holding company system, controlling entity & type of control, if control > 10% of influence -Part 2: summary of transactions among members of the holding company system

5-Year Historical Data Exhibit

Gross & Net WP by: -Liability -Property -Liability & Property Combined -All Other -Non-proportional reinsurance

IRIS Ratio 10

Gross Agent's Balances to PHS -Unusual >40% -analyzed because they usually cannot be converted to cash in event of liquidiation

IRIS Ratio 2

Net Written Premium to Surplus -Unusual: >300% -measures adequacy of surplus on net basis -if too high consider: --if insurer is a member of a group of affiliated companies, what is the ratio for the group on a consolidate basis? more serious of others also have high ratios --profitable insurers can sustain higher ratio --long tail LOBs should maintain lower ratios --how adequate is reinsurance protection against large losses, CATs, etc? --determine quality of reinsurers, sufficient collateral

Certified Provision for Reinsurance

recoverable *[1-(% collateral provided)/(% collateral for full credit)]

R1 - Charge for Asset Risk Associated w/ Fixed Income Investments

Components -holding company -upstream affiliate (parent company) -insurance subsidiaries that are not subject to RBC (excl. aliens) -investment affiliates -non-insurance subsidiaries -unaffiliated bonds -mortgage loans -miscellaneous assets (including cash, cash equivalents & other short term investments, nonadmitted collateral loans) -replication (sythetic asset) transactions & mandatory convertible securities -off-balance sheet collateral Adjustments -Bond Size Factor -Asset Concentration Factor

R5 - Charge for Written Premium

Components -net written premium -excessive premium growth -health premium -health stabilization Adjustments -loss sensitive contracts -premium concentration

Schedule DB

Derivatives owned -Part A: positions in options, caps,, floors, collars, swaps & forwards -Part B: positions in futures -Part C: positions in replications (synthetic asset) transactions -Part D: describes the counter party exposure (credit risk) for the derivative instruments open at 12/31

Insurance Expense Exhibit

Detailed info about expenses & profitability; needs to be filed by 4/1 -Part 1: allocation of OUE -Part 2: allocation of pretax profit by line, on net basis -Part 3: allocation of pretax profit by line, on direct basis -Interrogatories

Schedule D

Details about stocks & bonds -Part 1: lists long term bonds & certificates of deposits owned at 12/31, adjusted carrying value & maturity of bonds; source of bond values on balance sheet -Part 2: stocks owned at 12/31 -Part 2, Section 1: preferred stocks, divided into industrial & miscellaneous parents, subsidiaries & affiliates -Part 2, Section 2: common stocks, mututal funds & money market mutual funds -Part 3: onds & stocks acquired during year & still owned at 12/31 -Part 4: bonds & stocks owned at start of year & sold during year -Part 5: bonds & stocks acquired & sold during year -Part 6: preferred & common stocks in affiliates

Receiver

Disinterested person/business appointed to receive, protect & account for money or other property due

Schedule T

Each part shows content by US State, Territory, Canada & Other Alien Territories -Part 1: Exhibits of Premiums Written: Written premiums, earned premiums, policyholder dividends, paid loss, incurred loss, unpaid loss, finance & service charges, direct premiums written for federal purchasing groups -Part 2: applies to insurers that also write life insurance; annuities, disability income & long term care insurance

IRIS Ratio 13

Estimated Current Reserve Deficiency to PHS -ratio measures adequacy of current reserves -distortions may arise when there are changes in exposure --significant changes in premium volume: increase in premium will show a deficiency greater than the true number --shift in product mix: in this case, may be a good idea to calculate the ratio separately by line

National Insurance Convention

Formed 1871, took actions: -developed constitution setting forth regulators goals in 14 states -designed a uniform accounting statement -adopted guidelines for insurer taxation -adopted first model law which covered items such as commissioner's duties & regulations on fire, life & marine insurers -didn't allow multiline insurers until 1945

Federal Insurance Office (FIO)

Functions: -coordinate federal efforts & develop federal policy on the prudential aspects of international insurance matters, including representing US at IAIS -determine whether state insurance measures are preempted by covered agreements -consult w/ the states regarding insurance matters of national importance

IRIS Ratio 7

Gross Change in PHS -Unusual >50%, <-10% -ultimate measure of change in financial condition -ratios which are too high may warrant further investigation: a number of insolvent insurers experienced large increases in surplus prior to the insolvency -factors affecting change in surplus --net gain or loss --unrealized capital gains or losses: ---compare current to prior Exhibit of Capital gains to determine what types of investments are responsible for change ---determine whether insurer had similar experience to other insurers that invested in similar types of assets ---if there are large unrealized capital losses, investigate the actions of the insurer to percent further losses ---if there are large unrealized capital gains, determine if these were caused by stock market increases, as this could generate just a temporary increase to surplus --change in surplus notes, capital paid in & surplus pain in --accounting changes & corrections of errors ---notes to the financial statements on changes should provide details of the changes ---are insurer's changes consistent with changes of other insurers that write similar lines ---will changes have a material impact on current year operations and/or future periods --change in DTA --change in ownership

SAO Identification Paragraph

Identifies -appointed actuary -the actuary's relationship to the company -the actuary's qualifications for acting as the appointed actuary -date of appointment -statement that the appointment was made for the board (or its equivalent)

Main Paragraph Parts of SAO Opinion

In my opinon the amounts carried in Exhibit A on account of the items identified, A. meet teh requirements of the insurance laws of {state of domicile} B. are computed in accordance with accepted actuarial standards and principles C. make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the company under the terms of its contracts and agreements D. make a reasonable provision for the unearned premium reserves for long duration contracts and/or {other loss reserve item on which actuary is expressing an opinion} of the company under the terms of its contracts and agreements

Minimum Floodplain Management Standards

Intended to: -restrict development of land that is exposed to flood damage, where appropriate -guide development of proposed construction away from locations that are threatened by flood hazards -assist in reducing damage caused by floods -improve long-range land management & use of flood-prone areas Require communities to do things like: -require permits for development in the SFHA -require elevation of lowest floor of all new residential buildings in the SFHA to be above the Basic Flood Elevation (BFE) -restrict development in the regulatory floodway -require the use of certain construction materials & methods

DOI Accreditation Review

Involves -interviewing department personnel -reviewing laws & regulations -inspecting regulatory files for selected companies -reviewing organizational & personnel policies -gain understanding of document & communication flows -discussing comments & findings from the review =conducting closing conference with state to discuss findings & prepare a report

Active Statuses of Insurers

L: licensed insurance carrier of RR R: registered non-domiciled RRG Q: qualified or accredited reinsurer E: eligible or approved to write surplus lines in state N: none of the above, not allowed to write business in state

IRIS Ratio 9

Liabilities to Liquid Assets -Unusual >100% -liquid assets: bonds, stocks, cash & cash equivalents, short term investments, receivables for securities and investment income due & accrued -measures insurer's ability to meet the financial demands -provides rough indication of the possible implications for policyholders if liquidation necessary -deferred agents balances excluded because they are not a liquid asset, so the comparison will be fair -many insurers who went insolvent had high ratios prior, so ratio is concerning if high or increasing -if high, focus on reserve adequacy & that the insurer has the right valuation, mix & liquidity of assets, in order to determine if insurer can meet its obligations

Schedule B

Lists mortgage loans owned by insurer -Part 1: details about all owned at 12/31, segmented into: mortgages in good standing, restructured mortgages, those with interest >90 days overdue which are not in foreclosure & those in the process of foreclosure -Part 2: detailed listing of loans acquired throughout the year -Part 3: detailed listing of loans ended (including repaid)

SAO Exhibit A

Loss & LAE Reserves: 1. reserves for unpaid losses (liabilities, surplus & other funds page) 2. reserve for unpaid LAE 3. reserve for unpaid losses - direct & assumed (should equal Schedule P, Part 1, totals from cols 13&15, line 12 * 1000) 4. reserves from unpaid LAE - direct & assumed (total from cols 17, 19 & 21, line 12 *1000) 5. the page 3 write in item reserve, "Retroactive Reinsurance Reserve Assumed" 6. other loss resreve items on whicht he actuary is expressing opinion (list separately) Premium Reserves 7. reserve for direct & assumed unearned premiums for long duration contracts 8. reserve for net unearned premiums for long duration contracts 9. other premium reserve items on which the actuary is expressing opinion -if the actuary is not opining on certain items (or subset of items) in exhibit A, she should clearly state that in the scope. if she believes these items are material, the SAO would need to be "qualified"

Atkinson & Dallas Formulae

Modify Cost of Double Taxation equation to reflect the additional cost that arises because of the investment constraints of insurers

IRIS Ratio 8

Net Change in Adjusted PHS -Unusual >25%, <-10% -measures the change in financial condition, based on operational results -pieces subtracted to determine change in surplus from actual operations

IRIS Ratio 11

One Year Reserve Development to PHS -Unusual >20% -reserves net of salvage & subrogation, gross of discounts, -if there is significant adverse development, focus on when AYs & LOBs caused the development -if consistently showing adverse development and/or if ratio 12 consistently greater than ratio 11, the insurer may be intentionally understating its reserves & therefore deficiencies are arising as losses are paid -significant increases in reserves may be caused by reserves strengthening, and significant decreases may be caused by reserve understatements

Commutation Distortions

Primary -downward development of paid losses -net ultimate losses increase, despite a constant gross ultimate Reinsurer -jump in paid losses -ultimate loss decrease purely due to commutation price being lower than the reserves -jump in claims closed counts

Notes to the Financial Statement

Provide additional qualitative information that may provide a more complete picture of insurers condition -reinsurance -changes in incurred loss & LAE -premium deficiency reserves -discounting of liabilities for unpaid loss & LAE -asbestos/environmental reserves -summary of significant accounting policies -events subsequent -intercompany pooling -structured settlements -high deductibles

Schedule A

Provides details about Real Estate owned by the insurer as of 12/31 -Part 1: all real estate owned -Part 2: purchased during the year -Part 3: sold during the year -Part 1, Col 9: sources of real estate values in balance sheet

Risk of Material Adverse Deviation

Relevant Comments Would Contain -the amount of deviation the actuary considers to be material & an explanation of how that standard was derived -a description of the factors or conditions underlying the significant risks or uncertainties that the actuary considers material -a statement about whether the actuary believes that there is significant risks or uncertainties that could result in material adverse deviation

Reinsurance Attestation Supplement

Requires CEO & CFO confirm that -there are no separate written or oral agreements between the 2 parties -there is documentation for every reinsurance contract where risk transfer is not self evident --describe the economic purpose of the transactions --discloses that documentation proving risk transfer is available for review -the reporting entity complies with all SSAP 62 requirements -the appropriate controls are implemented to monitor the use of reinsurance

Loss Reserving Discount Accounting

SAP -rarely allows discounting, except for certain WC & LTD claims with fixed & reasonably determinable payment patterns -does not specify rate, 3.5% usually used -discount for non-tabular discount capped at minimum of investment yield (1.5%) & yield of US treasury debt that has duration similar to the loss duration GAAP -allows SAP discount to be used, or option to use alternative discount rate as long as it is reasonable & based on the conditions applicable at the time that the claims are settled

SAP vs Tax Accounting

SAP -recognizes losses quicker -UW losses in year that loss occurs -positive investment income in the following years Tax -loss is discount in first year (there should be an UW gain) -in the following years, investment income on assets backing the loss reserves offsets the amortization of the interest discount of the reserves

Goodwill Accounting

SAP -statutory purchase: goodwill = purchase price - statutory surplus, capped at 10% of the acquiring firms capital & surplus from the most recent annual statement (adjusted to exclude goodwill, electronic data processing equipment & net DTAs) -it is amortized to unrealized capital gains & losses over the period in which the acquiring firm benefits economically, up to 10 years -statutory merger: equity of one entity is exchanged for equity of another (w/ the equity in the second then cancelled) GAAP -combos accounting for with purchase accounting -goodwill - purchase price - net assets -goodwill regularly evaluated for impairment (as opposed to being amortized)

Retroactive Reinsurance Accounting

SAP -undiscounted ceded reserves recorded as negative write in liabilities -Schedule P therefore not impacted -a gain may be generated if the consideration paid is less than the negative write in liability. treated as a write-in gain as part of "other income" & the surplus benefit is treated as "special surplus" until the paid reinsurance recovery exceeds the consideration paid GAAP -ceded reserves treated as a reinsurance recoverable asset -any gain is deferred, so there is no immediate income or surplus benefit -this gain is amortized over time --if the payments from the reinsurer are reasonably estimable, the "interest method" is used --otherwise, amortization is based on the portion of actual recoveries to the estimated total recoveries

Paul v. Virginia

Situation: -1869, Paul applied to become licensed insurance agent in VA for NY insurers Results: -insurance is a contract delivered locally, thus insurance contract is not interstate commerce -states could continue to regulate own insurance market without violating constitution

Runoff Agreement Accounting

Transferring Entity -payment to reinsurer recorded as paid loss -if payment less than reserves being transferred, the difference is recorded as a decrease in the losses incurred -the reinsurance recoverable increases by the amount of the transferred reserves Reinsurer -transactions need to be recorded in same LOB & in same level of detail as recorded by the transferring entity

IRIS Ratio 12

Two Year Reserve Development to PHS -Unusual >20% -reserves net of salvage & subrogation, gross of discounts, -if there is significant adverse development, focus on when AYs & LOBs caused the development -if consistently showing adverse development and/or if ratio 12 consistently greater than ratio 11, the insurer may be intentionally understating its reserves & therefore deficiencies are arising as losses are paid -significant increases in reserves may be caused by reserves strengthening, and significant decreases may be caused by reserve understatements

Dongle Advantages & Disadvantages

advantages -can be installed by driver -re-usable -can be transferred to another vehicle -automatically turns on with cars ignition -generates high quality & secure data on location & driving style disadvantages -can only be used in modern vehicles -vulnerable to fraud -it will soon be technologically obslete

Embedded Device Advantages & Disadvantages to Auto Manufacturers

advantages -product differentiation -improved customer relationship management -potentially lower costs if there are product recalls disadvantages -higher cost for the consumer (often subscription based) -not standardized -potential issues with compatibility with insurance -obsolescence: autos have a long product cycle, so technology often outdated by time car is released

Retroactive Reinsurance Agreements Between Affiliates

agreements resulting in gain to surplus to the ceding company use accounting: -the consideration paid by the ceding is recorded as a deposit, it is treated as a nonadmitted asset -no deduction can be made to the ceding insurers loss & expense reserves

Own Risk & Solvency Assessment (ORSA)

at minimum, should contain -overall solvency need, based on specific risk profile, approved risk tolerence limits, business strategy, etc. -compliance with capital requirements & the requirements of the technical provision -extent to which the risk profile deviates significantly from the assumptions underlying the SCRW

Schedule F

details of the insured's prospective reinsurance transactions (excluding retroactive) -Part 1: assumed reinsurance -Part 2: portfolio reinsurance -Part 3: ceded reinsurance -Part 4: aging of ceded reinsurance -Part 5: unauthorized reinsurance -Part 6: overdue authorized reinsurance -Part 7: slow paying authorized reinsurance -Part 8: restatement of balance sheet -New Part 6: certified reinsurer, shifts 6-8 to 7-9

8-K

filed to disclose certain material events including: -changes in principal officers or directors -change in company's certified accountant -entering/terminating a material definitive agreement

Terrorism Risk Insurance Act (TRIA)

goals -create temporary federal program of shared public & private compensation for terrorism losses -protect consumers by ensuring the availability & affordability of terrorism insurance -preserve state regulation of insurance purpose -give insurance industry enough time to gather data & create the structure & capacity to be able to offer terrorism coverage

IFRS 4

one of key elements to define insurance contracts -contract under which one party accepts significant insurance risk from another party by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder

TRIA Coverage

only covers commercial lines, excluding: -federal crop insurance -private crop or livestock insurance -private mortgage insurance -title insurance -financial guaranty insurance -medical malpractice -flood insurance -reinsurance -all life insurance

Schedule P

provides details about loss & LAE reserves -Part 1: loss & LAE experience as of 12/31 -Part 2: historical net loss & DCC estimates -Part 3: historical net paid loss & DCC -Part 4: historical net IBNR for loss & DCC (before tabular discount) -Part 5: historical claim counts (closed w/ payment, open & reported) -Part 6: historical earned premiums -Part 7: loss & premium data on loss sensitive contracts

Regulation S-K

provides requirements for non financial statement portions of the 10-K. need to disclose: -a tabular analysis of the changes in aggregate reserves for unpaid loss & LAE for each of latest 3 one year periods, including the beginning reserve, reserve development during the CY, paid losses & ending reserve -10 year loss reserve development table: shows reserve estimates at annual evaluations for all AYs prior to given AY. also contain paid losses at annual evaluations. this can be used to evaluate management's record of setting reserves. criticism: reserve setting process may not have been consistent & distorted by market cycle -method to estimate effects of inflation -reconciliation between SAP & GAAP reserves including explanation on key differences -amount of discount of GAAP loss reserves

Codification

purpose to provide a comprehensive guide to statutory accounting

Deferred Tax Assets

refers to future tax benefits that arise due to temporary differences in come recognition between tax & SAP; net DTA nets out any DTL that may exist

Novation

reinsurance transaction where the original insurer's obligations are completely extinguished, where there is no more exposure to loss from the novated business -the party assuming the risk though of as "primary" party -to be eligible for reinsurance accounting, the parties are not affiliates (if they are, novation needs to receive approval from regulators) & accounting of original reinsurance agreement will not be changed from retroactive prospective -amounts paid recorded as reduction in written or earned premium -novated balances shall be written off the accounts where they were originally recorded -the assuming insurer shall report the amounts received as WP or EP & obligations assumed as incurred losses

Regulation S-X

requires disclosures in Notes to the Financial Statements: -basis of assumptions (e.g. tax rate) -deferred acquisition costs amortized during the period -statutory stock holders equity requires schedules to include in 10-K: -Schedule III: supplementary insurance information for each reporting segment, including detail on: deferred policy acquisition costs, unpaid loss & LAE, unearned premiums, other policy claims payable, premium revenue, net investment income, loss & LAE, amortization of deferred policy acquisition costs, other operating expenses, premiums written -Schedule IV: reinsurance (including amounts ceded & assumed) -Schedule VI: supplemental information (includes same information as Schedule III, but in total across fiscal years for the current & 2 prior fiscal years)

Securities Exchange Act of 1934

stock companies must provide annual reports to shareholders -5 years of financial data, included income & total assets -managements discussion & analysis on items such as liquidity & planned uses of capital -industry segment information for the previous 3 years -income statements & statements of cash flows for 3 years & balance sheet for 2 years

Slow Paying Reinsurer

(receivables on paid losses > 90 days overdue)/(total receivables on paid losses + amounts paid in last 90 days) -excludes disputed balances -ratio >20% -> slow paying

Unauthorized Provision for Reinsurance

(unsecured total recoverables) + 20%(recoverables on paid losses >90 days overdue, excluding disputed) + 20%(amounts in dispute)

Expected Reinsurer Deficit (ERD)

-10-10 rule: benchmark used in industry to determine if risk transfer does not exist: there needs to be at least a 10% chance of a 10% of greater loss -ERD = probabllilty (NPV UW loss to reinsurer)* avg severity -risk transfer assumed to exist if ERD > 1%

Sherman Antitrust Act

-1890, did not directly apply to insurers because insurance not interstate commerce -gave states motivation to pass own antitrust laws against controlling rates: prohibited insurer compacts/associations from controlling rates

McCarran-Ferguson Act

-1945 -returned regulation back to the states -Sherman Act continues to apply to the use of boycott, coercion & intimidation -if congress passes a law that applies only to the insurance industry, it will supersede any state regulation

NFIP Reinsurance

-9/19/16-3/19/17: reinsured 1Mx5M, reinsurer pays $1M when total losses from single event exeeds $5.5B -1/1/17-1/1/18: reinsurer covers 26% of losses between $4B&$8B arising from single flood even (full amount triggered for Harvey) -1/1/18-1/1/19: reinsurer covers 18.6% from 4B-6B, 54.3% from 6-8B

Schedule DB lists:

-Derivatives owned, sold & terminated -# of contracts for each derivative -the notional amount (the # of units of the underlying asset that are involved) -the original trade date & the maturity/expiration date -transaction price -current price -information about the item hedged (if applicable) & type of risk being hedged -important information about the counter-parties for all derivatives that are open at year end

NFIP Issuance Structures

-Direct Servicing Agents (DSAs): private contractor issues policies directly from NFIP -Write-Your-Own: private insurers paid to directly write & service policies; forms of compensation: --operating & administrative expenses --commission allowance --growth bonus --ALAE & ULAE --special ALAE (SALAE): direct expenses above what is covered under by ALAE

4 Categories of Telematics Solutions Available

-Dongle: self installed device that will be used for a period of time, most popular in US due to relatively low cost -black box: professionally installed device, considered 1 of most secure & reliable options, more commonly used in Europe -Embedded: initially designed to provide services like remote diagnostics, navigation & infotainment -Smartphones: ideal option, usually equipped wiht relevant sensors, large data storage capcity & superior comunication

Fair Value Under Purchase GAAP

-GAAP system for business combos often called Purchase GAAP (P-GAAP) -under P-GAAP, when 1 company buys another, the value of assets & liabilities of purchase entity need to be accounted for at fair value -goodwill asset cretaed as difference between purchase price & implied capital -if implied capital exceeds purchase price, difference immediately recognized as income (operating gain) -actuaries may need to assist in valuation of fair value of loss & LAE reserves and vale of business in force

Nonadmitted Asset Accounting

-GAAP: does not have "nonadmitted" category -SAP: does not consider these assets for purpose of calculating statutory surplus

Prospective Reinsurance Accounting

-GAAP: establishes asset to recognize the ceded reinsurance recoverables, because it usually does not allow offsetting of assets & liabilities -SAP: reserves net of anticipated reinsurance recoveries, details about gross liabilities in Schedule P

Deferred Tax Assets (DTA) Accounting

-GAAP: fully recognizes the DTA, but creates a valuation allowance if it is likely that DTAs will not be recognized -SAP: there is a strict admissibility test to recognize DTA, in addition to valuation allowance, admitted portion equals: --amount of DTA expected to reverse in the upcoming year, that can be applied to taxes paid on profits in the prior 3 years (loss carry backs)

Anticipated Salvage & Subrogation Accounting

-GAAP: must subtract anticipated balances -SAP: insurer has option to record reserves in Schedule P gross or net of anticipated S&S (usually net)

Deferred Acquisition Cost (DAC) Accounting

-GAAP: only the direct costs (those that would not have been incurred had the contract not been written) from a successful acquisition/renewal can be differed -SAP: does not allow, all costs expensed as incurred

Gramm-Leach-Bliley Act

-GLB Financial Services Modernization Act: states continue to have primary authority over insurance -prohibits state actions that would prevent bank-related firms from selling insurance on same basis as insurance producers -treats underwriting different from sales & marketing --prohibits national banks from forming subsidiaries to underwrite insurance --can arrange financial holding companies to create insurance affiliates: makes it more difficult for a failing bank to use insurer assets to meet operational needs -compels states to facilitate insurance producers ability to operate in more than 1 state -GLB creates concerns: --privacy of personal information --ability of state regulation to serve an integrated & global financial services market adequacy --consumers desire or need for integrated financial services

Trend Test

-Insurer needs to undergo trend test if it has an RBC ratio 200%-300% and has a combined ratio >120% -test is designed to be an early warning of companies that may incur RBC ratios below 200% -companies may need to comply w/ requirements of Company Action Level

Common Non-Admitted Assets

-Investments in bonds, stocks & mortgages that exceed any state limitations -investments in electronic data processing equipment (EDL) that exceed set limits -furniture, equipment & supplies -balances due from an agent from sale of a security over 15 days from settlement -funds held at a reinsured company that exceed associated liabilities -10% of deductibles recoverable in excess of collateral -premium >90 days overdue

US AAA Qualification Standard

-MAAA, FCAS, ACAS, or fully qualified member of another IAA member association -3 years of responsible actuarial experience -knowledge of applicable law (via exams or documented professional development) -either: --attained highest possible level of membership in an IAA orgnaization & have 1 year of responsible actuarial experience in the relevant area under the review of an actuary qualified to issue an SAO --have a minimum of 3 years responsible experience under the review of an actuary qualified to issue an SAO -30 hours of relevant continuing education, including: --at least 6 organized --at least 3 covering professionalism topics --up to 3 general business sessions

Future of RBC

-NAIC currently reviewing solvency regulation in US (SMI - Solvency Modernization Initiative) -Going forward, RBC process will be complemented by additional assessments that are part of ORSA Considering: -documenting the development of the RBC over the last 20 years, including reasons for changes of the calculations -evaluating enhancements to current risk charges (including addressing the relevance of current charges) & considering new chargers -making the details of the RBC calculation public

10-K

-Part 1: business description, risk factors, unresolved issues w/ SEC staff, properties, legal proceedings, matters subject to vote by shareholders -Part 2: financial statements supplementary data, management discussions & analysis of results, controls & procedures -Part 3: directors & officers, executive compensation, securities ownership by certain beneficial owners & management, fees of principal accountant -Part 4: reports, exhibits & schedules from any 8-K's filed

Common Interrogatories

-Purpose: give more details about company operations, business practices & types of internal & external controls in place -Sections: general, board of directors, financial, investment, other

RBC Regulatory Action Level

-Ratio 100%-150% -Company Action: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or it will reduce risks -DOI Action: right to take corrective actions (e.g. restricting new business)

RBC Company Action Level

-Ratio 150%-200% -Company Action: submit action plan to commissioner of domiciliary state explaining how it will obtain needed capital or it will reduce risks -DOI Action: none

RBC Authorized Control Level

-Ratio 70%-100% -Company Action: none initially -DOI Action: commissioner authorized to take control of the insurer

Differences Between RBC & Solvency II

-Solvency II uses IFRS assets, while RBC is based on SAP values. This causes differences in the asset valuation. -Required capital under Solvency II is based on the 99.5% VaR, while RBC is not based on modeled results. -Reserves are not discounted under RBC, while Solvency II discounts reserves and adds a risk margin. -Solvency II can be tailored to individual companies (ORSA), while RBC uses the same set of formulas for all companies. -RBC does not consider many risks which Solvency II does, including Interest rate risk, Catastrophe risk, and Operational risk -RBC has four action levels based on the RBC ratio, while Solvency II has two quantitative requirements (SCR and MCR). -Solvency is principle based, while RBC is rule based

Steps to allocating investment income to line

-Step 1: allocate surplus to line -Step 2: allocate ceded reinsurance premiums payable to line -Step 3: calculate the company's investment gain ratio -Step 4: calculate the investment gains on funds attributable to insurance transactions for each line -Step 5: Calculate the total investment gain -Step 6: Calculate the investment attributable to capital & surplus

Qualified Actuary

-a member in good standing with the CAS -a member in good standing with AAA & who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Counsel of the AAA. an actuary who qualifies this way must attached to SAO a copy of approval letter from the AAA every year

Securities Act of 1933

-act designed to: --implement market system so investors could gain ready access to material info on publicly traded securities --prevent abuses of fraud, deceit & misrepresentation in sale -stock organizations required to register securities they plan to offer or sell to the public (including filing a prospectus)

Factors that lead regulator to believe insurer in hazardous financial condition

-adverse findings in financial analysis or exams/audits/actuarial opinion/cash flows/liquidity analyses -insolvency of insurers, reinsurer, or within insurer's insurance holding company system -finding of incompetent or unfit management -failure to provide (accurate) information -any other finding determined to be hazardous to policyholders, creditors or general public

3 Reasons Most Insurers Are Rated

-agents are cautious of unrated insurers - may indicate financial distress -3rd parties rely on outside assessments of insurer solvency -rating agencies efficient at assessing financial strength (most agents, underwriters & some regulators lack time & expertise)

Arguments for Credit-Based Scoring

-allows for more accurate rating -increases capacity -removes subsidy

Accounting Unique to Prospective Reinsurance Agreements

-amounts paid for prospective reinsurance shall be reported as a reduction to written & earned premiums -reinstatement premiums (if any) should be earned over the period from the reinstatement to the expiration of the agreement -changes in estimated reinsurance recoverables are recognized as changes in losses incurred in the income statement -reinsurance recoverable on loss payments is an admitted asset ("reinsurance recoverable on loss and LAE payments") -reinsurance recoverable on unpaid losses is recognized by reducing the respective reserves

Assigned Risk Plans Common Characteristics

-applicants need to demonstrate they are uable to obtain insurance within a certain number of days (usually 60) -minimum limits offered at least equal to compulsory requierements -certain peiople may be ineligible for coverage --no valid drivers license --convicted of felony within prior 3 years --that habitually violate the laws -premiums usually higher than voluntary market

General Interrogatories - Investment

-asset & investment decisions -security lending programs & associated collateral -hedging programs -mandatory convertible stocks or bonds -compliance w/ NAIC "Purpose & Procedures Manual" -amount of control insurer has over its operations & its compliance w/ the rules

Assuming Accounting for Retroactive Reinsurance

-assumed retroactive reinsurance is excluded from the existing reserves & instead recorded as a liability "retroactive reinsurance assumed" -loss is recorded as a write in item, "retroactive reinsurance loss" under other income -the consideration received increases the assets (e.g. cash)

Conditions for Runoff Agreement Accounting Treatment

-assuming entity is properly licensed -agreement should contain same limits & coverages as original -agreement should not contain any adjustable features, profit sharing or retrospective rating -agreement must meet requirements of risk transfer -assuming reinsurer must receive financial strength ratings from at least 2 different agencies that is at least equal to that of the transferring insurer -the assuming is responsible for all assessments on the business being assumed -the agreement must only cover liabilities of lines that re no longer actively marketed by the transferring entity -neither parry can cancel the agreement for any reason

Discounting Disclosures

-assumptions behind the selected discount rate & the support -difference between discounted & undiscounted reserve -whether the discounted reserves include a risk margin & if so, the basis for the margin -significant limitations that may have had an impact on results -accounting, valuation & review dates -significant risks & uncertainties associated with the timing of payments -whether the actuary states reliance on another source -whether the actuary deviated materially from ASOP 20 -if providing a range, basis for the range -if the unpaid loss estimate is an update, disclose the change in assumptions procedures, methods or models that the actuary believes to have a material impact on the estimate & the reason for the changes (the actuary doesn't need to quantify the impact of the changes)

SAP Bond Valuation

-at purchase: actual cost -Class 1&2: amortized cost -Class 3-6: min(amortized cost, fair value) -When sold, realized gain = amount received - amortized cost

3 Programs Created to Serve High Risk Market

-auto insurance for high risk drivers -FAIR plans -beachfront & windstorm plans

GAAP Invested Asset Accounting

-available for sale (AFS): purchased w/ intention to sell efore maturiy, but after a year: fair value, with changes in fair value being recorded a "other comprehensive income" (which directly impacts surplus) -held to maturity (HTM): intent & ability to hold til maturity: amortized cost -held for trading (HFT): purchased with intention of selling within hours or days (if it wishes, insurer can classify assets it will hold for longer periods as HFT): fair value, with changes in fair value recorded as income

Liquidation

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

2 Major Categories of Telematics Predictive Models

-based on total milage, time of day & set of predefined events --disadvantage: assumes a few sharp breaking, acceleration or cornering events sufficient to predict loss cost -based on more granular data about the vehicle use --goal to assess predictive power of different operation characteristics in a very contextual basis

Black Lung Benefits Act (BLBA)

-benefits for wage loss & medical provided to miners totally disabled from black lung disease & eligible survivors -established as state WC often didn't provide coverage -BLBA victims eligible for WC benefits, but federal benefits reduced if state benefits available -trust fund funded from excise tax on mine operations

Longshore & Harbor Work Comp Act of 1927

-benefits to maritime workers for employment related injuries & disease while on or near navigable waters & for which no state coverage act applied -employers may purchase insurance or self insure -some cases, workers may be able to pursue benefits under either longshore benefits or state WC. employers need to have sufficient insurance protection from both exposures

Medicare Set Aside

-calls for all parties to a settlement to agree to set aside money to be primary over medicare for the period where the individual is eligible for medicare -Center for Medicare & Medicaid Services (CMS) will review all MSAs where --claimant is already medicare eligible & settlement > $25k --claimant expected to be medicare eligible within 30 months & settlement or expected future meidcal cost & lost wages > 250k

Competitive Advantages of Telematics

-can identify the lowest risk drivers & increase retention -attract customers with potentially lower premiums -new methods to communicate with policyholders -enhanced claim management: increased speed & efficiency -more accurately estimate accident damages & reduce fraud & claim disputes -early adopters will benefit from the rich driving behavior data that will be collected

Focus of Solvency Modernization Initiative (SMI)

-capital requirements -governance & risk management -group supervision -statutory accounting & financial reporting -reinsurance

2 asset categories

-cash & invested assets vs. non invested assets -admitted vs non-admitted assets

Ceded Reinsurance Accounting

-ceded premiums payable net of associated ceding commissions need to be recorded as a liability, it can be deducted from the amounts owed from the reinsurer as long as a legal right of offset exists -if reinsurance premium paid prior to effective date, the ceding shall reflect the prepaid item as an admitted asset. it should only be recognized in the income statement as reinsurance premium on the effective date of the policy. impairment must be recognized if necessary -amounts withheld by the ceding company need to be recorded as funds held by the entity under reinsurance treaties -interest due or payable is recorded as an aggregate write in for miscellaneous income -ceded reinsurance transactions shall be classified in the annual statement LOB which relates to the direct or assumed transactions that create the cession or retrocession -ceded retroactive reinsurance premiums need to be excluded from all schedules

Other Surplus Changes

-change in unrealized capital gains -change in net unrealized foreign exchange capital gains -change in net deferred income tax -change in non-admitted assets -change in provision for reinsurance -cumulative effect of changes in accounting principles -capital changes & surplus adjustments (including issuance of stock, return of capital & stock dividends)

Reinsurance Commissions Accounting

-commissions payable on ceded business treated as an offset to Agent's Balances receivable on ceded offset to ceded reinsurance balances payable -if ceding commissions > anticipated acquisition costs, ceding establishes a liability equal to difference between the two & is amortized pro rata over effective period

Guaranty Funds Assessments

-commonly made on basis of premiums written, divided along lines of insurance --some states have market cap on assessment of 2% of written

Community Suspension

-community can be suspended for: --failing to adopt & approve floodplain map & an approved set of floodplain management standards within time period set --repealing/revising its floodplain management standards below the minimum level set by regulations -consequences for suspended communities & non-participating: members will not be able to purchase NFIP insurance

Pre-Firm Subsidy

-congress instructed FEMA not to charge actuarial rates to properties taht were constructed or substantially improved before the later of: --12/31/74 --the date upon which FEMA published FIRM for community -pre-FIRM subsidy allows these properties to contribute towards pre-funding their recovery from the flood disaster, instead of relying exclusively on federal assistance -BW-12 requires subisdy be phased out over time (length of time extended by HFIAA) so premiums for pre-FIRM will ultimately reach actuarially sound levels -phase out period depends on property type

Exhibit of Net Investment Income

-contains details by asset class -differentiates between income earned (accrued) & income collected -contains the deductions for investment expenses & other costs

SAO Exhibit B

-contains disclosures about the net reserves identified in the scope section that are addressed in the relevant comments 1. name of the appointed actuary 2. the appointed actuary's relationship to the company -E: Employee, C: Consultant 3. the appointed actuary is a qualified actuary based on what qualification? -A ACAS, F: FCAS, M: MAAA, O: Other 4. type of opinion, as identified in the opinion -R: Reasonable, I: Inadequate, E: Excessive, Q: Qualified, N: No Opinion -if different opinions on gross & net, indicate opinion for net 5. materiality standard expressed in USD 6. is there a significant risk of material adverse deviation? -"Not Applicable" if 0% participation in an intercompany pooling arrangement where the lead company has 100% of pooled reserves 7. statutory surplus 8. anticipated net salvage & subrogation included as a reduction to loss reserves as reported in Schedule P 9. discounts included as a reduction to loss reserves and loss expense reserves as reported in Schedule P -9a. nontabular discount -9b. tabular discount 10. the net reserves for losses & expenses for the company's share of voluntary & involuntary underwriting pool's & association's unpaid loss & LAE that are included in reserves shown on the liabilities, surplus & other funds page, losses & LAE lines 11. the net reserves for losses & LAE that the company carries for the following liabilities included in the liabilities, surplus & other funds page, losses & LAE lines, as disclosed in Notes to the Financial Statements -11a. asbestos -11b. environmental 12. the toal claims made extended loss & LAE reserve -12a. amount reported as loss reserves -12b. amount reported as unearned premium reserves 13. other items on which the appointed actuary is providing relevant comment

General Interrogatories

-contains series of questions insurer must respond to -purpose: provide additional clarity to users & identify areas that need further regulatory review -Part 1: common interrogatories; general questions applicable to all insurers -Part 2: questions specific to type of insurer -must disclose: name & address of independent CPA that conducts annual audit * appointed actuary name, address & affiliation

SEUA Federal Investigation & Criminal Indictments

-continuing agreement & concert of action to take control of 90% of the fire & allied lines -fixing premium rates & agents commissions -using boycott & other forms of coercion & intimidation to force non-SEUA members to comply -withdrawing rights of agents to represent SEUA members if they also represented non-SEUA companies -threatening insurance consumers with boycott & loss of patronage if they didn't purchase insurance from SEUA members

Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010

-created as a result of 2008 financial crisis -controversial in relationship to insurance -provided the federal reserve system (fed) limited regulatory authority -established Federal Reserve Office (FIO), part of US treasury to monitor the insurance industry -expected to impact a limited number of insurers (but there are signs that impact could spread through industry) -allows the Fed & FIO to influence / be influeced by the International Association of Insurance Supervisors (IAIS)

Ways to calculate earned premium

-daily pro rata method: based on # of days of policy expired -monthly pro rata method: assumes premiums written uniformly throughout the month; 1/24 earned first month, 1/12 in each of next 11 months, 1/24 in last month

Differences Between SAP & GAAP

-deferred acquisitions costs -nonadmitted assets -deferred tax assets -invested assets -balance sheet presentation of reinsurance -ceded reinsurance (prospective & retrospective) -structured settlements -anticipated salvage & subrogation -discounting of loss reserves -goodwill under purchase accounting

Classification of Insurers as SIFIs

-designation results in significant additional regulation -business models between insurers & banks very different -acknowledged that insurers made minimal contributions to crisis -criteria to be classified as SIFI is unclear: there have been no guidelines published

National Flood Insurance Program (NFIP)

-designed to involve private insurers in WYO (write-your-own) flood insurance financially backed by FEMA at no risk to insurer -premiums set by FEMA, insurers perform UW, premium collection, claim payment, administration & premium tax payments -FEMA treated like reinsurer for accounting purposes: balances due recorded as ceded reinsurance balances receivable or payable -commissions recorded treated as regular reinsurance commissions

2 Schools of Thought Around Compacts

-deter open & free competition -in public's best interest if it prevents insolvencies

Potential Regulatory Responses to Price Optimization

-determine which practices, if any, allowed in state -define any constraints, including: --limit price adjustment to be between the current rate & actuarially indicated rate --require that rating factors selected be: ---between current & indicated ---within confidence interval around current/indicated ---directionally consisten with current factors --limit variables that can be used in defining a risk --only allow optimization for groups of certain size --rating factors maintain cost based differences -develop regulatory guidance on statutory rate requirements -enhanced filing requirements -require explanations when deviating from actuarial indicated -change laws to require transparency

Insurers Regulated by Fed Must

-develop living wills (resolutions plans) for if there's a bankruptcy -meet liquidity requirements -undergo stress testing -meet capital standards

Interstate Commerce Commission

-dictates acceptable minimum policy limits & conditions for insurers & sureties -policy forms & endorsements must be in forms prescribed & approved by the ICC -insurer must give ICC 30 days written notice before canceling policies

Commutation Pricing Differences

-different discount factors, since reserves are a risky liability for the reinsurer & the recoverables are a risky asset (contra liability) for primary -each party must reflect their unique tax treatment -each party must reflect factors related to the motives for entering into a commutation -based on everything, each party can derive a range of prices at which they are willing to enter into the commutation -if they cannot agree on a price, the commutation will not happen

Actuarial Report

-documents the significance of the actuary's opinion or findings & that documents the analysis underlying the opinion -report is due by 5/1 (or within 2 weeks after a request from a state commissioner) -needs to be maintained by insurer & be available to be furnished to the regulators for 7 years -not public -typically include commentary on all material items covered in the SAO & how materiality threshold calculated

Asbestos & Pollution Contracts Exemption

-domiciliary regulator of the ceding company may approve an exception with regards to a retroactive reinsurance agreement that provides essentially duplicate overage to a prior reinsurance agreement on asbestos and/or pollution exposures -ceding can aggregate the reinsurers into 1 line item in Schedule F & reflect the counterparty for the purposes of deriving the provision for reinsurance -qualify for exemption --the agreement must clearly indicate that the credit risk associated with the collection of the inuring reinsurance recoverables & losses related to credit risk will be covered by the retroactive reinsurance counterparty --the retroactive reinsurance agreement must transfer significant risk of loss --the retroactive reinsurance counterparty must have a financial strength rating from at least 2 nationally recognized statistical rating organizations (NRSRO), the lowest of which is >= the NRSRO ratings of the inuring reinsurers --the transaction is limited to reinsurance recoverables attributable to asbestos and/or pollution --the recoverables from the inuring reinsurers remains subject to credit analysis & contingent liability analysis

Asset Concentration Factor

-doubles RBC charge of the 10 largest issuers that the insurer is exposed to -to determine 10 largest, determine its total investments (both fixed income & equity) -total charge factor (after this adjustment) for each asset is limited to .3 -fixed income investments subject to charge: unaffiliated bonds (class 2-5), collateral loans, mortgage loans -R2 assets subject to charge: unaffiliated preferred stocks & hybrid securities (class 2-5), unaffiliated common stock, investment in real estate, encumbrances on invested real estate, schedule BA assets (excluding collateral loans), receivables for securities, aggregate write-ins for invested assets, derivatives

FEMA Development of New FIRMs

-during mapping process, FEMA must conduct extensive communication & outreach efforts within the community -communites asked to submit data regarding their: --flood hazards --flooding experience --mitigation plans to avoid floods -communities & individuals able to appeal to a scientific resolution panel about a proposed FIRM

NAIC 1971 Early Warning Test Program

-early version of IRIS (IRIS 1977) -goal to prevent need for guaranty fund assessments by taking over insurers & returning them to active operation or merging with other going concerns

Requirements From Standards Specific to SAO

-either --successfully completed exams from AAA or CAS on: policy forms, coverages, underwriting & marketing; principles on ratemaking; statutory insurance, account & expense analysis; premium, loss & expense reserves; reinsurance --obtain a signed statement from another actuary who is qualified to issue an SAO that states that the writer is familiar with the actuaries professional history & that the actuary has obtained sufficient alternative education to satisfy the basic educational requirements for the specific qualifications standard -at least 3 years responsible experience related to the subject of the SAO under the review of a qualified actuary to issue the SAO -15 CE hours per year related directly to the particular topic -at least 6 CE hours per year of "organized" activities directly related to the topic

ERISA Act of 1974

-employers took tax deductions for contributions to pension plans but employees did not receive pension benefits they were promised -ERISA designed to ensure plan participants become more informed about their benefits & could gain access to that info readily -set greater standards for qualified plans, determined proper funding levels & provided protection to plan participants whose plans were terminated

Requirements for Actuarial Communication

-ensure form & content of the actuarial communication is appropriate to the circumstances & users -communication should be clear & understandable & should clearly identify the responsible actuary -communication should be issued within a reasonable time period

Regulatory Framework for Telematics Should

-establish data ownership & privacy standards -establish standards for permitted & prohibited use of consumer data -collect & analyze granular data on offers & sale of UBI -require insurers to include variables for race & income in GLMs to determine if groups being adversely impacted -create standards for disclosure of telematics results -replicate analyses that are presented by insurers in summary form -stop offering "discounts" unless the rating factor can be correlated with lower claims, as opposed to just a redistribution of income

Bond Size Factor Adjustment

-excludes bonds w/ 0 charge -diversification measured based on the # of issuers of bonds in the insurers portfolio to derive adjustment factor -Factor is applied to RBC charge of the eligible bonds -Factor = weighted issuers / issuers - 1 -for first 50 issuers, weight is 250% -for next 50, weight is 130% -for next 300, weight is 100% -rest, weight is 90%

Levels of Government Involvement in Insurance

-exclusive insurer -partner with private insurers -competitor to private insurers

Benefits of Reinsurance

-expands capacity -share large risks -spread the risk of catastrophes & stabilize UW results -aid withdrawing from a line -reduce the net liability to amounts appropriate to its financial resources

P&C Interrogatories

-exposure to catastrophic events & excessive loss -process used to calculated the PML -level of reinsurance protection -if there are any limiting provisions within reinsurance contracts, guaranteed policies & retrospectively rated policies -any releases of liability under reinsured policies (where the company may have to re-assume liability) -exposure to warranty business

Terrorism Risk Insurance Program Reauthorization Act 2015

-extended TRIA to end of 2020 -decrease the federal sharing gradually from 85% to 80% -increase program trigger by $20M a year from $100M (in 2015) until it reaches $200M -increase insurer aggregate retention by $2B a year from $27.5B until it reaches $37.5B, after set by secretary of treasury to equal average of aggreage insurers deductibles for past 3 years -extend date for mandatory recoupment by 7 years -increase mandatory recoupment to 140% -require treasury to study the certification process & issue rules governing the process (which would include a timeline) -require treasury collect additional data on the terrorism insurance market & include that in its annual report -require Government Accountability Office (GAO) study the possible effects of instituting insurer premiums for TRIA coverage & requiring capital reserve funds for terrorism

Steps of Regulatory Intervention Procedure

-fact finding -implementation of regulatory action to control financial difficulties facing insurers

Reasons for Government Participation in Insurance

-filling insurance needs unmet by private insurance -compulsory purchase of insurance -convenience: may be easier for government to quickly establish a program -greater efficiency: based on assumption that government can provide insurance at a lower cost than private market (however savings may be overstated) -social purposes

Considerations to Assess Regulatory Success

-frequency & extent that regulation helped by identifying & correcting insurers problems before causing harm to policyholders & claimants -frequency of insolvencies & payments to policyholders in those insolvencies -effective & efficient rehabilitation actions -market health -levels of competition -perceived & actual cost-benefit of regulation

First Few Months of Liquidation

-gives notices of liquidation to creditors & policyholders & informs them of their rights to claims -cancel policy coverage -notify agents of their duties in the liquidation -identify, sell & collect assets -recover any improperly transferred assets -establish procedure for receiving & adjudicating claims -make personnel decisions regarding insurers staff & hire help if needed

Community Rating System (CRS)

-goal to encourage communities to improve the minimum floodplain standards that are required to participate in NFIP -FEMA awards "points" to increase the communities class rating -points based on how community --informs its public about the flood risk --maps & regulates its floodplain --reduces possible flood damage --provides immediate warnings --responds to flooding incidents -discounts not provided to PRPs -to participate in CRS program, community needs to apply to FEMA & document its improvements through site visits & assessments

R2 - Charge for Asset Risk Associated w/ Equity Investments

-holding companies -upstream affiliate (parent company) -insurance subsidiaries not subject to RBC (excluding alien insurers) -investment affiliates -other non-insurance subsidiaries -off-balance sheet collateral -replication (synthetic asset) transactions & mandatory convertible securities -insurance affiliates that are subject to RBC -unaffiliated stocks -real estate -Schedule BA assets -miscellaneous assets (including receivables for securities aggregate write ins for invested assets, derivatives)

Common Interrogatories - General

-holding company relationships -latest regulatory financial exams (date, date through which statements were evaluated, release date of report, name of department performing exam, whether insurer has complied w/ all adjustments & recommendations) -excessive sales/commission levels -merger activity -suspension of licenses -foreign controls -exemptions from required regulations -whether senior management is subject to code of ethics

Key issues of when to take over supervision

-how accurate are loss reserves? -if assets liquidated, what would proceeds be? -has management enacted measures stringent enough to stem the operating losses? -is reinsurance adequacy & collectible?

SAO Components

-identification paragraph -scope paragraph -opinion paragraph -relevant comments

FIO Monitor of the Insurance Industry

-identifies insurance activities that could contribute to a financial systemic crisis -develops federal policy about nationally or internationally important insurance issues -consults state government on insurance matters -there is concern monitoring authority is so broad that FIO can monitor anything it wants

Schedule F Functions

-identifies portion of gross losses that are from assumed reinsurance transactions -helps estimate the significance of the assumed & ceded transactions to the surplus balance -allows further investigation into the financial strength of the insurers & reinsurers -identifies reinsurers that may need further scrutiny because they are either slow paying or not regulated

Structured Settlement Accountin

-if claimant signs the release, GAAP & SAP the same: purchase price of annuity recorded as a paid loss & the claim is closed -SAP release not signed: treatment is same as where there is a release, but must disclose contingent liability in Notes the the Financial Statement -GAAP release not signed: settlement treated like reinsurance contract, which involves creating a reinsurance recoverable asset

Retroactive Agreements

-if contract has not been signed within 0 months of effective ate, the contract is assumed retroactive, exceptions: --facultative contracts --agreements with >1 reinsurer which are signed by the lead reinsurer within 9 months --agreements with >1 reinsurer entered into before 12/31/96 where reinsurers representing over 50% of the capacity have signed within 9 months --reinsurance agreements where 1 party is in conservation, rehabilitation, receivership or liquidation

Reinsurance Dislcosures

-if entity has unsecured aggregate recoverables with any individual reinsurers for reserves & UEPR >3% of the ceding company's surplus, it must list each reinsurer & the unsecured aggregate recoverable pertaining to that reinsurer -reinsurance recoverable in dispute shall be identified if: --the amounts in dispute from any entity exceeds 5% of ceding company's surplus --the aggregate from all entities exceeds 10% of surplus -if uncollectibe reinsurance written off during year, OR if there was a commutation of ceded reinsurance, disclose: name of reinsurer, losses incurred LAE incurred, premiums earned -in "Reinsurance Assumed & Ceded" section of Notes to the Financial Statements, disclose: --the max return commission due to the reinsurers if all insurance is cancelled --the accrual of additional or return commission based on the loss experience

6 Principle Functions of Reinsurane

-increase large line capacity -provide catastrophe protection -stabilize loss experience -provide surplus relief -facilitate withdrawal from a market segment -provide UW guidance

Disadvantages of being Unrated Insurer

-independent agents may be resistant to use them -banks require property insurance from rated insurers for mortgages

Scenarios That May Generate a Qualified Opinion

-insufficient information available to perform a quantitative review on a portion of the business that may be material to loss reserves, or form a conclusion about its materiality -actuary identifies a portion of business that is material to the loss reserves, but there is insufficient information to perform a review -a portion of the business is deemed to be outside the scope of the actuary's review (e.g. a different actuary may be opining on it)

Environmental Protection Agency (EPA)

-insurance & risk retention group coverage - EPA dictates exact wording required on a policy -insurers issue surety bonds for federal projects which guaranty certain promises & must often satisfy federal mandates

Regulation Particularly Concerned With

-insurer insolvencies -unavailable & unaffordable insurance coverages -equitable treatment of insurance consumers

Reinsurance Facility

-insurers accept all applicants with valid license, issue policy, collect premium & settle claims -if they don't want to retain the policy, it can assign to reinsurance facility while continuing to service it -all auto insurers share UW losses & expenses

2 Reasons Price of Insolvencies is High

-insurers are directly assess for the operation of funds -competition is distorted --insurers that can aggressively market or loosely underwrite can gain greater share of market

Risks in Life RBC but not P&C RBC

-interest rate risk -business risk: not implicitly included, but components included in the UW risk charge

Net Investment Income based on

-interest received during the year -interest due & accrued -current years amortization/accretion -interest paid for accrued interest on dividends

SAP Invested Asset Accounting

-investment grade bonds & higher rated redeemable preferred stocks: amortized cost -lower rated bonds & preferred stocks: min(amortized cost, fair value) -common stocks & higher rated nonredeemable preferred stocks: fair value -changes in carrying value due to changes in fair value recorded as direct changes to surplus

Actuarial Work Affected by Financials

-issuing a SAO -Pricing/designing insurance products -determining capital requirements -evaluating risk transfer of reinsurance contracts -assessing the reserve adequacy of non-insurers -assisting in the calculation of taxable income -valuing insurers in M&A transactions

Criteria for DOI to be Accredited

-laws & regulations used by the state must meet certain basic standards of NAIC models -regulatory methods of the state must be acceptable -department practices must be adequate

Grounds for Rehabilitation

-liabilities exceed assets -insurance company refuses to submit its books, records, accounts, or affairs to insurance department -insurer willfully violates its charter or any other state law

Voluntary Market Programs Common Characteristics

-limit coverage, ust enough to comply with compulsory, some may ofter optional higher limits -coverage for medical payments (to insured) may be limited -may have high collision deductible -premium significantly higher

FAIR Plans

-main candidates in urban areas that are usceptible to damage caused by riots & civil commotion -most plans require insurers to share losses -to qualify, property must be ineligible in voluntary market & must be inspected by a FAIR plan administrator -if it does not meet safety levels, it may be required to make improvements --plan can deny coverage if they don't, assuming that the issues are not related to the neighborhood location, or to environmental conditions beyond the owner's control -most plans only provide coverage for a limited number of perils -specialty insurer may offer difference in condition policy

Grandfathering Cross-Subsidy

-maintain old flood insurance rate class if their property is remapped into new flood rate class/district to pre-FIRM subsidy -policies may also be grandfathered if the elevation of a base flood zone changes in the map, but the property does not change flood zones -discount subsidized by other policyholders

R0 - Charge for Company Subsidiaries

-market value approach: min(affiliate RBC, statutory surplus) * ownership % -equity approach: min(affiliate RBC * ownership %, book/adjusted carrying value of stock) -insurance subsidiaries - preferred stock & bond investment: min(pro rata share of excess RBC, book/adjusted carrying value) -directly owned alien insurance affiliates: book/adjusted carrying value * .5 -indirectly owned alien: carrying value * .5 -off balance sheet: amount * .01 -off balance sheet securities lending programs: amount * .002

Reasons an Insurer May Request Another Rating From a Different Agency

-may want rating from agency with more experience in certain area -may want rating from agency better known to its investors -may not like current rating & believes second will be better

SAO Scope Paragraph

-mentions the reserve elements upon which the actuary is opining & the basis for presentation of the reserves -reserve items can include: loss & LAE reserves, retroactive reinsurance assumed reserves, UEPR for long duration contracts, UEPR for extended reporting endorsements, other reserve items for which the appointed actuary is opining -should include paragraph about assumptions & methodologies that support the booked reserves (by reviewing the methods & assumptions) -if actuary did not review methods & assumptions, can instead perform independent test to evaluate the reserves -can also perform independent analysis

Alternatives to Insolvency Regulations Will Consider

-mergers & acquisitions -reinsurance arrangements -non-renewal of part/all of the business -placing insurer into run-off mode

RBC Report

-must be filed by 3/1 -contains calculations, management discussions & analysis of the results -report confidential, but summarized results available int he 5 year historical data exhibit

Required Items for Reinsurance Agreements

-must contain insolvency clause -recoveries due to the ceding company must be available without delay that will allow orderly payment of policy obligations by the cedants -agreement should provide no guarantee of profit for either profit -agreement must provide for reporting of premiums & losses at least quarterly, unless there is no activity, the report should mention the ceding's loss & LAE reserves on the policy obligations, so that the respective organizations can be recorded -agreement must contain a reinsurance intermediary clause (if applicable) that mentions that the credit risk for the intermediary is the responsibility of the reinsurer -if the reinsurer is certified, the agreement must include a proper funding clause, which requires the reinsurer to provide at least sufficient security such that the ceding company does not incur any financial statement penalty Additionally for Retroactive Reinsurance -premium paid must be a specific fixed amount stated in agreement -direct or indirect compensation to ceding or reinsurer prohibited -also prohibited, provision for adjustment based on actual experience (except in case where ceding company can participate in reinsurance profit) -contract shall not be cancelled or rescinded without approval of the commissioner of the domiciliary state of the ceding company

SAO Opinion Paragraph

-must list the opinion of the actuary regarding the reserves of the company it must state whether the opinion is for loss & LAE combined or separately

Regulatory Framework for RRGs

-must pay applicable taxes -must submit plan of operation or feasibility to the domiciliary state regulator, outlining: coverages, deductibles, coverage limits, rates & rating classification system -must submit to regulators of each state they do business in: copy of plan, copy of groups annual financial statement (including SAO) & submit to an examination to determine its financial conditions if the domiciliary regulator has not conducted one

Preconditions for Effective Regulation

-needs to have requisite authority to achieve its mission -requisite authority consists of: --legal basis --independent & accountability --adequate powers --financial resources --human resources --legal protection --confidentiality -all states have adopted NAIC model laws

R3 - Charge for Credit Risk

-non-invested assets -reinsurance recoverables (split between R3&R4) -health credit risk

3 Categories of Off-Balance Sheet Items in R0 Charge

-noncontrolled assets: collateral loaned to others from secuirites lending programs, assets that are reported on the company's balance sheet, but for which it does not have exclusive control over, assets sold that are subject to a put option -contingent liabilities: amounts for which the insurer may be liable, but for which the amount is uncertain -guarantees for the benefit of affiliates

Most Common Reason for Filing Disapproval

-not in the public interest -illegal -unfairly discriminatory -other: excessive, inadequate, or not meeting minimum standards

Data Errors Impacting Opinion

-notification needs to include a summary of the findings of the error & an amended opinion -within 5 days of discovery: actuary notifies board of directors or audit committee -within next 5 days: insurer forwards summary & amended opinion to commissioner copying the actuary -if actuary has not seen message, within next 5 days notify commissioner that original SAO should not be relied upon -amended AOS should state: that this is a revised document, explanation for the change & revised date

Actuary Replacement Procedures

-notify insurance department in writing within 5 days -withing 10 days, provide additional letter tot he commissioner stating whether in the 24 months prior to the actuary being replaced, were there any disagreements with the actuary regarding the content of the opinion regarding: --risk of material adverse deviation --required disclosures --scopes --procedures --category of opinion issued --substantive wording of opinion --data quality -includes disagreements resolved & unresolved to former actuary's satisfaction -letter must include description of disagreement & nature of its resolution (or a statement that it was not resolved) -letter needs to include response from former actuary addressed to the company stating if the actuary agrees with the statements in the letter 7 if not, reasons she does not agree -may be appropriate to also include disagreements regarding the AOS, although the instructions do not require this -newly appointed actuaries should review the correspondence before they begin work on the SAO

Insurability of Terrorism Risk

-often considered uninsurable due to lack of data -need to rely on models (relatively new) -elements of insurable risks: --there must be a sufficiently large # of insureds to make the losses reasonably predictable --losses must be definite & measurable --losses must be fortuitous or accidental --losses must not be catastrophic

National Conference of Insurance Regulators (NCOIL)

-organization of sate legislators whose premium area of concern is insurance -activities include: --educating legislators on insurance issues --helping communications between state legislators on insurance issues -improving insurance regulation -asserting legislators' perogative in making state insurance policy -speaking about congressional initiaties that might affect state insurance regulations

SAO Data Reconcilliation

-paid & case incurred loss -paid & case incurred DCC -paid A&O -salvage & subrogation -earned premiums

Factors Considered in Choosing Materiality Standard

-percentage of surplus (10-20% common) -percentage of reserves (10% common) -amount of deviation that would cause a drop in financial strength rating -amount that would cause surplus to fall below minimum capital requirements -amount that would cause RBC to fall to next action level -multiples of retained risk -the upper limit of the insurer's reinsurance protection on reserve development (if any)

Mandatory Corrective Action

-perform certain actions to reduce its liabilities -limit new or renewal business or products not guaranteed renewal -reduce its general & commission expenses by specified methods -increase its capital & surplus -suspend or limit dividend payments to stockholders/policyholders -limit or withdraw from specified investments -file reports concerning the value of its assets -document the adequacy of its premium rates

Common Surplus Lines Characteristics

-permit only specially licenses producers to place business -licensee must make placement with unauthorized/nonadmitted insurers that meet specified financial & management requirements -before placement can occur, risk must be declined by admitted market through a "diligent search" of state's admitted insurance market

Consumer Benefits of Telematics

-possible lower premiums -ability to control premiums: programs convert fixed costs into variable costs, therefore more transparent to consumers how their driving behavior & usage impact the premium -enhanced safety & improved claims experience -eliminates subsidy for high risk / high mile drivers: lower income drivers should benefit from subsidy elimination, as many are lower mileage drivers -households with young drivers will appreciate education & safety -faster emergency response time -road side assistance -stolen vehicle recovery -fuel efficiency -vehicle maintenance support

NFIP Funded in 3 Ways

-premiums, including fees & charges -direct annual appropriations for specific costs -borrowing from the US Treasury when the balance of the NFIF insufficient to pay NFIP obligations

Newly Mapped Subsidy

-previous zones that were mappined into SFHA on or after 4/1/15, if applicant purchased within 12 months -first 12 months after revision, rate equal to PRP rat (but with higher Federal Policy fee of $150 vs $125) -after, rate increases capped at 18% oer year -do not qualify for newly mapped subsidy --properties mapped into a SFHA by initial FIRM for a community entering NFIP --properties that were excluded due to loss history

Insurance Advisory Organizations

-primarily deal with filing rates or prospective loss costs & forms -develop rating systems -collect & tabulate statistics -research topics important to members & the industry -provide forum for discussion of issues important to members -educate members, the industry, insurance regulators & the public about particular issues -monitor regulatory issues of concern to members

Consumer Concerns with Telematics

-privacy & insurer ability to protect their personal data -distribution of data by insurers for purposes other than loss mitigation & pricing -reduced offerings of UBI programs to consumers in low & moderate income minority communities -failure to achieve material loss mitigation (due to black box) -use of telematics as just another data mining exercise that penalizes consumers because of where & when they drive, which is heavily impacted by where they work & live -limited regulatory oversight to date

Rehabilitation

-process of reorganizing an insurer's financial affairs so ti can continue to exist as a financial entity, with creditors satisfying their claims from its future earnings -rehabilitation period used to asses insurer's financial situation by comparing its assets & liabilities -if rehabilitation is feasible, often try to find an investor to invest capital, perhaps in return for an ownership stake

Price Optimization

-process of using big data (data mining of both insurance & non-insurance databases of personal consumer info) and/or advanced statistical modeling to select prices that differ from indications at very granular level -process of maximizing or minimizing a business metric using sophisticated tools & models to quantify business considerations -few filings have mentioned use of price optimization

Assumed Reinsurance Accounting

-proportional assumed reinsurance premiums allocated to the appropriate LOB in the annual statement -non-proportional assumed reinsurance premiums are allocated to the appropriate subcategroy of non-proportional reinsurance -funds held or deposited with reinsured companies is an admitted asset at long as: --they do not exceed the liabilities that they secure --the reinsured is solvent -funds which exceed the liabilities that they secure, or funds held by a reinsured that is insolvent, are nonadmitted -interest earned on these funds is treated as an aggregate write in for miscellaneous income (component of other income) -reinsurance premiums receivable are combined with the receivables from the direct business & the total reported as agents balances -if assuming receives premium prior to effective date, it needs to record it as a liability & can not consider it as income until the effective date -if premium received after effective date but prior the due date, it is recorded as a reduction to deferred but not yet due asset (it will also result in an increase to cash) -if there's no specific contract with due date for reinsurance premiums, they are deemed due 30 days after either: date at which notice of premiums is provided to ceding entity, date at which the assuming entity books the premium -reinsurance premiums >90 days overdue shall be nonadmitted assets unless: the reinsurer maintains UEPR & Loss reserves due to the ceding entity (the admitted balance is limited to he size of the reserves & the ceding entity is licensed & in good standing

NAIC Fundamental Insurance Regulatory Objectives

-protect the public interest -promote competitive markets -facilitate teh fair & equitable treatment of insurance consuemrs -promote the reliability, solvency & financial solidity of insurance institutions -support & improve state regulation of insurance

Purpose of NFIP

-provide access to primary flood insurance (transferring portio of risk from property owners to the federal government) -reduce the nationwide comprehensive flood risk (financial risk & risk of human life) via development & implementation of floodplain management standards

SAO Relevant Comments

-provides context, enabling regulators to better understand the opinion, including the actuary's justification -refers to Exhibit B, which provides various dislcosures -considered to be the most valuable section of the SAO

Criticism on Schedule F Solvency Monitoring

-provision formulaic, & therefore ignores management input -formula has no statistical, historical, or actual basis -unauthorized reinsurance may provide higher quality protection and/or lower prices -slow payer may eventually pay, whereas current reinsurers may not be able to withstand a stress event -multitude of calculations & level of detail may lead to a false level of precision & cause true credit risk to be overlooked -cost of collateral requirements will be passed to insurers, and then to policyholders -provision may limit amount of competition in US -Schedule F doesn't reveal anything about the reinsurer's solvency

Crop Insurance

-public/private partnership: private insurer markets, writes & services policies -Risk Management Agency (RMA) sets rates & determines which crops can be insured in different areas & acts as reinsurer -gov reimburses insurers for operating & administrative costs -premiums subsidized by federal gov

Solvency Modernization Initiative (SMI)

-purpose to continually improve US insurance financial regulatory framework -priorities --create a document that articulates the US insurance regulatory system --examine international developments for potential use in US -comply with international association of insurance supervisors (IAIS) & insurance core principles (ICP) -apply lessons from the global financial crisis

Actuary Appointment Procedures

-qualified actuary needs to be appointed byt he board by 12/31 -qualified actuary needs to be a person (not a firm) -appointed actuary does not beed to be reappointed annually -within 5 days of appointmet, company needs to provide info to the insruance commissioner --actuary's name & title, and firm if consulting actuary --manner of appointment of the actuary --statement that the person meets the requirements to be a qualified actuary -no further notice required unless no longer appointed or no longer meets requirements

General Interrogatories - Other

-questions about payments made to trade associations, service organizations, statistical or rating bureaus, attorneys & others regarding legislative/regulatory matters -need to list the names of any organizations that received over 25% of the total

Most Frequent Contributions to Insurer Insolvency

-rapid premium growth -inadequate rates & reserves -unusual expenses, such as unexpected CAT losses -lax controls over managing general agents -reinsurance collectible -fraud

SAO Opinions

-reasonable provision -deficient provision -redundant provision -qualified opinion -no opinion

Insurer Benefits of Telematics

-reduced claim costs -better risk pricing -mitigate adverse selection & moral hazard -modify risky behavior -improve brand recognition/awareness & loyalty -differentiate their product offerings -create new revenue streams

Technical Mapping Advisory Council (TMAC)

-reestablished in BW-12 -authorized to recommend improvements as to how FEMA produces flood hazard/risk/map info -believes it should take 3-5 years to produce new or revised FIRM (based on current, it can take >6.5 years, ideally should only be 25 months)

Purpose of RBC Square Root Rule

-reflect the diversification among the risks: RBC assumes they're independent -R0 is NOT assumed to be independent, so it isn't included under square root

US Financial Regulatory System 3 Stage Process

-regulators limits/eliminate risks via restrictions/prior approval requirements -financial oversight -regulatory backstops & safeguards

IEE Uses

-regulators: monitor the financial health of the insurer & monitor rate adequacy -stakeholders: determine lines that were profitable & use this to help make business decisions -investors: help determine how much to invest -actuaries: source of premium, loss & expense for benchmarking

R4 - Charge for Reserve Risk

-reinsurance recoverables (split between R3&R4) -unpaid loss & LAE reserve -excessive premium growth accident & health claim reserves

Key Features of Business of Insurance

-relationship between insurer & insured -types of policies that can be issued -reliability, interpretation & enforecement of policies

Characteristics of Reinsurance Agreements

-reporting responsibility of ceding entity -payment terms -payment of premium taxes -termination: cut-off or run-off -insolvency clause

Medicare, Medicaid & SCHIP Extension Act of 2007 (MMSEA)

-requires claim payers (Responsible Reporting Entities, RREs) to report data to the CMS -must determine if medicare enrollment status of all claimants & report certain information about those claims

Preventative Corrective Measures Include

-requiring insurer to provide an updated business plan -require insurer to file interim financial reports -prohibiting insurer from certain investment or investment practices -restricting/suspending the business that can be written/renewed -ordering an increase to the capital & surplus -ordering insurer to correct corporate governance practice deficiencies -require replacement of senior management -seeking a court order to place the insurer under conservatism/rehabilitation/liquidation

For reserves being opined upon, need to identify

-reserve amounts -accounting date -accounting standards applicable to reserves

Signs Insurer Uses a Risk Margin

-reserves booked higher than what would be implied by standard reserving methods -reserves booked igher than the actuarial reserve indications -favorable reserve development in Schedule P, Part 2 -average paid losses lower than the held reserves -IRS reserve indications lower than that of the insurer

Cedant Accounting for Retroactive Agreements

-reserves recorded on gross basis, recoverables recorded as contra liability -any suprlus gain from retroacive transactions should be recorded as a special surplus fund -gain shall not be classified as unassigned funds until the actual retroacive reinsurance recovered exceeds the consideration paid -the transfer of special surplus to unassigned surplus shall be limited to the lesser of --the actual amount recovered in excess of the consideration paid --initial surplus gain resulting from the retroactive contract -special surplus needs to be adjusted to reflect any change in the ceded reserves -the initial gain should be recorded as a write in item in the statement of income, identified as "retroactive reinsurance gain" -the consideration paid reduces the assets

High Deductible Policies

-reserves should be net of deductible unless deemed uncollectible, in which case reserves should be gross -no collateral: deductible recoverables >90 days overdue are nonadmitted -holds collateral: 10% of deductible recoverables in excess of collateral is nonadmitted; if amounts >10% deemed uncollectible, they should be nonadmitted as well

Discounting Approaches

-risk free approach: determined from fixed income assets with low investment risk & similar timing characteristics -portfolio approach: anticipated return on selected asset portfolio -discount rates requested by another party: actuary needs to disclose that she is not responsible for these rates

SAO Relevant Comments Should Address

-risk of material adverse deviation -other disclosures in Exhibit B, including --anticipated salvage & subrogation --discounting --voluntary and/or involuntary underwriting pools & associations --asbestos & environmental liabilities --extended reporting endorsements --long duration contracts -reinsurance --retroactive reinsurance --financial reinsurance --uncollectible reinsurance -IRIS ratios -changes in methods & assumptions

General Interrogatories - Board of Directors

-role of board in approving purchase/sale of investments -does company have process in place to notify board of conflicts of interest w/ senior management -whether the permanent records of the boards proceedings are retained

Legal condition under which an insurer may be required to obtain commissioners permission before

-selling or transferring assets or in-force business, or using as collateral -withdrawing lending or investing funds -incurring debt -accepting new premiums -renewing policies that are not guaranteed renewable -meeting with another insurer -entering into a reinsurance agreement -paying specified policy or account values -making any management change -increasing officer or director compensation

Joint Underwriting Associations

-servicing insurers, perform services: --receive applications --issue policies --collect premiums --settle claims --other necessary services -agents/brokers submit applications -JUA sets rates approves policy form to JUA/servicing insurers -insurers will pay share of UW losses & expenses based on market share, some money goes towards compensating servicing insurers

NAIC's Uniform Application Process Requires Insurer

-show that it meets the state's minimum capital & surplus requirements -identify whether it is part of a holding system -submit biographical affidavits of its officers, directors & key managers

SAO Signature of Actuary

-signature of actuary -printed name of actuary -emmployer's name -address of actuary -telephone # of actuary -email address of actuary -date opinion was rendered

Flood Maps Should Be Updated If

-significant new building developments in/near flood zone -changes to the flood protection systems -environmental changes in the community

Exemptions from Producing SAO

-small companies: insurers with <$1M total direct & assumed WP & <$1M total direct & assumed loss & LAE reserves at year end -insurers under supervision or conservatorship (unless ordered to do so by the domiciliary commissioner) -nature of the business: if an insurer is not exempt due to one of the above, it may apply for an exemption due to the nature of business written -financial hardship: if the projected reasonable cost the actuarial opinion would exceed the lesser of: --1% of the insurer's capital & surplus from the latest quarterly statement of the year for which the exemption is sought --3% of the direct & assumed WP during the year -insurer has to file a letter of intent for which exemption is being claimed before 12/1. commissioner may deny this request prior to 12/31. a copy of the approved exemption must be filed with the annual statement in all jurisdictions in which the insurer is authorized

Business of Insurance Characterized by

-spreading & underwriting of risk -direct connection between insurer & insured -activities need to be exclusive to entities within the insurance industry

Reason some model laws changed or never adopted

-state may view as inappropriate or unnecessary due to coverage in other state laws -modify to meet state's particular needs or better match other laws -legislature considers many matters & may consider NAIC model laws as just another agenda item

Main Purpose of SAO

-state the actuary's opinion about the reasonableness of the insurer's reserves specified withing the scope of the SAO -notify the stakeholders about significant risks & uncertainties that may impact the reserves -disclose whether the risks could produce significant material adverse deviation

RBC Model Act

-state's statutes do impose minimal capital requirements on insurers, but they are usually relatively low & do not account for unique characteristics of the insurer -RBC helpful as it reflects information specific to insurer & can be used to help identify insurers in financial trouble -RBC produces a RBC dollar level required, which needs to be compared to the insurer's total adjusted capital -if the insurer owns a life insurance subsidiary, it needs to adjust its surplus by the same magnitude that the life insurer does for RBC purposes (add an asset valuation reserve & 50% of the divided liability)

Annual Report Requirements for DOIs

-statement of income & expenses of insurance department -exhibit summarizing the financial status & business transactions of licensed insurers in the state -listing of insurers closed for business that year -names of insurance companies in receivership or other official financial difficulty with a brief explanation of the status -recommendations by insurance commissioner about insurance laws & department operations -list of other insurance matters of general interest determined by commissioner some states have other state specific requirements: -annual report of the profitability of a specific LOB -analyzing specific types of tort cases -annual report to legislature, including number of insurers with WP, LRs, analysis of change in loss reserves -of insurers public liability loss experience -of fraudulent claims

Allocation of Insurance Regulation Between State & Federal Governments

-states given primary regulatory control over the "business of insurance" -the Sherman Act prohibits boycott, coercion & intimidation -federal antitrust laws apply to the extent that state laws do not regulate such activities

Regulator Concerns with Telematics

-storage & reporting of private data -rating factors used to calculate UBI premiums -Birnbaum believes regulators should provide regulatory structure for telematics programs that provides transparency & fairness to consumers & confidence that their data won't be used against them

Argument that US Regulatory System has been "Successful"

-strong track record of protecting consumers & overseeing insolvencies -strong depth & breadth of the US insurance industry -capacity of the insurance guaranty system

Accounting Principles for Retroactive Reinsurance does not apply to

-structured settlement annuities -novations -the termination of, or reduction of participation in reinsurance treaties that are entered into in the ordinary course of business -intercompany reinsurance agreements (among companies 100% owned by a company parent) where there is no surplus gain between affiliates -run off agreements

Criticism of Credit-Based Scoring

-studies show use of scores disparately impacts certain classes (lower income, protected classes) -inaccuracies in credit reports -downturn in economy could potentially magnify differences in credit scores among vulnerable populations -identity theft -methodologies used to create scores opaque to consumers -can be negatively impacted by sound financial decisions

Actuarial Opinion Summary

-supplement to SAO & needs to be signed by same actuary A. actuary's unpaid claim estimate: point estimate and/or range on a gross & net basis, if both used in different segments how they combine to form opinion B. company's carried reserve C. difference between A&B on a net basis D. difference between A&B on a gross basis E. whether insurer has experienced adverse development in excess of 5% of the respective prior year surplus in 3 or more of the past 5 years, if so provide explanation, can address common questions the regulators may have -field with domiciliary state separately from annual statement, due 3/15

Examples of ways NAIC staff supports state insurance regulatory officials

-supporting NAIC committees & task forces -maintain databases to help regulators track financial adequacy of insurers -scrutinizing alien E&S insurers seeking to do business in US -supporting individual state insurance regulators in court cases by issuing "friend of the court" supportive briefs -valuing insurers securities -keeping track of insurance issues at federal level -helping state insurance officials with info about pricing & coverage -assisting states in responding to federal reporting requirements -producing various publications about insurance issues -developing statistical reports dealing with financial & market matters -giving expert advise about financial regulation, market conduct regulation & computer usage to state insurance officials

Reinsurance Impact to Ceding Company's Financials

-surplus -loss reserves -unearned premium -leverage ratios -income statement

Fed only authorized to regulate 2 types of insurers

-systematically important financial institutions (SIFIs): institutions that could case a national systemic economic disruption if they fail (AIG, Metlife & Prudential) -insurance holding companies that own banks or thrifts

RRG Risk Focused Exams

-tend to emphasize review of higher risk areas & are typically more tailored to individual companies -advantage: more uniform regulation aong states generates more trust among state regulators -disadvantage: could increase cost & financial burden on RRGs

TRIA Structure

-terrorist act must be certified by the Secretary of Treasury, Secretary of State & Attorney General -industry losses must exceed $5M to be eligible for coverage -aggregate industry certified losses in a year must exceed $100M -each insurer has deductible of 20% of its direct annual EP (for lines covered by TRIA) -government will pay 85% of insured losses that exceed deductible -if aggregate industry losses do not exceed $27.5B, the secretary will recoup 133% of coverage via surcharges within 10 years -if losses do exceed $27.5B, government has discretion to apply surcharges to recoup money paid -government will only cover up to $100B of losses, after than there is no federal coverage, nor is there requirement of private market to provide coverage

Insurance Regulatory Information System (IRIS)

-test used by regulators to identify insurers that are in need of regulatory action -ratio calculated ine ach test compared to "normal range" -all ratios rounded to nearest percent (except investment yield rounded to tenth of a percent) -individual ratio should not be viewed in isolation, the results of other ratios & other pertinent information should be considered -process also includes other tools & databases of financial information that regulators can use to monitor the financial condition of the insurer

Commutation Reserving

-the ceding will record the premium as a recovery of paid losses & can eliminate reserves ceded to reinsurer -reinsurer will record premium as paid losses & it can eliminate the associated loss reserves

Circumstances That May Require Changes to Map

-the natural elevation of the property was incorrect in the FIRM & where it should not be considered to be part of the SFHA based on correct elevation ("Letter of Map Amendment") -community believes a physical development has reduced the flood risk for areas that were previously mapped in the floodplain ("Letter of Map Revision") -decision to correct map must be based on scientific analysis info that demonstrates current map is inaccurate

Commutation Motives

-the reinsurer may wish to exit a LOB -insurer wants to exit & extinguish liabilities from a line -insurer wants to exit a line & loss portfolio transfer is easier to arrange if no reinsurance involved -there may be concern about other party's solvency --if ceding in difficulty, it will benefit from the cash infusion & reinsurer will not have to deal with problems associated with liquidation of the ceding company --if reinsurer in difficulty, ceding company can eliminate the credit risk -parties may wish to end a troubled relationship -each side may believe they are benefiting from the commutation, due to different ultimate loss projections

SAO Scope Additional Disclosures

-the review date - the date (subsequent to the valuation date) through which material information known to the actuary is included in forming the reserve opinion -statement about who provided the data & either: --a statement that the data was reconciled to Schedule P by the actuary --statement that the actuary reviewed the reconciliation prepared by the insurer --expected that the person assigned responsibility for the data is a senior executive -identify the "stated basis of the reserve presentation" which is a description of the nature of the reserves & includes --whether the reserves are discounted (if yes, mention what has been discounted & the basis for the interest rate) --whether the reserves include an explicit risk margin & if so, the basis of the margin --whether the reserve is gross or net of recoverables --whether the reserve considers the potential for uncollectible receivables, if so, the category of the recoverables that are considered to potentially have uncollectible amounts & whether these categories reflect potential collectibility concerns --the types of unpaid LAE covered by the reserves --if the opinion is only for a portion of the reserve, the category of loss that are incorporated by the opinion --anything else that is necessary to describe the reserves sufficiently for the actuary's evaluation of the reserves

Insurers Exempt from RBC

-title insurance companies -monoline financial guaranty insurance companies -monoline mortgage guaranty insurance companies

SAO Additional Disclosures

-title should mention words "statement of actuarial opinion" -the intended users of the SAO -the intended purpose of the SAO -the reserves being opined on -stated basis of the reserve presentation -whether any material assumption or method was prescribed by law -whether the actuary disclaims responsibility for any assumption or method that was provided by another source -if there have been any changes in accounting procedures since the prior statement -whether the reserves are on a gross or net basis -if the reserves are deficient/redundant, the minimum/maximum amount the actuary believes is reasonable -if qualified, item to which qualification relates, the reason & the amount for such items if known -significant risks that could cause material adverse deviation -if the actuary uses the analysis of another actuary, whether the actuary reviewed the other's analysis (if a review was conducted, actuary should disclose the extent of the review, including if things like the methods & assumptions or the underlying arithmetic calculations were reviewed) -if the reserves are calculated using discounts the rates used & amount of the discount -if the reserves are net of reinsurance, the collectiblity of the reinsurance

Uses of Credit Based Scoring

-to segment into homogenous groups for rating -used in underwriting decisions - determine whether to accept/reject risk

Financial Reports help stakeholders & regulators:

-track the company's financial performance -compare the company's performance -make informed decisions

Commutations

-transactions when results in settlement & discharge of all (or a portion) of future obligations between the reinsurer & ceding company -ceding company eliminates the reinsurance recoverable & records the cash received as a negative paid loss -any gain/loss treated as UW income (for both ceding & assuming) -reinsurer will eliminate reserves & record payment made -the commuted balances are written off the exhibits in which they were originally recorded

Receivership

-type of bankruptcy an insurer enters into when a receiver is appointed to manage the insurer & its property -financial difficulty so sever more than supervision needed -receiver formulates plan to distribute insurers asset to settle obligations -2 possible outcomes: rehabilitation or liquidation

Insurance Risk

-uncertainty about both: --the ultimate amount of net cash flows (underwriting risk) --the timing of those cash flows (timing risk) -requires that both timing & amount are directly related to the claims paid by the ceding company -investment returns not an element -needs to b reasonably possible for reinsurer to realize a significant loss -second criteria can be satisfied if substantially all of the insurance risk related to reinsured portion has been assumed by the reinsurer

Deposit Accounting

-used when contract does not qualify as reinsurance: does not transfer both components of insurance risk -ceding entity records amount paid as deposit, assuming entity records as liability -the deposit is an admitted asset for the ceding if: assuming entity is licensed, or there are funds held by the ceding company -the ceding company cannot reduce the reserves -the assuming will record the consideration to be returned ot he ceding as a liability -at each report date, the amount of hte deposit is adjusted to reflect the payments made to date & expected future payments -if the total losses are valued upward --the assuming company will record an interest expense --the ceding company will increase: the deposit, outstanding liability, interest income & incurred losses

Properties Consider to be Uninsurable

-vacant or open to trespass -poorly maintained or has unrepaired fire damage -subject to unacceptable physical hazards -violates law of public building -not built in accordance with building & safety codes

Circumstances where state laws & regulations can be void under the US Constitution

-when state law contradicts federal law -when courts determine that a state law interferes with the purpose or results of a federal law although the state law does not expressly contradict the federal law -when the state law imposes improper burden on interstate commerce, even though a federal law does not exist

General Interrogatories - Financial

-whether the financials were developed using an accounting system other than SAP loans made to senior leadership & other stakeholders -assets that the insurer was obliged to transfer to another party which were not reported as liabilities -assessments other than guaranty fund assessments -amounts due from affiliates

Preferred Risk Policies (PRPs)

-zones outside SFHA may elect to purchase a lower-cost preferred risk policy -unlike SFHA properties, can be denied a PRP if they have significant loss history -same forms as SFHA with discounted rates

SEUA Case Key Questions

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

3 Pillars of Solvency II

1. Quantification: quantitative capital requirements (solvency capital requirement & minimum capital requirement) 2. Governance: supervisory activities (internal control & risk management, supervisory review process) 3. Transparency: supervisory reporting & public disclosure

Hierarchy of Accounting Rules

1. SSAPs (including GAAP reference material adopted by the NAIC) 2. consensus positions of the emerging accounting issues working group (as adopted by the NAIC) 3. NAIC statement instructions and purposes & procedures manual of the NAIC Securities Valuation Office 4. SAP Statement of Concepts 5. sources on nonauthoritative GAAP accounting guidance & literature, including practices that are widely recognized & prevalent either generally or in the industry, FASB concept statements, International Financial Reporting Standards, accounting textbooks, handbooks & articles, etc.

Statement of Principles Governing P&C Ratemaking

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

5 Steps of Interactive Rating

1. background research by ratings analyst & proprietary data submitted by insurer 2. interactive meetings between ratings analyst & senior managers of insurers 3. preparations of rating proposal by lead analyst & additional data submitted by insurer 4. decision by ratings committee after lead analyst presents proposal 5. rating published

3 Stages of Financial Regulation

1. mitigate/eliminate risk via restrictions on insurers activities: certain transactions & activities required approval, or are prohibited 2. use financial tools & oversight to work with insurer & implement corrective actions -determine which companies in potentially hazardous financial condition -new risk concentrations and/or insufficiently recognized risks 3. provide a backstop of financial protection in event of receivership -conservation: safeguard insurer's assets while determining course -rehabilitation: fix problems, protect assets, run off liabilities, or prepare for liquidation -liquidation -most take actions before company falls below RBC -in event of liquidation, guaranty funds provide some coverage

US Insurance Financial Solvency Core Principles

1. regulatory reporting, disclosure & transparency 2. off-site monitoring & analysis 3. on-site risk focused examinations 4. reserves, capital adequacy & solvency 5. regulatory control of significant, broad-based risk-related transactions/activities 6. preventative & corrective measures, including enforcement 7. exiting the market & receivership

Summary of Insurance Regulation

1752 - first insurer chartered in Philadelphia early 1800s - sporadic state insurance regulation 1869 - Paul v. Virginia 1871 - National Insurance Convention 1890 - Sherman Antitrust Act 1914 - Clayton Antitrust Act 1936 - Robinson-Patman Act 1944 - South-Easter Underwriters Association decision 1945 - McCarran Ferguson Act 1972 - NAIC: unfair claims settlement practices and unfair trade practices act 1999 - Gramm-Leach-Bliley Act

SEUA Decision

1944, immediate effect: -insurance is interstate commerce & federal legislation now applied to insurance -Sherman Act (1890) - prohibits collusion in attempts to gain monopoly power, any act that restrains trade or commerce is illegal -Clayton act (1914) - identified & made illegal practices that lessened competition or created monopoly power, made tying illegal - requiring purchase of 1 product to purchase another -Robinson-Patman Act - an amendment to the Clayton Act, required price differences to be justified by reduced operating costs

Actuarial Report Disclosures

Always disclose: -the actuary responsible for the report -the date & subject of the document Should disclose unless inappropriate to do so: -the intended users of the report -the scope & intended purpose -acknowledgement of qualification -any cautions about risk & uncertainty: actuary may need to provide cautions to user about uncertainty associated with the analysis -any limitations/constraints on the use of the actuarial findings -any conflicts of interest -any material information the actuary relied upon, for which the actuary does not assume responsibility: this means that the actuary used the data/info/methods/assumptions without assuming responsibility for it. actuary should always disclose extent of reliance -information date: date through which data is considered -subsequent evens: relevant events that meet criteria: --becomes known to the actuary between the information date & the date at which the report is issued --has material impact on actuary's findings --would be impractical to revise the report before it is issued -documents comprising the report

Market Regulation

Analysis of insurers behavior in market 1. treatement of policyholders & claimants in product development & pricing 2. competition 3. statistical reporting 4. administration of residual markets 5. licensing of insurance producers 6. consumer assistance & information services

RBC Components

Asset Risk -R0: subsidiary insurers -R1: Fixed Income -R2: Equity -R3: Credit Underwriting Risk -R4: reserve risk -R5: NWP risk Covariance Adjustment

Max Standard Flood Insurance Policies (SFIPs) Coverage Limits

Building/Contents -Family 250k/100k -Other Residential 500k/100k -Nonresidential 500k/500k

IRIS Ratio 3

Change in Net Writings =(Current NWP - Prior NWP)/(Prior NWP) -Unusual: > +/- 33% -large change may indicate lack of stability in insurer's operations -investigate source of insurers expansion & whether it maintained adequate pricing, terms & conditions -large decrease can be caused by: --sign of financial distress --pulling out of an LOB --reducing writings due to large losses in LOB --loss of market share --higher amounts of reinsurance -unstable results: insurer may not have good controls on its underwriting, or even a solid business plan, should analyze if the assets are properly valued & liquid enough to meet cash demands, and if the reserves are adequate (can look at IRIS ratios 11-13 & Schedule P) -very concerning if increasing cash flow in order to pay current claims -increased NWP doesn't necessarily mean greater chance of insolvency if accompanied by: --low Ratio 2 --adequate reserving (ratios 11-13) --profitable operations (ratio 5) --stable product mix -reduced NWP accompanied by stable GWP may indicate insurer trying to increase cash flow from ceding commissions: look at ratio 4 to determine if case

Notes... on Reinsurance

8 sections: 1. Unsecured reinsurance recoverables 2. Reinsurance recoverables in dispute 3. Reinsurance assumed & ceded 4. Uncollectible reinsurance 5. Commutation of ceded reinsurance 6. Retroactive reinsurance 7. Reinsurance accounted for a desposit 8. Disclosure for the transfer of P&C run-off agreements

Cost of Double Taxation

= capital * investment yield * [(investment yield * corporate tax)/(1 - corporate tax)]/[premium * (IT investment yield)^.5]

RBC Action Levels

1. Company Action Level: 150%-200% 2. Regulatory Action Level: 100%-150% 3. Authorized Control Level: 70%-100% 4. Mandatory Control Level: <70%

How provision for reinsurance encourages solvency

1. It encourages insurers to demand prompt payment from reinsurers 2. It encourages insurers to require letters of credit or other collateral from unauthorized and slow paying authorized reinsurers

How provision for reinsurance may damage insurer ability to remain solvent

1. It might encourage them to buy coverage from authorized reinsurers even though unauthorized reinsurers have better coverage and prices. 2. It is costly to obtain letters of credit. This may mean insurers will have to increase rates and they may lose good business because of it.

IRIS Ratio 5

2 Year Overall Operating Ratio -Unusual > 100% -measures profitability of the insurer -can help identify what is causing poor performance -if losses are cause of poor performance, look at ratio 11&13, because reserve development or deficiency can distort the ratio -if unusual, need to recalculate afer removing the prior years development

Authorized Non-Slow Paying Provision for Reinsurance

20%*(paid recoverables >90 days overdue)

Authorized Slow Paying Provision for Reinsurance

20%*max(unsecured total recoverables, paid recoverables >90 days overdue)

Schedule P Interrogatories

7 questions to add insight 1. Extending reporting endorsements arising from death, disability or retirement 2. If LAE is being defined as DCC and A&O 4. Whether reserves are net of non-tabular discount 6. If claim counts per event or claimant 7. Any changes or anything special that user needs to be aware of

Schedule E

Cash & Cash Equivalents -Part 1: detailed listing of cash at the bank, trust companies and savings & loan associations, totals of cash held at the company offices, & CDs maturing in 1 year or less -Part 2: cash equivalents -Part 3: lists the special deposits, which are assets that have been included in the asset schedules, but are segregated for special purposes (eg bail bonds, collateral)

IRIS Ratio 1

Gross Written Premium to Surplus -Unusual: >900% -measures the adequacy of surplus on a direct & assumed basis, excluding the effects of ceded premium -if ratio is high, consider: --compare to ratio 2, if there is a large variance, insurer may be relying too heavily on reinsurance or possibly involved in a fronting arrangement. investigate quality, rating & collectibility of reinsurance & collateral held. if small difference, sign reinsurance protection is insufficient --the LOB of the insurer: long tail lines should maintain lower ratios because it is usually harder to estimate losses for these lines --profitability: insurers who are more profitable & have adequate reinsurance coverage can maintain higher ratios --% of assumed business vs direct: for large portion assumed review types of business assumed, attachment points, layers & limits, underwriting risk & price monitoring controls on the assumed book, ceding company's experience in line, reasons for ceding business & reason outside reinsurance wasn't used

Schedule BA

Information about other long term assets owned, that are not included in any other invested asset schedules -Part 1: details on all owned at 12/31 -Part 2: purchased during the year -Part 3: sold during the year

IRIS Ratio 6

Investment Yield -Unusual >6%, <3.5% -indicates general quality of the investment portfolio -low yields can be caused by: --speculative investments: may produce large capital gains in long run but little in interim, focus on their stability & liquidity --large investments in affiliated companies: focus on appropriateness of investments, value & liquidity --large investments in home office facilities: focus on if insurer can afford the facilities & the appropriateness of the rent charge to UW expenses --large investment in tax exempt bonds --significant interest payments on borrowed money: large borrowings result in large interest payments reducing the yield --extraordinarily high investment expenses -high yields not necessarily good if caused by: --investing in high risk instruments --extraordinary dividend payments form the subsidiary to the parent

Schedule DL

Securities Lending Collateral Assets -main purposes is to add transparency: provides detail abou the collateral invested by the insurer, including the fair & book values & date in which the agreements mature -Part 1: list the collateral assets that are not included in other investment schedules -Part 2: lists those reported in other asset schedules

Schedule DA

Short Term Investments -bonds, mortgage loans, other short-term invested assets for parents, subsidiaries & affiliates, exempt money market mutual funds, class 1 money market mutual funds & other short-term invested assets -Part 1: held at 12/31

IRIS Ratio 4

Surplus Aid : PHS -Unusual >15% -if outside normal, should give insurer careful scrutiny even if it did well on other ratios, should recalculate removing the surplus aid: --1,2,7,10 & 13 -carefully examine individual insurance treaties when not normal, need to determine the potential impact of solvency on the insurer which may result form cancellation of treaties

Codification of SAP

adopted 1/1/01; purpose to provide a common set of principles that each state can follow, in order to ease regulatory burdens on companies & promote consistency

Excessive Premium Growth Charge

avg growth rate factor * .45 * net reserves -calculation performed on a group basis -premiums used to derive the growth rate direct & assumed -business acquired/divested as a "shell" is only included in the calculation if the liabilities are retained -servicing carriers of involuntary pools can exclude the written premiums from the pols -if an insurer is in its 1st year, 40% avg growth rate assumed -if it currently has no GWP, a rate of 0 is used