CAS Exam 6

Early Warning Tests program (Eventually became IRIS)

Goal was to prevent the need for guaranty fund assessments by taking over insurers and returning them to active operation or merging them with other going concerns

Some Areas of actuarial interest in the P&C interrogatories

Exposure to Cats, The process used to calculate PML, Level of reinsurance protection

What topics does Interrogatory 1 cover:

Extended reporting endorsements (EREs) arising from death disability or retirement (DDR). There are six parts: - The first asks whether the insurer offered the endorsement for free ( or at a reduced rate) - The remaining parts are about how the company reports the DDR

Iris Ratio 7: Gross change in PHS

Gross Change in PHS= Change in PHS/Prior PHS If current is 0 or negative this equals -99 If current is positive and prior is 0 or negative this equals 999 This is the ultimate measure of change in financial condition

Iris ratio 10 Gross agents balances to PHS

Gross agents balances in course of correction/PHS usual range is below .4

Premiums in relation to risk transfer analysis

Gross premiums should be utilized. Complications arise when the premium is dependent on future events. There are several options in this case: -Initial deposit premium -Expected premium: -Actual Premium: based on the losses simulated. This is the best option Also all fees should be treated as premium

Topics covered in the general section of common interrogatories

Holding company realationships, Letest regulatory financial exams, merger activity,excessive sales commision levels, suspension of licenses. Also provides info about the CPA and Appointed Actuary

(Vaughan Economic) Fundamental question for U.S. Regulators

How can we improve efficiency without losing the inherent strength of our checks and balances where they matter?

There is no explicit definition for reasonable self evident with regard to reinsurance contract

However the CAS Working Party recommended that if all of the following criteria apply, risk transfer is reasonable self evident: -Aggregate Limits no less than one per occurence limit or twice premium -No ceding commisions -rate on line is under 500%

Sample paragraph on material adverse deviation that the actuary should include in his SAO.

I have derived a materiality standard of 2M, which is the amount that would generate the RBC "Company Action Level". I have identified the major risk factors for this company as XYZ. The existence of these risk factors leads me to conclude that there is a risk of material adverse deviation for this company. These risk factors are described in more detail in the report supporting this Opinion. The absence of other risk factors from this listing does not imply that additional factors will not be identified in the future as having been a significant influence on the Company's reserves. I reflected the above risk factors by increasing my range of reserves.

Scope Paragraphs text

I have examined the actuarial assumptions and methods used in determining the reserves listed in Exhibit A, as shown in the Annual Statement of the Company as prepared for filing with state regulatory officials, as of FINANCIAL DATE, and reviewed information provided to me through REVIEW DATE date. (where Exhibit A lists the items on which the actuary is expressing an opinion, and the amounts for each). In forming my opinion on the loss and loss adjustment expense reserves, I relied upon data prepared by _________ (name, affiliation & relation to the Company). I evaluated that data for reasonableness and consistency. I also reconciled that data to Schedule P - Part 1 of the company's current Annual Statement. In other respects, my examination included such review of the actuarial assumptions and methods used and such tests of the calculations as I considered necessary.

Examples of Asbestos and Liability wording (material exposure):

I have reviewed the company's exposure to asbestos and environmental claims, and I have concluded that this exposure is material

Examples of Asbestos and Liability wording (remote chance of material liability):

I have reviewed the company's exposure to asbestos and environmental claims. In my opinion, there is a remote chance of material liability, since reported claim activity levels are minimal, and the company writes only personal automobile business.

3 responsibilities of FEMA regarding hazard maps

Identifying areas of special flood, mudslide or flood related erosion hazards Completing a flood insurance study (FIS) Issuing a flood insurance risk map that indicates risk premium rate zones

List a counterargument to the argument that rate regulation is needed because when purchase of insurance is compulsory, rates need to be regulated to prevent excessive profits to insurers:

Fails to recognize that inelastic demand does not produce excessive profits in competitive markets

Describe Regulatory Forbearance

Failure to take prompt and stringent action in the face of a potentially troubled firm

Fair value versus historical cost

Fair value: value if traded at in the open market Historical cost: Purchase price less depreciation

EDP Equipment is an admitted asset

Dont know what it is though, but count it

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

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

Employee Retirement Income Security Act 1974

ERISA enacted to curb abuse in private pension system and in employee benefit plans

Determination year and company elections (IRS: Determining Discounted Reserves)

Each determination year, which occurs in all years that end in a 2 or 7 the insurer elects to use either: -industry aggregate payment patterns, or -it own payment patterns If the company uses its *own payment patterns*, it derives these from the most recent Schedule P data available before the beginning of the AY. (So for AY 02 this would be from the 00 statement) On the other hand if it uses *industry data* the paument patterns are "vintaged", and can only be updated in the determination years

Syndicated Letter of Credit

Essentially a Letter of Credit from several different banks.

The McCarran-Ferguson Act (1945)

Essentially gave the NAIC and insurance industry what they wanted and returned regulation of insurance back to states. Exceptions: -If states are not regulating the activities -Sherman Act continues to apply to the use of boycott coercion or intimidation -If congress passes law that applies only to the insurance industry, it will supersede any state reg

Two ways to account for premium deficiency

Establish a write in liability or reflect as part of the UEPR IF the insurer uses the second approach the only way that a user can know it exists is by referring to the notes. The insurer needs to disclose the size of the deficiency and whether or not investment income was considered

Purpose of Guaranty Funds

Established to protect policyholders from inability of an insolvent insurer to pay claims; and refund a portion of the uepr

Define "Cost based" rate:

Estimate of the future cost associated with individual risk transfer. This is based on expected claims, claim handling expenses, underwriting expenses, policy acquisition expenses, reasonable prot, investment income, and other risk transfer costs

Iris ratio 13: estimated current reserve deficiency to policy holder surplus (highly tested)

Estimated deficiency/ PHS Estimated deficiency = reserve required - current reserve Reserves required = premiums earned x ratio of reserves/premium reserves/premium = average of this ratio from prior 2 yrs Reserve/premium from prior year = (reserves from prior yr + 1 yr loss dev) / (premiums earned in prior yr) usual range is below 0.25

Actuaries Involvement with the income statement

Estimating the amount and timing of the loss payments

Primary purpose of rate regulation

Financial stability of the insurer

Flood Management Challenges facing the NFIP

Finding ways to: 1. improve the accuracy of flood risk assessment and mapping of hurricane and coastal storm hazard areas 2. Strengthen the financial sustainability of the NFIP in the face of future extreme weather events, sea-level rise, and coastal flooding 3. Address potential affordability challenges associated with mandatory purchase requirements 4. reduce the likelihood of future emergency supplemental spending to finance recurring recovery expenditure by making communities stronger and more resilient. 5. address uncertainty surrounding human settlement patterns and the NFIP's ability to contain the nation's growing exposure to floods 6. Explore the creation of effective hazard reduction strategies -- linked to land use planning techniques (and construction standards - to direct development and people out of, and away from flood prone areas.

Jurat Page

First page of the annual statement that contains basic information about an insurer including its name, NAIC code, Address, name & title of preparer, Officers.

Creating Schedule P Part 3 using last years part 2, part 3 and CY paid, IBNR, and case reserve info

First prior year column = 0 Prior year Column of year A: Last years part 3 column A - Last years part 3 column (A-1) + Last Years part 3 2nd row Column A - Last Years part 3 2nd row Column (A-1) Prior year last column: second to last column of current prior years row + CY paid from prior row Lowest diagonal shifts up diagonally Other Cells left are: previous column in same row + CY paid for same row

Investment gain on funds attributable to insurance transactions = investment gain ratio x funds attributable to insurance transactions for the line

Funds attributable to insurance transactions = mean net loss and lae reserves + mean upr x [1-(prepaid expenses/written prem)] - (mean net agents balances - ceded reinsurance premiums payable) where prepaid expenses = comm and brokerage exp. incurred + tax, L & F + Other ac, field sup and collection + .5x(general expenses incurred) Prepaid expenses are calculated using only data for the most recent year

SAP records reserves net of anticipated recoveries

GAAP establishes an asset to recognize the ceded reinsurance recoverables

SAP and GAAP both recognize DTAs but differ in their treatment

GAAP fully recognizes the DTA but creates a valuation allowance if it is more likely than not that the DTAs will not be recognized SAP: There is a strict admissibility test to recognize DTA,

Explain how the initial value of goodwill can vary greatly between SAP and GAAP accounting

GAAP goodwill, the value of the company is dependent on fair value accounting. SAP goodwill, the value of the company is dependent on Statutory accounting. Due to conservative nature of SAP, the value of the company may be a lot smaller, resulting in a higher amount of goodwill than GAAP.

Gramm-Leach Bliley Act

GLB Financial Services Modernization Act addressed issue of state vs federal regulation -Each segment of financial services business is regulated separately -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.

IRIS ratios section of the relevant comments in SAO

If any of the tests below have exceptional values, the actuary needs to explain the main reasons for the exceptional values: -One yr Reserve dev to Surplus -Two yr Reserve dev to Surplus -Estimate Current Reserve Deficiency to Surplus

Statutory and GAAP accounting treatments of structured settlements

If either the insurer is the owner & payee; or the claimant is the owner & payee and has released the insurer from its obligation; the treatment is the same between the two accounting systems If the claimant is the owner and payee, and has not released the insurer, GAAP: the gain from the purchase of the annuity needs to be deferred. Statutory: recognizes the gain immediately

State the exception whereby a contract may still be accounted for as reinsurance even though it fails to meet the criteria.

If no significant risk, the contract can still be considered reinsurance if substantially all of the insurance risk related to the reinsured portion has been retained by the reinsurer. This puts the reinsurer in essentially the same position as the ceding company.

Relevance of Iris ratio 4 to RBC ratio

If ratio 4 unusual the insurer is getting an excessive amount of surplus aid. This is benefiting its RBC ratio, due to the increase to surplus.

In IFRS 4, under what circumstances can an insurer change its accounting principles:

If that change: - Makes the financial statements more relevant to the user's decisions, without being less reliable; or - Makes the statements more reliable, without being less relevant

The NAIC Financial Analysis Handbook provides a Bright Line Indicator Test in regards to the Risk of Material Adverse Deviation for those companies subject to RBC reporting requirements.

If the Appointed Actuary does not address material adverse deviation, yet ten percent (10%) of the company's net loss and LAE reserves is greater than the difference between the Total Adjusted Capital and the Company Action Level capital, then comments from the Appointed Actuary should be pursued by the Financial Analyst. In situations where the test is triggered, the Appointed Actuary may consider disclosing why he/she does not feel there is a RMAD, if that is the conclusion.

When does the Dodd-Frank Act authorize the FIO to preempt state measures:

If the FIO believes the state measures: - Are inconsistent with covered agreements, or -Would result in less favorable treatment of insurers domiciled in foreign jurisdictions that are subject to covered agreements, compared to insurers that are admitted in the state

Adjusted Regular Income Tax (ARIT)

If the firm pays the AMIT, credit for the excess tax that it paid over the RIT can be carried over to the following year to reduce that years RIT ARIT = RIT - prior year's minimum tax credit If ARIT > AMIT the tax liability that the insurer has to pay is the ARIT If ARIT < AMIT the AMIT is the tax liability. The excess AMIT over ARIT becomes the new minimum tax credit The minimum tax credit can be carried forward indefinitely, but can not be carried back

Net gain from Agents or premium balances charged off: (An element of Other Income)

If the insurer believes that the balances wont be collected it needs to recognize them as a loss. Any balances that had previously been written off and later collected should be recognized as gains

Trend Test

If the insurer meets both of the following criteria, it needs to undergo a trend test: RBC ratio between 200% and 300% Combined Ratio > 120% This test is designed to be an early warning of companies that may incurr RBC ratios below 200%.

Requirement for the "financial hardship" exemption from producing an SAO:

If the projected reasonable cost of 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 premiums during the year for which the exemption is sought

If a question asks you to select a materiality standard for adverse development, you should probably choose the Surplus change needed to Target the Authorized Control Level: Surplus - RBC Capital Action Level

If they ask other considerations that could be used in establishing a materiality standard: -percent of surplus -amount that would change the AM Best rating

AAA: In general the actuary should select a constant materiality standard for all aspects of a given task.

In addition, once this standard is selected, it should remain constant over the years.

It is important to be conservative when developing estimates in order to provide a margin of protection

In addition, valuation procedures should aim to prevent sharp fluctuations in surplus

Arguments in favor of and against the termination of TRIA

In favor: • the risk can be covered by large reinsurers or by catastrophe bonds • there has not been a significant terrorist attack recently so market has recovered and is well capitalized to provide coverage Against Termination • losses tend to be catastrophic so TRIP should continue to exist to ensure affordability and availability • there has been no attacks since 9/11 so hard to say whether private market can take the financial outcome so government should continue to cover large losses

The 2015 CASTF Regulatory guidance notes that when the Appointed Actuary is silent regarding the review date, this can indicate either a review date that is the same as the date the SAO is signed or that the Appointed Actuary overlooked this disclosure requirement.

In instances in which the Appointed Actuary's review date is the same date that the SAO is signed, regulators suggest actuaries clarify that in the SAO. Such language may include, "...and reviewed information provided to me through the date of this opinion."

Provide appropriate language to be used in the Opinion Paragraph of the Statement of Actuarial Opinion on Property and Casualty Loss Reserves

In my opinion, the amounts carried in Exhibit A on Account of the Items Identified: A. Are consistent with the insurance laws of the state of Alabama. B. Are computed in accordance with accepted actuarial standards and principles C. Make a reasonable provision for all unpaid loss and expense liabilities of the company under the terms of its contracts

Why did regulators begin to oversee and restrict insurer investments:

In the 90s, several insolvencies were caused by high risk investments. To help reduce the insolvencies, regulators began to oversee and restrict insurer investments:

If a reinsurance contract does not indemnify the ceding company against loss, the premium paid to the reinsurer (less any premium retained) needs to be accounted as a deposit by the ceding.

Indemnification of a ceding company only exists if: -Significant insurance risk applies and -It is reasonable possible that the reinsurer will incur a significant loss

Total investment gain = investment gain ratio x investable funds association with the line of business

Investable funds associated with the LOB = mean net loss and lae reserves + mean unearned prmium reserve - mean net agents balances + ceded reinsurance premiums payable + allocated p0licy holder surplus

Liquidation vs going concern

Investors view the company as a going concern while regulators view the company from a liquidation scenario.

What can the note for reinsurance recoverables in dispute be used for?

It can be used to Identify credit risk and to identify insurers that try to over recover from reinsurers

Briefly describe the information collection requirements that FIO can impose on insurers

It can require any insurer or an affiliate to submit specific data/information to the FIO. Before requesting information from insurers, the FIO needs to coordinate with federal and state regulators to see if they (or other public sources) can provide the data.

Explain how a downturn in the economy could impact different segments of the population:

It could potentially magnify differences in credit scores among vulnerable populations

Why do reinsureds like the LOC form of collateral

It is not part of the estate of the insolvent reinsurer, and therefore will not be tied up/ subject to degradation in the event of a bankruptcy

If a company has a 0% share of the pool (no reported Schedule P data),

It needs to submit an Opinion that reads similar to that of the lead company (eg the IRIS Ratio and risk of material adverse deviation discussion, and other Relevant Comments need to refer to the risks of the lead company) Exhibits A & B of the lead company need to be attached.

How is the Dodd-Frank Act a first step in the direction of federal involvement in insurance regulation

It requires the Federal Reserve Board regulate large insurers that have been recognized as being systematically significant.

IF the insurer believes that a higher than minimum reserve for uncollectible reinsurance is necessary, what should it do?

It should hold an additional reserve. The insurer should record this additional amount on the income statement by reversing the accounts that had been used to establish the reinsurance recoverable.

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

It will not lower overall insurance premium, but redistribute charges - Risks with lower expected costs will pay more than actuarially fair - Risks with greater expected costs will pay less than is actuarially fair

Sources of State insurance law by branch

Legislative Branch -State legislature -Enacts statutes resulting in a body of law called statutory law Executive Branch -Insurance Dept -Enforces state insurance code -Adopts regs resulting in a body of law called administrative law -Issue bulletins or circulars that prvide additional information about their policies and procedures Judicial Branch -State Court System -Adjudicates disputes by applying and interpreting statutory and administrative law resulting in a body of law called case law

The following hierarchy applies to accounting rules (NAIC Preamble):

Level 1: SSAPs (including GAAP reference material adopted by the NAIC) Level 2: Consensus positions of the Emerging Accounting Issues Working Group (as adopted by NAIC) Level 3: NAIC Annual Statement instructions and Purposes & Procedures Manual of the NAIC Securities Valuation Office Level 4: SAP statement of concepts Level 5: Sources of nonauthoritative GAAP accounting guidance & literature, including practices that are widely recognized and prevalent

Robertson V California

Licensing of companies and agents is part of the business of insurance

Calculate a commutation price

Lowest price possible L L= Discounted Ceded Reserves - (Avg Disc Factor for Primary Insurer x Ceded Reserves - L) x Tax Rate for Primary insurer Highest Price Possible H H = Discounted Ceded Reserves - (Avg Disc factor for Reinsurer x Ceded Reserves - H) x Tax Rate for Reinsurer A price between H and L will benefit both parties

Briefly describe Medical Set-Aside Allocation

MSA calls for all parties to a settlement to agree to set aside money to be primary over Medicare, for a period where the individual is elligible for Medicare

Briefly describe Medical set-aside allocation:

MSA calls for all parties to a settlement to agree to set aside money to be primary over medicare for the period where the individual is eligible for Medicare

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

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

Describe the notion of conditional payment

Many people begin incurring medical costs before eligibility to collect insurance is determined. Until this time, Medicare will make conditional payments. If the insurer is determined to be primary it will need to reimburse medicare

Formula for the margin needed on the premiums as a percentage of premium

Margin = Capital x [(yield x (corporate tax))/(1-corporate tax)]/Premium If we assume that premiums are paid at policy inception and taxes are paid midyear, we need Margin / ((1+investment yield)^0.5)

Fair value of loss and lae reserves under P-GAAP

Mark-to-model approach is used, where the market value is calculated using an estimation process there are 3 components: -Expected value of the nominal future cash flows -A reduction to reflect the time value of money at the risk free rate, plus a load to reflect the illiquid nature -A risk adjustment to compensate the investor for the risk associated with the liabilities. This is calculated with a cost of capital approach.

RBC charge for stock investment in a subsidiary

Market value approach: based on market value adjusted for ownership percentage R0 = min(RBC,Stat Surplus) x ownership % Equity method: The investment is based on the statutory equity of the entity adjusted for unamortized goodwill and adjusted for ownership percentage R0 = min(RBC x ownership %, Book/Adjusted carrying value of stock)

Examples of business metrics that are maximized via price optimization:

Marketing goals, profitability and policyholder retention.

Two methods of accounting for nonadmitted assets

Method 1: Write off the nonadmitted assets as an expense Method 2: Classify the asset as nonadmitted and charge surplus directly method 1 is more complicated because the insurer needs to keep a separate set of books for GAAP and statutory accounting

Provision for reinsurance from overdue reinsurance to certified insurers

Min(Max[20% x (paid rec over 90 days + disputes over 90 days),20%(Credit - Collateral)],Credit) Credit = Recoverable x (% collateral provided/% of collateral for full credit)

Purchase GAAP (P-GAAP)

The GAAP Accounting System for business combinations. Under P-GAAP, when one company buys another the value of the assets and liabilites of the purchased entity need to be accounted for at fair value, which is defined as the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions.

An analyst is relying solely on the IRIS ratios to form an opinion about the condition and performance of an insurer. Explain the problem with this approach

The IRIS ratios look at just some aspects of the insurer's condition/ performance (overall, profitability, liquidity & reserve ratios), and therefore does not provide a comprehensive view. For example, it does not assess the risks that the insurer is exposed to. In addition, the unusual ratios are fixed for all insurers, and therefore do not reflect the insurer's unique characteristics. For example, ratios 1 & 2 don't reflect if the insurer is writing short or long tail lines of business. The IRIS ratios can be distorted. For instance, ratio 13 can be overstated or understated if there is a change in the mix of business, because it assumes that the historical ratio of reserves: premium should apply going forward. IRIS is also reliant on good data. If incorrect data is used, it is likely that the output will also be incorrect.

Bond investments in insurance subsidiaries

The R0 charge for bond investmetns is only generated if there is excess RBC. RBC = min(Pro rata share of the excess RBC, Book/adjusted carrying value of bonds)

Explain how the NAIC affects insurance regulation through the state accreditation program

The accreditation process encourages state insurance departments to meet minimum standards in three areas: -state laws & regulations -regulatory methods -DOI practices

Stated basis of reserve presentation in the SAO (according to ASOP 36)

The actuary needs to identify the stated basis of the reserve presentation, which is a description of the nature of the reserves. It includes: -Whether the reserves are nominal or discounted and, if discounted, the items discounted and the stated basis for the interest rate -Whether they include a specific risk margin, and if so the stated basis for the risk margin -Whether it is gross or net of recoverables -Whether the reserve considers the potential for uncollectible receivables -Types of LAE covered by reserve -If the opinion is only for a portion of the reserve, the claim exposure that is incorporated by the opinion

Reasonability checks for actuarys regarding the SAO

The actuary should perform reasonableness checks on the data. Data points that could be due to random variations in claim experience or normal coding errors do not necessarily need to be questioned. Only data points that are so unusual that they may indicate a data error of significance to the actuary's opinion of the reserves.

If the appointed actuary relied on the opinion of another actuary for a material portion of the reserves covered by the scope he must identify the actuary (name & affiliation) in the Opinion section of the SAO

The actuary signing the opinion should still perform a sufficiently thorough analysis on the other actuary's work so that she does not have to issue a qualified opinion

Unpaid claim estimate

The actuary's estimate of the obligation for future payment resulting from claims due to past events. For clarity and unless otherwise indicated, this estimate is on an undiscounted basis

What happens if an insurer refuses an interactive meeting

The agency may issue a public rating using public information. The Agency may do this to inform others that past rating is no longer valid

What to do if the insurer has a high IRIS ratio 9

The analyst should focus on the reserve adequacy, and that the insurer has the right valuation, mix and liquidity of assets, in order to determine if the insurer can meet its obligations.

What to do if IRIS ratio 5 is unusual and losses are the reason why

The analyst should look at Ratio 11 and Ratio 13 because reserve development, or reserve deficiency can distort the ratio. If the insurer is outside the normal range for Ratio 11, it needs to recalculate Ratio 5 after removing the prior year's development.

Schedule B

Mortgage Loans

Tax exempt income adjustment for computing taxable income

Munie bond interest is tax exempt so it needs to be subtracted from the statutory income to produce Taxable Income However, due to the "proration provision" of the 1986 Tax Reform, tax exempt income is not completely tax exempt for insurers. Instead 15% of the tax-exempt portion of the income is added to the regular taxable income.

Possible wording in the SAO if there is material amount of ceded reinsurance with some collectability problems:

My review of reinsurance-recoverable balances found $XX million of loss and LAE reserves ceded to currently insolvent reinsurers. Provisions for uncollectible reinsurance, including amounts shown on the Liabilities, Surplus and Other Funds page, Provision for reinsurance, only account for $YY million of this amount, with no provision made for the remaining $(XX - YY) million. In forming my opinion of the net reserves, I have recognized this $(XX - YY) million as uncollectible.

Post McCarren Ferguson Act

NAIC and State legislature began developing and implementing various insurance laws that were designed to -Allow cooperation in setting rates and keep congress from interfering States had until 1948 to pass legislation to regulate insurance and limit federal regulation Principal concerns for NAIC were promoting equitable ratemaking and preventing unfair trade practices -NAIC approved two model rate reg bills with the following purposes: Ensure rates not excess, unfair disc, or inadequate, Also allow cooperation in setting rates as long as it didnt hinder competition. -To achieve purposes, the bills -Required the prior approval of rates -Explained how to file rates -Described the role of rating organizations -recommended anti-rebating laws

Unaffiliated bond RBC factors

NAIC bond class Factor Class 1 - Highest credit quality - US gov guaranteed by US gov 0.000 US gov not guaranteed by US gov 0.003 All other (government) 0.003 Class 2 - High credit quality 0.010 Class 3 - Med credit quality 0.020 Class 4 - Low credit quality 0.045 Class 5 - Lowest credit quality 0.100 Class 6 - In or near default 0.300

Preferred Stock RBC Factors

NAIC preferred stock class Factor Class 1 - Highest credit quality 0.003 Class 2 - High credit quality 0.010 Class 3 - Med credit quality 0.020 Class 4 - Low credit quality 0.045 Class 5 - Lowest credit quality 0.100 Class 6 - In or near default 0.300

National Insurance Convention

Nat insurance Convention formed in 1871 took following actions -Developed a constitution setting fort regulators goals -Designed a uniform accounting statement -Adopted guidelines for insurer taxation -Adopted first model law which covered items such as commisioners duties and regulation of fire, life and marine insurers

IRIS Ratios Ratio 8: Net Change in adjusted PHS

Net change in adjusted PHS = Change in adjusted PHS/Prior PHS Where the change in PHS = PHS of current year - Changes in surplus notes - capital paid in or transferred - surplus paid in or transferred - PHS of the prior year This measures the change in financial condition based on operational results.

Investment gain ratio

Net investment gain/ total investable assets Net investment gain = Net investment income + realized capital gains

Two categories of investment income

Net investment income earned (interest/dividends, recorded gross of tax but net of expenses) Net realized capital gain (adjusted for amortization of premiums)

2 yr investment income ratio

Net investment income earned over 2 yrs/Premium earned over 2 yrs

According to empirical data, is there a relationship between the credit score and frequency/ severity of claims:

No significant difference in magnitude of claims, only frequency: Consumers with lower credit scores file more claims

Admitted vs. Nonadmitted assets

Non admitted assets are not easily converted into cash to satisfy the insurers liabilities. They are not included in the surplus

An increase in the following things decreases surplus

Non admitted assets, provision for reinsurance, dividends to stockholders (can only be paid out from unassigned surplus)

Dodd-Frank also tries to create uniformity among states in the following areas of insurance regulation:

Non-admitted reinsurance market Reinsurance

3 categories of off-balance sheet items are included in the R0 Charge

Non-controlled assets (collateral loaned, assets sold subject to a put etc.) , Contingent liabilities, Guarantees for the benefit of affiliates A 1% RBC charge is applied to these things (except securities lending programs which get a 0.2%)

The phrase "I evaluated the data for reasonableness and consistency" normally means

Normally means that the actuary reviewed the triangles, etc; and found no data points that were either outside the range of reasonable possibilities or that were internally inconsistent

Why cant a yield curve be used to discount cash flows in a risk transfer analysis:

Not consistent with the accounting standards, as it would produce different interest rates in each iteration of the simulation when the timing of cash flows differed, which is against the standard that interest rates can not vary by scenario.

Sections of the notes to the financial statements

Notes that require direct involvement by actuary -Reinsurance -Changes in incurred Loss & LAE -Premium Deficiency Reserves -Discounting of liabilities for unpaid L&LAE -Asbestos/environmental reserves Notes that are potentially relevant: -Summary of significant accounting policies -Events subsequent -Intercompany pooling -Structured Settlements -High deductibles

Accounting unique to retroactive reinsurance:

Occasionally the reinsurance agreement will be initiated before the beginning of the policy, but is not finalized until after the policy begins. Apart from some exceptions, if the contract has not been signed within 9 months of the effective date, the contract is assumed to be retroactive: -Facultative Contracts -Reinsurance agreements with more than one reinsurer which are signed by the lead reinsurer within 9 months -Reinsurance agreements where one of the parties is in conservation, rehabilitation, receivership or liquidation

Impairments

Occur when the insurer believes that it wont collect all amounts due on the sale of a bond. In this case the insurer treats the amount of impairment as a realized capital loss.

Ammortization and accretion (bonds)

Occurs when the purchasing price of the bond is different from the face value. This difference is because the coupon rate is different to the market interest rate at the time that the bond was purchased. This premium or discount is amortized over the life of the bond.

Opinion paragraph of the SAO

On the level of indicated reserves has been calculated, the actuary can provide one of the following statements: 1.Reasonable provision 2. Deficient Provision: The actuary also needs to disclose the minimum amount that he believes in reasonable. 3. Redundant provision: The actuary needs to state the maximum amount that he believes is reasonable. 4. Qualified Opinion: if certain items can not be estimated, or if the actuary is unable to provide an opinion about those items. 5. No opinion: If the actuary can not reach a conclusion due to limitations in the data, analyses, assumptions or related information.

GAAP records the revenue associated with the insurance premium over the duration of the contract

On the other hand the IFRS recognizes the present value of all premium and expenses as soon as the contract is signed: the present value of premium impacts assets and premium income; while the present value of claims and expenses impacts expenses and liabilities

U.S. Insurance solvency Framework part 3: How often do on site risk focused exams take place

Once every 5 years

National Flood Insurance Program

One of the largest property insurance programs the federal government offers which is administered by the Federal Insurance Administration under the Federal Emergency Management Agency (FEMA).

The primary and ceding company should have different tax impacts from a commutation

One reason for this is that each company most likely has different discount factors, as one (or both) may be using their own payment patterns

Novation reinsurance transaction

One 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 can be thought of as the "primary" party. In order to be eligible for reinsurance accounting: -The parties are not affiliates -The accounting of the novation will not be changed from retroactive to prospective

To what extent can the FIO preempt state law:

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

Schedule BA

Other Long term invested Asset information

Advantages and disadvantages of the different types of filing laws

P.A Advantage - regulator has close surveillance of insurer and can protect insured. Disadvantage - delays in rate approvals that do not allow insurers to charge rates based on mkt trends. N.F Advantage - easy for insurer, less costs. Disadvantage - regulator has trouble monitoring. U&F Advantage - use rates immediately / quick to market. Disadvantage - cost associated with completing a filing

Formula for current year policy holder surplus

PHS = Prior years surplus + Income + Direct Credit to Surplus Direct credit to surplus = Change in net unrealized capital gains + Change in Net Deferred Income Taxes- Change in nonadmitted assets - Change in provision for reinsurance - dividends to stockholders + capital paid in + surplus paid in unrealized capital gains are net of anticipated taxes (DTL) This correct for sure

List the 2 parts of part 7 (Schedule P)

Part A: Primary Contracts (direct business) Part B: Reinsurance Contracts (assumed business)

Organizational structure of schedule P (7 parts)

Part1: Loss and LAE experience as of 12/31 of curent year Part2: historical net loss & DCC estimates Part3: historical net paid loss & DCC Part4: historical net IBNR for loss & DCC (The difference between part 2 and 4 indicates the historical reported loss development) Part5: Historical claim counts Part6: historical earned premium Part7: loss and premium data on loss sensitive contracts

3 Parts of the IEE

Part1: allocation of other underwriting expenses part2: allocation of pretax profit by line on a net basis part3: allocation of pretax profit by line on a direct basis

Advance Premiums

Premiums that are paid prior to the effective date of the policy. These premiums are recorded as a liability. They are not considered income untill due. They should not be included in the written premium or unearned premium reserve.

List some factors which the loss distributions can be based on in risk transfer analysis

Previous company experience Industry benchmarks Pricing information Judgment All of the above

Briefly describe the black box device:

Professionally installed device, which is considered to be one of the most secure and reliable options. It can be used with both programs based solely on mileage (PAYD) and programs that are based on both mileage and driving safety (PHYD).

Profit comissions in relation to risk transfer analysis

Profit commissions need to be excluded from the analysis. This is because the risk transfer analysis only focuses on scenarios that would generate a loss to the reinsurer. Profit Commissions actually can have an indirect impact on risk transfer: the reinsurer may charge a higher premium to account for the fact that profit commissions may need to be paid

Anti rebating laws

Prohibit insurers from returning portions of premiums and producers from returning portions of commissions to persons who purchase insurance

What does the federal Nonadmitted and Reinsurance Reform Act (NRRA) prohibit:

Prohibits a state from denying credit for reinsurance, if the domiciliary state: • Has recognized credit for reinsurance, and • Is an NAIC accredited state It also assigns the domiciliary state the sole responsibility for regulating the reinsurer's financial solvency.

Gramm-Leach-Bliley Act treats underwriting different from sales and marketing

Prohibits national banks from forming subsidiaries to underwrite insurance However 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

What types of properties are covered under Beach and Windstorm plans

Properties along the Atlantic and GULF Coasts vulnerable to windstorm loss

Valuation rules in Schedule A depend on the type of real estate:

Properties occupied by the company: Depreciated Cost - Encumbrances Properties held for production of income: Depreciated Cost - Encumbrances Properties held for sale: min(Depreciated cost - Encumbrances, Fair Value)

Argue for and against the use of credit-based insurance scores in personal lines insurance.

Proponents 1. Scores are predictive of an insured's future claims experience 2. Necessary tool for underwriting and/or rating Critics 1. Example of imposed discrimination against lower income individuals and protected classes of people 2. Studies show use of scores disparately impacts certain classes of people

List the US Insurance Regulatory Mission

Protect the interests of the policyholder and those who rely on the insurance coverage provided to the policyholder first and foremost, while also facilitating the financial stability and reliability of insurance institutions for an effective and efficient marketplace for insurance products.

Purpose of economic regulation

Protect the public interest by efficiently mitigating market failure

After the actuary has derived the unpaid claim estimate, the actuary should consider the following

Reasonableness of the estimate: the actuary can assess this using various indicators or tests Multiple Components: If the estimate consists of multiple components, the actuary needs to consider if the estimate of the various components are reasonably consistent Presentation: the actuary has several options when determining how to present the estimate (point estimate, range, probability distribution, etc). When determining which method to use the actuary should consider the intended purpose

List some parties disproportionately negatively affected in the credit scoring process:

Recent divorcees Recently naturalized citizens Elderly Disabled Those with certain religious convictions Younger individuals who have not established credit histories

Types of events subsequent

Recognized (additional detail on conditions that existed at the accounting date) and non recognized (conditions that didnt exist)

Company B has been in operation for two years and currently operates in several states. It is having difficulty obtaining liability insurance coverage and is interested in partnering with companies with similar operations. Recommend the optimal way to manage the insurance risk and describe the rationale.

Recommendation -It should start or join an RRG with companies having similar operations Rationale: -Company B won't meet seasoning requirements, so likely won't be able to form a captive -RRG provides liability coverage and allows Company B to be licensed in the domiciled states but operate in multiple registered states

Insurance Industry Trade Associations

Provide services to the member insurers, agents and brokers.

Schedule P

Provides detail about loss and LAE reserves

The IEE

Provides detailed information about the expenses of an insurer. Also provides profitability by line of business.

Formula for provision for reinsurance for an Authorized reinsurer (not slow paying)

Provision = 20%x(recoverables over 90 days overdue) amounts in dispute over 90 days overdue are included

Formula for provision for reinsurance for an Authorized slow paying reinsurer

Provision = max[20%x(unsecured total recoverables),20%(recoverables over 90 days overdue)] amounts in dispute are included in both of these categories

Formula for provision for reinsurance for an unauthorized reinsurer

Provision = unsecured total recoverables + 20%x(recoverables over 90 days overdue)+20%x(amounts in dispute) unsecured total recoverables includes disputes and equals (Reinsurance recoverables + commisions owed to primary insurer - Funds held - ceded balances payable - letters of credit-misc balances payable) Rec over 90 days excludes disputes AMOUNTS IN DISPUTE IS TOTAL This provision is capped at the total amount recoverable RECOVERABLES INCLUDES AMOUNTS UNPAID BY PRIMARY INSURER

When the insurer settles a claim via a structured settlement it:

Records the amount paid for the annuity as a paid loss and closes the claim.

Provision for reinsurance from certified insurers due to collateral deficiency

Recoverables - Recoverable x (% collateral provided/% of collateral for full credit)

The SEC reporting requirements are outlined in 2 regulations

Regulation S-X: form and content of financial statements Regulation S-K: Integrated Disclosure rules

How can regulators effectively regulate in a market as big as the US insurance market:

Regulators need to adopt a risk focused approach, where they focus on the greatest risk that insurers are exposed to.

Explain why the allocation of investment income to line of business is important to rate regulators.

Regulators want to see if particular LOB's rates are excessive or inadequate, and this can be hidden when only looking at overall numbers.

Political theory of regulation

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

When is a disclosure for reinsurance recoverables in dispute required

Reinsurance recoverable in dispute shall be identified if: - the amounts in dispute from any entity exceeds 5% of the ceding entitys surplus, - the aggregate from all entities exceeds 10% of the surplus.

Unsecured Reinsurance Recoverables

Reinsurance recoverables would ideally be collateralized in order to minimize credit risk. The insurer needs to disclose information about reinsurers that don't provide collateral if the recoverables from the insurer exceed 3% of surplus. They need to disclose name, paid losses, ceded reserves, ceded unearned premiums

Finite Resinsurance

Reinsurance that does not transfer underwriting or timing risks. This receives deposit accounting instead of reinsurance accounting.

1947 NAIC adopted the Act Relating to Unfair Methods of Competition

Purpose to preempt application of the FTC act to insurance industry Certain activities deemed to be unfair and deceptive

4 categories of asset risk in RBS formula

R0 Subsidiary insurers: defailt risk from investments in these companies R1 Fixed Income: impact of changin impact rates on the valuation and the default risk R2 Equity: change in valuation R3 Credit

2 categories of underwriting risk in RBS formula

R4 Reserve risk: the risk that the reserves will develop adversely, assuming that the current values are adequate R5 Net written premium risk: the risk that the following years business will be unprofitable

RBC Charge for Mortgage Loans (R1)

RBC Charge = 0.05 x book/adjusted carrying value of the loans

RBC Charge for non-invested assets (R3)

RBC Charge = 0.05 x net admitted value

RBC charge for Reinsurance Recoverables ((R3) and (R4) split equally unless the reserve RBC is less than the sum of credit risk RBC for non invested assets and one half of the rbc for reinsurance recoverable in which case the total is allocated to R3)

RBC Charge = 0.1 x reinsurance recoverable (where the recoverables have been reduced by the provision for reinsurance)

RBC Charge for Unaffiliate Common Stocks (R2)

RBC Charge = 0.15 x book/adjusted carrying value of stock

RBC charge for a holding company (R1)

RBC Charge = 0.225 x (Holding Company value - carrying value of the indirectly owned insurance companies)

RBC Charge for bond investments in a parent company or insurance subsidiary or non-insurance subsidiary (R1)

RBC Charge = 0.225 x carrying value of bonds

RBC charge to R0 for investments in alien insurance affiliates

RBC Charge = Book/adjusted carrying value x 0.5

RBC Charge for Miscellaneous Assets (R1)

RBC Charge = Factor x book/adjusted carrying value of assets Where the factor is: Cash, net cash equivalents, other short term investments: 0.003 Admitted collateral loans: 0.05

RBC Charge for Preferred Stock (R2)

RBC Charge = NAIC preferred stock class Factor x book/adjusted carrying value of preferred stock

RBC Charge for Mandatorily Convertible securities (50% (R1) and 50% (R2) The assumption behind this is that half of the securities are debt and half are equity)

RBC Charge = max ( 0 , Charge for converted security - Charge for original security)

RBC Charge for Unaffiliated Bonds and bond size factor

RBC Charge unaffiliated bonds = NAIC bond class Factor x book/adjusted carrying value of bonds In addition to this a bond size factor is applied to reflect the amount of diversification. The diversification is measured based on the number of issuers of bonds in the insurers portfolio. Factor = Weighted Issuers/Issuers - 1 The weights are the following 2.5 for the first 50 issuers 1.3 for the next 50 for issuers between 101 $ 400, its 1 For issuers above 400 its 0.9 This factor is applied to the RBC charge of the eligible bonds. If the portfolio has more than 1300 bonds this factor becomes 0.

Describe how an insureds placement in a residual market program is determined

RF: Insurers decide which risk to keep, and which to cede to the pool. JUA: Insureds apply to regular insurers; insurers transfer the policies to JUA FAIR: Insureds apply to the plan.

Reinsurer Expenses in relation to risk transfer analysis

Reinsurer expenses need to be excluded from the simulation, as they do not constitute a cash flow that takes place between ceding company & reinsurer

Certified reinsurer

Reinsurers that have received certification from the insurers domiciliary state.

Describe the differences between RRG and non-RRG captives.

RRG captives - States can charter RRGs under regulations for traditional insurers or captives - Regulatory requirement for captives generally less restrictive - LRRA provides single-state regulation Non-RRG captives - May provide property coverage, which RRGs cannot - Generally cannot conduct insurance transactions in states other than domiciliary

Reliable and relevant

Reliable: the information about an item is representationally faithful, free of material errors, and free of bias. Relevant: The item can make a difference in the users decisions.

Interest paid for accrued interest on dividends (bonds)

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

Producer Licensing Model Act

Requires states to establish either a system of reciprocal producer licensing or uniform licensing standards

The actuary needs to identify the following with regards to the reserves being opined upon (according to ASOP 36)

Reserve amount(s) Accounting Date Accounting standards applicable to the reserves (eg SAP, GAAP, IFRS)

2 advantages of RRGs during hard markets:

Result in: - Increased availability of commercial liability insurance - Reduced premiums

Identify and briefly describe three topics of regulatory importance the Appointed Actuary must address using RELEVANT COMMENT paragraphs in the Statement of Actuarial Opinion.

Risk of Material Adverse Deviation: -the materiality standard -how this standard was derived -whether there are significant risks that could produce material adverse deviation Reinsurance: -retroactive reinsurance -financial reinsurance -reinsurance collectability Methods & Assumptions: -any signification changes in assumptions or methods

SEC vs. Variable Annuity Life Insurance Co.

Risk underwriting is the distinctive feature of the activities encompassed by the business of insurance ⇒ Therefore, variable annuities not part of business of insurance

Describe how SAP, GAAP, and IFRS differ in their treatment of risk margins for loss reserves

SAP -no explicit risk margin, but undiscounted reserves includes an implicit margin GAAP -no explicit risk margin, but undiscounted reserves includes an implicit margin IFRS - risk margin required

DAC in SAP

SAP does not allow deferring of expenses so DAC doesn't exist. All expenses are expensed as incurred.

The main difference between SAP and GAAP is due to the different users

SAP is primarily used by regulators and therefore focuses on the insurers ability to pay claims. GAAP is used mainly by investors and creditors and therefore focuses on the measurement of earnings emergence

Compare the GAAP & SAP treatment of anticipated prospective reinsurance recoveries:

SAP records the reserves net of anticipated reinsurance recoveries GAAP establishes an asset to recognize the ceded reinsurance recoverables

DTAs SAP v GAAP

SAP: -Under SAP there is a strict admissibility test for all DTAs. -Only a portion of the SAP DTA is admitted, and calculated as the amount of DTA expected to reverse in the forthcoming year, plus the amount of DTA expected to reverse during a forthcoming period (beyond the initial year) limited to a % of surplus, plus the amount of DTA that can be offset against existing DTLs. GAAP: -Under GAAP DTAs are fully recognized. -A valuation allowance is established if, based on the weight of evidence, it is more likely than not that the DTAs will not be realized. -GAAP established a hierarchy of evidence to be considered when evaluating DTAs; this is a subjective determination requiring management to use significant judgment.

For a structured settlement, if the claimant doesn't sign the release, the SAP and GAAP treatment

SAP: the purchase price of the annuity is recorded as a paid loss, the claim is closed (same is if signed) GAAP: the settlement is treated like a reinsurance contract which involves creating a reinsurance recoverable asset

Cash Schedules

Schedule E-1:Contain cash Details Schedule E-2: Contains cash equivalents (maturity under 3 months) Schedule DA: contains short term investments (maturity under a year)

What do the 2 sections of the new part 6 contain? (Sch F)

Section 1: Provision for Reinsurance for certified reinsurers due to collateral defficiency Section 2: Provision for Overdue Reinsurance ceded to certified reinsurers

Schedule DL

Securities lending collateral assets. Added to the annual statement in 2010 following the financial crisis. If collateral is invested, it should be invested in short term, low risk, highly liquid markets.

Briefly describe the dongle device:

Self installed device that will be used for a period of time (often 6 months). This is the most popular option in the US

FTC v. National Casualty Co.

Selling and advertising of insurance policies is part of the business of insurance

Schedule F excludes retroactive reinsurance

So does Schedule P

AAA materiality standards are more consistent among tasks (like pricing or reserving) than among practices (like Workers Comp or General liability).

So like same standard for pricing in WC and GL. and same standard for Reserving in WC and GL. Not same standard in Pricing WC and Reserving WC.

What inconsistency should users be aware of when comparing Part 5 (sch P) data of different companies:

Some companies record claim counts on a per claim basis, whereas others record them on a per claimant basis

Explain why a credit score distributional shift is likely to have a smaller effect on renewal business:

Some states / companies only allow use of scores for renewals if it reduces insured's premium

Under SAP Accounting the goodwill depends on how the business combination is accounted for: Statutory Purchase

Statutory Purchase:combinations that produce parent-subsidiary relationships . -Goodwill equals the difference between the purchase price and the statutory surplus - It is capped at 10% of the acquiring firms capital and surplus from the most recent annual statement -It is amortized to unrealized capital gains and losses over the period in which the acquiring firm benefits economically (up to 10 years)

The definition of Incurred losses varies between statutory and tax accounting

Statutory accounting: IL = Paid losses + Change in full value reserves Tax accounting IL = Paid loss + Change in discounted reserves Stat accounting does not represent the true econ of the bus because res are not disc. This means: -a UW loss may be shown during the period that losses occur -Future periods will have positive investment income

Company RBC % used in R4

Straight average of industry RBC % and industry RBC % adjusted for company experience. industry RBC % is derived by calculating the ratio of net incurred loss and DCC development during the year (from Schedule P part 2) to the net loss & DCC reserves from the prior year -unusual data points are ignored -the 87.5th percentile is used -there is a floor of 5% -factors are capped to limit the change in base rbc to 35% The adjustment for comp exp is based on the company dev factor: (sum of incurred loss & dcc from 9 prior AYs evaluated as of the current year)/(sum of initial valuations of the same AYs) adustment factor = company dev factor/ind avg dev fact

Define structured settlements.

Structured settlements are agreements to make specific, set payments to claimants.

For each of the three most recent PYs the gross UEPR must be no less than the largest of the following three tests:

Test1: managements best estimate of the amounts refundable to the contract holders at the reporting date Test2: Gross premium * (projected future gross losses & expense from the unexpired term/projected total gross losses and expenses) Test3: Projected future gross losses and expenses to be incurred during the unexpired term, minus the present value of future guaranteed gross premiums

Examples of Asbestos and Liability wording (difficult to estimate):

The company currently holds $XYZ million of reserves for losses and loss adjustment expenses for asbestos and environmental claims. Estimation of ultimate liabilities for these claims is unusually difficult due to ABC. Therefore, any estimation of these liabilities is subject to significantly greater than normal variation and uncertainty.

NAIC permits the actuary to conduct the analysis for the SAO on a pooled basis. The actuary may wish to comment on this, using wording such as:

The company is part of an intercompany pooling agreement with other affiliates of [name of group]. Premiums and losses are allocated to the company based on its assigned percentage of the total pool. Analysis of the reserve items identified in Exhibit A has been performed for all pool companies combined. The following is a listing of all companies in the pool, their respective pooling percentages, their state(s) of domicile, and an identification of the lead company.

Total cost of holding capital for an insurer is:

The cost of double taxation (before tax basis) + the cost of the insurer investing in safer investments. This tends to be added into the premium. Since this is a percentage of capital, it needs to be divided by the premium to capital ratio in order to convert it to a percentage of premium.

(SCOPE section of SAO) The data testing requirement

The data testing requirement ensures that the auditor will become aware of the data and/or data elements that the appointed actuary identifies as being significant. COPLFR believes that a data item or attribute would normally be considered to be significant to an analysis of loss reserves if, in the appointed actuary's professional judgement, the correctness of the data item or attribute is likely to have a material effect on the SAO. Examples of material effect might include a change in the type of SAO rendered or the presence/absence of RMAD. To satisfy the requirement, appointed actuaries identify to management and the auditor the data that are deemed significant in the analysis of loss reserves.

Describe hedge accounting treatment

The derivative receives the same accounting treatment as the hedged asset

GAAP goodwill

The difference between the purchase price and the fair value of net assets. Goodwill is regularly evaluated for impairment (as opposed to being ammortized)

SAP does not specify a discount rate for tabular discounts but 3.5% is typically used.

The discount rate for non-tabular discount is capped at the min of investment yield minus 1.5% and yield of US treasury debt that has duration similar to the loss duration

Why are the elderly disparately impacted by the use of credit scoring?

The elderly typically use less credit, which has an adverse impact on the credit score.

Written premium should be recorded on the effective date of the policy

The exception is workers comp which can be recorded on an installment basis to match the billing to the policyholder

Which types of events subsequent result in an adjustment to financial statements?

The financial statements need to be adjusted to reflect the impact of material Type 1 (recognized) events. It is only necessary to disclose the nature and amount of the adjustment if this will keep the financial statements from being misleading.

Discounting of Liabilities for Unpaid Loss & LAE (Notes to the Financial Statements)

The first part of the note discloses whether tabular discounting is used for any liabilities, and if so, the basis & assumptions. In the second part of the note, the insurer has to disclose whether it uses non-tabular discounting, and if so, the basis for the discount. Finally, the note requires that the insurer disclose whether there has been a change since the prior year of any of the key assumptions that were used to calculate the discount.

The following procedure must be followed to account for the purchase of annuities: If the insurer is owner and payee -no reduction in loss reserves - annuity is recorded as an other than invested asset at its present value - income from the annuity is recorded as miscellaneous income

The following procedure must be followed to account for the purchase of annuities: If the claimant is the payee: -loss reserves can be reduced -cost of annuity is recorded as a paid loss

Reaction to the SEUA Decision

The immediate effect of the SEUA decision was that federal legislation now applied to insurance -The Sherman Act (1890) -Clayton Act(1914) ->Price discrimination ->Robinson-Patman Act (an amendment of the clayton act): required price diffs to be justified by reduced operating cost ->Tying - requiring purchace of 1 product to purchase another

If Ratio 11 or 12 is consistently showing adverse development, and/or if Ratio 12 is consistently greater than Ratio 11:

The insurer may be intentionally understating its reserves, and therefore deficiencies are arising as losses are paid.

How do the interrogatories help identify if an insurer is using finite reinsurance:

The insurer needs to answer an interrogatory that asks if it ceded reinsurance that: - Resulted in an underwriting gain/ loss of more than 5% of the prior surplus; or ceded premiums/ loss reserves of more than 5% of surplus - Was accounted for as reinsurance (not deposit) - Had at least one of the following features: Duration of at least 2 years and non-cancelable/ Limited cancellation provision/ Aggregate stop loss coverage/ Either party has the right to commute for a reason other than the downgrade in the credit rating of the other party/ Ability to report or pay losses less frequently than quarterly/ Delayed reimbursements to the ceding company

Adequacy of insurance liabilities

The insurer needs to asses whether its insurance liabilities are adequate at each reporting date, with a liability adequacy test. If there is a deficiency it needs to be reported in current earnings. GAAP accounting does test for premium deficiencies. These are recorded as liabilities.

Premium Deficiency Reserves (Notes to the Financial Statements)

The insurer needs to disclose: The size of the deficiency Whether investment income was considered In addition to this, if the insurer changes its calculation from the prior year to either include or exclude investment income, it would disclose this in another note, "Accounting Changes and Correction of Errors". It would mention: The fact that it has changed the treatment of investment income The impact

Redeemable preferred stocks

The issuer has the option to redeem the stock at a preset price. Perpetual stocks cannot be redeemed.

Par value of a stock

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

*Disclosures regarding loss contingencies* If a contingency/asset impairment is not recorded because only one of the two conditions was met OR there is an exposure to loss higher than the amount accrued. What disclosures need to be made?

The nature of the contingency and an estimate of the possible loss/range of loss. Or a statement that such an estimate cant be made.

High deductible policies (Notes to the financial statements)

The note must disclose: - The reserve credit that the insurer has recognized for the unpaid claims - The amount billed but not yet collected for the paid claims

Intercompany Pooling (Notes to the Financial Statements)

The note would need to disclose if a pool exists. It also describes the cessions & assumptions. It should mention: - Members of the pool - Lead company - Pooling percentage of each participant

The AOS for pooled companies should include a statement that the company is a xx% pool participant

The numbers discussed in the AOS and listed in its exhibits should be based on the companys share

E = f(Y,T,L) where E = pre-tax equivalent yield Y = pre-tax stated yield T = Tax rate L = Length of the deferral period

The partial derivative of E with respect to each of the variables is positive.

A common metric used to measure investment performance for an insurance company is the ratio of income to average invested assets

The problem is that it does not reflect risk

Defines "price optimization":

The process of maximizing or minimizing a business metric using sophisticated tools and models to quantify business considerations.

Covariance adjustment of the RBC formula

The purpose of this is to reflect diversification among the risks. RBC assumes the risks are independent. RBC = R0+(R1^2+R2^2+R3^2+R4^2+R5^2)^0.5 The parentheses part is the adjustment. The risk of subsidiaries is assumed to be directly correlated with the aggregate risks of the insurer.

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

The regulators may perform more frequent exams of insurers who are subject to a higher level of financial risk. These more frequent exams may focus only on a specific risk.

Required Terms for reinsurance agreements

The reinsurance agreement must meet the following criteria: -The reins agreement must contain an insolvency clause -recoveries due to the ceding company must be available without delay in a manner that will allow orderly payment of policy obligations by the ceding -the agreement should provide no guarantee of profit for either party -the agreement must provide for reporting of premiums and losses at least quarterly, unless there is no activity. -the agreement must contain a reinsurance intermediary clause that mentions that the credit risk for the intermediary is the responsibility of the reinsurer -if the reins 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 fin statement penalty

Formula for the rightmost column of Schedule P Part 3

The right most column is derived from current year's Part 1. It equals the Part 3 2nd right most column, plus the following from Part 1: D&A loss - ceded loss + D&A DCC - ceded DCC

Join & Several Liabilities

These are arrangements where the total obligation is fixed at the reporting dates. These need to be reported as the sum of: the amount that the insurer agreed to pay based on its agreements with the co-obligors, and any additional amount that the insurer expects to pay on behalf of its co-obligors.

tabular discounts for discounting liabilities for unpaid loss and lae

These are based on an interest rate and mortality assumptions from life tables specified by the state regulator.

Users should be concerned if an insurer has significant amounts of receivables from Parent, Subsidiary & Affiliates

These are not as liquid as other assets

RBC Charge for RSATs

These are synthetic assets made from derivatives RBC Charge = Factor of the equivalent investment x Annual statement value. This charge is reduced for any of the charge that has already been applied to cash instruments (bonds) used in the RSAT

IRIS Tests

These are used by regulators to identify insurers that are in need of regulatory attention.

Premium deficiency reserve

These exist when the anticipated losses, lae, comm and other ac exceed the uepr. The PDR is recognized by recording a liability for the deficiency with a corresponding reduction to income.

Describe why reinsurer expenses need to be excluded from the risk transfer analysis.

They do not constitute a cash flow that takes place between the ceding company and reinsurer

If a company is ceding over 75% of premium to another company, it may be acting as fronting carrier for another company

They do this because the reinsurer is not licensed to do business in a particular state.

How do state legislatures influence insurance

They often directly control DOI budgets and pass insurance laws that insurance commissioners must enforce

Written Premium RBC Charge (R5)

This accounts for the risk that future business may be unprofitable. Base RBC = Current yr NWP x (Company RBC loss ratio x adjustment for investment income + Underwriting expense ratio -1) Premium concentration factor = .3 x (NWP in largest line) / (NWP for all lines) + .7 loss sensitive contracts adjustment = similar to reserve adjustment but is based on the portion of written premium in loss sensitive contracts in each line. Retroactively rated counts as loss sensitive

Allocation to lines of business direct

This allocates profit to lines of business excluding investment gain

Earned but unbilled premium

This arises from policies which have their exposures subject to audit. EBUB is the amount of the adjustments to premium due to changes in the level of exposure. ~prior to the audit companies should estimate the EBUB, premium is modified by the level of the estimate ~Once the audit is completed, EBUB shall be adjusted to reflect the actual exposures. This adjustment is recognized as revenue immediately

Dodd-Frank incorporates the Non-Admitted Reinsurance and Reform Act of 2010 (NARRA) bill.

This bill was designed to increase market choice, by making it easier for large commercial purchasers to obtain insurance from non-admitted companies.

RBC Formula

This calculates the minimum level of capital that the insurer should hold based on the risks to which it is exposed. The output feeds the RBC Ratio, the ratio of the actual to the required capital.

In P-GAAP accounting there are no deferred acquisition costs. Instead an asset based on the value of the business in force is established

This can be calculated by determining the fair value of the liabilities expected to be incurred in connection with the unearned premium reserves, and subtracting this from the unearned premium. The steps to derive the fair value of the liabilities are the same as those used to calculate the fair value of reserves except there are 2 additional steps: -The expected unbiased loss ratio is used to derive the expected liabiliites that are associated with the unearned premium - The cash flows in the 1st year should include a load for policy maintenance costs

Retroactive reinsurance

This covers liabilities that occurred prior to the effective date of the policy The following accounting treatment is required: The ceded reserves are recorded as a negative write in item in the balance sheet, Any difference between ceded reserves and premium paid is recorded as other income in the income statement and special surplus in the balance sheet.

Summary of Significant Account Practices (Notes to the Financial Statements)

This describes: - The source of the accounting rules used to construct the Annual Statement (typically the NAIC Accounting Practices & Procedures Manual) - Any exceptions that were made to the above rules, and the basis of the exceptions. The exceptions need to be either prescribed (required by state law) or permitted (requires approval by state). - Additional detail on the insurer's significant accounting policies

Finance and Service Charges not included in premiums (An element of other income)

This included the service charges that the insurer adds to the premium that is paid in installments

Dividends to policyholders (An element of other income)

This includes dividends that have been paid as well as dividends that have been declared but not yet paid

Events Subsequent

This includes events that occur between the accountnig date of the statement and the date at which the statement is issued.

Aggregate write ins for miscellaneous income (An element of other income)

This includes: Gain on sale of equipment Retroactive reinsurance Gain on Foreign exchange Corporate Expenses Fines and penalties of regulatory authorities

Disclosures for the transfer of P&C run-off agreements

This involves the transfer to a third party of a risk from a line or market segment that is no longer actively marketed by the insurer. The consideration paid is recorded as a paid loss. If the consideration paid is less than the reserves transferred the difference is treated as a decrease in losses incurred

Expected Reinsurer Deficit (ERD)

This is a risk measuring method. ERD = Probability(NPV UW loss to reinsurer) x Avg Severity(UW Loss) Risk transfer can be assumed to exist if this is greater than 1%

Actuarial Opinion Summary

This is a supplement to the SAO. It needs to be signed by the same Appointed Actuary. This includes: -The actuarys range of reasonables for L&LAE reserves net and gross of reinsurance -The actuarys point estimate for L&LAE Reserves net and gross of reinsurance -The company recorded L&LAE reserve, n and g of re -The diff between carried res and point estimate -If there is adverse development in excess of 5% of surplus in at least 3 of the 5 past years, a description of the reserve elements and/or management decisions that were major contributions to this adverse development.

Commutation

This is a transaction which results in the settlement and discharge of all (or a portion) of future obligations between a reinsurer and ceding company. In this case, the ceding company elimates the reinsurance recoverable, and records the cash received as a negative paid loss. Any gain/loss is treated as UW income

The analyst should be very concerned if the insurer is increasing the cash flow in order to pay current claims

This is a very short term solution that increases the risk of insolvency

common stocks are valued at initial carrying value when purchased (after purchase they are valued at fair value)

This is actual cot plus commissions and taxes

With workers comp claims in which the final exposures can change after audit, if inital exposure estimates before estimate are off this could cause distortions in Loss ratios shown in Schedule P part 1

This is because EP in Part 1 is frozen, and therefore audit premium collected after year end isn't taken into account. The loss & LAE ratios will be overstated if additional audit premium is gathered after the statement is finalized. To adjust for this distortionUse Part 6, Exposure Year Premium, as your base premium amount to calculate loss & loss expense ratios by year. Compare accident year losses & LAE to Exposure Year Premiums.

The threshold for commenting on adverse development by the actuary in the AOS is lower than the threshold used in IRIS 11.

This is because this part of the AOS is designed to detect insurers that consistently underestimate their reserves

Reserve RBC Charge (R4)

This is determined by applying a factor (company RBC percent) to the net loss and lae reserves before non-tabular discount. base RBC = {[(Company RBC % + 1) x Adjustment for investment income] - 1} x (net loss and LAE reserve + non tab discounts) Loss Sensitive Contract adjustment = lsd factor x base RBC Retroactively rated plans count as loss sensitive lsd is .3 for direct bus. .15 for assumed Loss concentration adjustment = .3 (net loss and lae reserves in largest line) / net loss and lae reserves for all line) + .7 the LCF includes non tab discounts on both sides and only counts for whole company's charge final =( base RBC - loss sens cont adj) x 1000 x loss conc adj

The total amount of capital which is subject to the cost of holding capital

This is equal to the sum of surplus, equity in the unearned premium reserves, equity in the undiscounted reserves. Deferred Tax Asset should be subtracted from this amount.

Gross paid in & Contributed Surplus

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

Cost of the insurer investing in safe investments

This is the difference between what the insurer could earn by investing in higher yielding equity compared to what they are earning by investing in safer securities.

Describe why the smartphone option has not taken over the market:

This may be due to limitations associated with the quality of data and reliability of measurement data that smartphones can provide: the accelerometer data is not calibrated, and the cellular gyroscopes need to be continually adjusted based on the phone's changing position.

If the domiciliary state regulator is considering approval of an insurers request for an accounting practice that deviates from the NAIC Accounting Practice and Procedures Manual and state prescribed accounting practices, the regulator must provide notice at least 5 days in advance of the approval

This notice must disclose the folowwing to all other states in which the insurer is licensed: -Nature and clear description of the permitted accounting practice request -Quant impact of the permitted accounting practice -The effect of the request on a legal entity bases, and on all parent and affiliated US insurers if applicable -Any potential effects to each financial statement line item affected by the request

Dividends received deduction adjustment for computing taxable income

This partially exempts the dividends from taxes in order to reduce the double taxation -If the taxpayer owns less that 20% of the firm: 70% is exempt from taxes - If the taxpayer owns between 20 & 80%, 80% of dividends are exempt -If the taxpayer owns more than 80%, all of the dividends are exempt the proration rule will add 15% of the tax-exempt dividends back to taxable income.

Government accounting standards board (GASB)

This provides accounting rules for the public sector

Note of REinsurance Assumed & Ceded

This provides information about the ceding commissions related to the ceded unearned premium reserve. This note can help identify situations where the insurer is engaging in reinsurance contracts to manipulate its surplus. It also helps derive the impact to surplus if the policies are cancelled

Solvency II Pillar 2

This provides supervisors with means of identifying firms with a higher risk profile and the power to intervene. It requires that insurers have implemented a governance structure to address the following functional areas: Internal audit Actuarial Risk Management Compliance

RBC Model Act for Insurers

This provides the state regulator the authority to take action if the RBC ratio falls below a threshold level

Calculate Policyholder Surplus as it would appear on the Liabilities, Surplus, and Other Funds page of the Annual Statement.

This question would use the balance sheet approach to PHS which means you ignore direct charges to surplus (Eg dividends to stockholders). Just A-L.

Gross change in PHS that is greater than 50% may warrant further investigation. A number of insolvent insurers expect large increases in PHS before insolvency.

This ratio should also stay above -10% to not be in unusual range

By when must the actuarial report be filed

This report must be produced by 5/1 of the year following the year end of the year for which the opinion was rendered. It needs to be maintained at the insurer, and be available to be furnished to the regulators for a period of seven years. The report contains significant proprietary information, and is therefore not available for public inspection.

Prior Years Row in Part *4* of schedule P formula

This represents the bulk & IBNR reserves for all accident years prior to the ten most recent. Direct plus assumed bulk and IBNR loss - ceded bulk and IBNR loss + direct and assumed bulk and IBNR DCC - ceded bulk and IBNR DCC + tabular discount = Net bulk and IBNR per Schedule P, Part 4

With Finite Reinsurance contracts, a reinsurance attestation supplement needs to be produced.

This requires the CEO and CFO to confirm that -There are no seperate written or oral agreements between the two parties -There is documentation for every reinsurance contract where risk transfer is not self evident that describes the economic purpose of the transaction and discloses that documentation proving risk transfer is available for review -The reporting entity complies with all requirements of SSAP62 -The appropriate control a are implemented to monitor the use of reinsurance

Unassigned funds in Equity statement

This results from the contribution of retained earnings to surplus

The Alternate Minimum Taxable Income

This sets a lower bound on taxable income: AMTI=RTI+.75 x Income that escapes taxation The Alternate minimum income tax = .2 x AMTI If the AMIT exceeds the RIT the difference between the two is added to the current regular tax liab. So effectively the insurer will pay the AMIT insted of the RIT

Significance of items listed in Exhibit B section of the Relevant Comments in SAO

This should include: -anticipated net salvage and subrogation -non tabular discounting -tabular discounting -net reserves for the company's share of pools -claims made extended loss and LAE reserves that are reported as UEPR and as loss reserves

Explain how the MAIF works (Maryland Auto fund)

To be insured with the fund, motorist must first provide: -Evidence of cancellation from one insurer -Evidence that application has been rejected by two other private insurers -All services, including claims, are handled by personnel of MAIF

What is the main purpose for Schedule F?

To derive the provision for reinsurance, which is a minimum reserve for the uncollectable reinsurance. This provision is booked as a liability.

2 reasons that the insurer needs to hold surplus in addition to reserves:

To ensure that: 1. The resources can cover the policyholder obligations in most future economic scenarios 2. There are sufficient resources for the regulator to be able to suggest or take corrective action in the case that an adverse trend is detected

RBC Ratio

Total Adjusted Capital / ACL Where the ACL = RBC after covariance x .5 The ACL is essentially the point at which the insurance commissioner is authorized to take control over the insurer

Total adjusted capital

Total adjusted capital = Surplus - Non-tabular discount (from schedule P, part 1) - tabular discount on medical reserves

Total investable assets

Total investable assets=Mean net loss and LAE reserves + Mean net unearned premium reserves + mean ceded reinsurance premiums payable + Mean policyholders surplus - mean agents balances

Formula for total recoverables (if it isn't provided in a provision for reinsurance problem)

Total recoverables = unearned premium reserve + un-recovered paid loss and LAE + unpaid loss and LAE

Describe the licensing differences between traditional insurers and RRGs

Traditional Insurers and non-RRG Captives -Subject to licensing requirements and oversight of each nondomiciliary state in which they operate RRGs - Required only to register with regulator of state in which they intend to sell insurance - Still expected to comply with other laws (i.e., claim settlement practices, unfair trade) and pay applicable premium and other taxes

Amounts recoverable from reinsurers

The balances due from reinsurers for the losses that have been paid by the insurer. Doesn't include amounts due on unpaid losses.

Equity in the unearned premium reserves

UEPR x acquisition cost %

DTA from UEPR

UEPR x acquisition cost % x Corporate tax %

Offsetting Assets and Liabilities is prohibited in both GAAP and IFRS

You cant offset insurance liabilities against related insurance assets Offsetting income/expense from a reinsurance contract against expense/income from a related insurance contract

Less complicated way of doing company RBC% used in R4

[Industry Loss and LAE RBC% x (Comp avg dev/Industry Avg dev) + Industry Avg Loss and LAE RBC%]/2

ComFrame

a common framework for the supervision of internationally active insurance groups. Currently in development

If the insurer participates in an intercompany pooling arrangement, the actuary needs to include (in the SAO) for each company in the pool:

a description of the pool identification of the lead company listing of all companies in the pool/ state of domicile/ pooling percentages

Annual Statement (the "Blank")

a publicly available document that reports the financial results to the state regulators in the IS. It is developed an maintained by the NAIC and is adopted by all states.

General interrogatories

a section of the annual statement that contains questions that the insurer must respond to. The purpose is to provide additional clarity to users of the statement and identify areas that need further regulatory review.

Retrocession

a transaction where the reinsurer cedes all or part of the business that it has assumed

After the SEUA decision, federal legislation applied to insurance. The NAIC opposed federal regulation of insurance and petitioned the Supreme Court to rehear the SEUA case. This was denied, so the NAIC began to determine the effects and make recommendations. a) State the recommendations of the NAIC for the insurance industry. b)State the principal momentum behind their recommendations.

a) Congress must be pressured to enact legislation under Commerce Clause which allows states to continue to regulate insurance • Sherman Act and Clayton Act must be amended to allow cooperative arrangements to establish adequate rates and coverages • FTC Act and Robinson-Patman Act must be amended to exclude insurance b) State regulators and insurance industry believed some forms of cooperation were necessary, especially with respect to establishing statistical base for adequate rates

Bond types included in the bond size factor adjustment

Unaffiliated bonds in classes 2 6 Non US government bonds in class 1

Revenue Offset adjustment for taxable income

Under Stat Acct: EP = WP - Change in UEPR Tax accounting modifies this equaiton by removing the acquisition costs from the UEPR. It makes the assumption that policy acquisition costs are 20% of the premium. Under Tax Acct: EP = WP - (.8)xChange in UEPR Since Stat accounting doesnt make this adjustment: it double counts the deduction for pre-paid acquisition costs: -Once as an expense -The second time in the UEPR

Equity in the undiscounted reserves

Undiscounted reserves x discounted %

Define "Unfairly discriminatory rates":

Unfair discrimination exists if, after allowing for practical limitations, price differentials fail to reflect equitably the differences in expected losses and expenses.

List 1 difference between a RRG and a Group Captive:

Unlike RRGs, Group Captives do not have to insure similar risks

vintaged

When a certain discount rate for an *Accident year* will be used in future *calendar years*

AAA: The materiality standard should be disclosed to the user in most cases. (although it is not mandatory in some cases)

When making disclosures take into account: -sophistication of the user -importance of the concept to the user

When is mandatory corrective action used? What actions are taken by the regulator as part of the process?

When: If fact finding reveals policyholders or public may be adversely affected by the insurer's financial condition What: order an insurer domiciled in the state to take specified actions to improve its financial condition, such as limiting new and renewal business, reduce expenses, and increase capital and surplus.

When is Administrative Supervision used? What actions are taken by the regulator as part of the process?

When: If mandatory corrective action fails What: , regulators can seek court authority to take formal control of the insurer's management. Insurer is required to obtain the commissioner's permission before taking actions

When is recievership/rehab/liquidation used? What actions are taken by the regulator as part of the process?

When: When commissioner judges that an insurer's financial difficulties are so severe that more serious action is warranted What: Commissioner, acting for a state court, become the receiver and must formulate a plan to distribute the insurer's assets and make sure that the insurer's obligations to customers are fulfilled to the extent possible. The two possible outcomes are rehabilitation or liquidation.

With unpaid claim estimates the actuary should disclose the following (if consistent with the intended purpose or use according to ASOP 20)

a. the assumptions as to selected discount rates and the basis for those assumptions, including the effect of income taxes b. to the extent practical, the difference between the undiscounted unpaid claim estimate and the discounted unpaid claim estimate c. whether the discounted unpaid claim estimate includes a risk margin, and if so, the basis for the risk margin (e.g. stated percentile of distribution or stated % load above expected); d. significant limitations, if any, that constrained the actuary's discounted unpaid claim estimate analysis such that, in the actuary's professional judgment, there is a significant risk that a more in-depth analysis would produce a materially different result; e. the following dates: (1) the accounting date of the discounted unpaid claim estimate, which is the date used to separate paid versus unpaid claim amounts; (2) the valuation date of the discounted unpaid claim estimate, which is the date through which transactions are included in the data used in the discounted unpaid claim estimate analysis; and (3) the review date of the discounted unpaid claim estimate, which is the cutoff date for including information known to the actuary in the discounted unpaid claim estimate analysis, if appropriate; f. specific significant risks and uncertainties, if any, with regard to actual timing of future payments; g. significant events, assumptions, or reliances, if any, underlying the discounted unpaid claim estimate that, in the actuary's professional judgment, have a material effect on the discounted unpaid claim estimate, including assumptions regarding the accounting basis or application of an accounting rule; h. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law i. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and j. the disclosure in ASOP No. 41, section 4.4, if, in the actuary's professional judgment, the actuary otherwise deviated materially from the guidance of this ASOP Additional Disclosures: a. When providing a range the basis for the range b. When the estimate is an update of a previous estimate, the actuary should disclose changes in assumptions, procedures, methods or models that the actuary believes to have a material impact on the discounted unpaid claim estimate and the reasons for such changes to the extent known by the actuary. This standard does not require the actuary to measure or quantify the impact of such changes.

Schedule Y

activities of insurer members of a holding company group

NAIC

an organization of regulators that coordinates governance. The NAIC itself is not a regulator so its laws are not in fact laws. States have the option of whether or not to adopt them.

Interrogatory Question 4

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

Interrogatory Question 6

asks if the insurer reports claim counts per claim or per claimant.

Interrogatory Question 7

asks if there are any changes or anything special that the user needs to be aware of if she relies on the Schedule P data to assess the adequacy of recorded loss & LAE reserves. If there are any factors, they must be disclosed. This is the most important Interrogatory.

Compares price optimization and the traditional ratemaking approach:

ating Plan Development: Both: base rate (loss cost) x adjustment factor Adjustment Factor: Both: Age, gender, territory, make & model year, etc Adjustment to rates based on market, regulatory and other considerations are based on... Trad: Qualitative Assessment PriceOp:Qual and quant assessments informed by analysis of risk related and non risk related data Basis for adjustment to rates is... Trad: Insurer Judgement PriceOp: Automatic, systematic analysis (modeling)

excessive prem growth charge to R4

charge = avg growth rate factor x .45 x net loss and lae reserves avg growth rate factor = Min (Max [Avg growth over 3yrs, 0.1], 0.4) - 0.1

P&C occurence contract

covers losses which occur during the policy period regardless of when the claim is reported

Solvency II

has an assessment process to determine if the regulatory regime of a given country is equivalent to its risk based approach to solvency regulation. If a country's regime is considered to be equivalent, it will be treated as if it were an EU member state. The US is not considered to be equivalent, one major reason for this is that it does not have a countrywide regulator for insurance.

Accounting for Structured Settlements

if the insurer is owner & payee: -no reduction to loss reserves -annuity is recorded as an "other than invested asset" at its present value -income from the annuity is recorded as miscellaneous income if the claimant is the payee: -loss reserves can be reduced -cost of the annuity is recorded as a paid loss

Tail coverage can be for a fixed or indefinite period

indefinite - the premium should be fully earned at inception of the tail contract and the liabilities for unreported claims should be recognized immediately. fixed - the premium should be earned over the term and therefore a uepr should be created for the unexpired portion. Losses should be recorded when reported.

Tabular reserves

indemnity reserves that are calculated using discounts determined with reference to actuarial tables that incorporate interest and contingencies. This definition should not include medical loss reserves or lae reserves

asbestos and environmental reserves

it is necessary to disclose whether there is potential asbestos/environmental exposure: The reserves have developed adversely over the last few decades There is a lot of uncertainty associated with the reserves

High IRIS ratio 4 may indicate problems

it may indicate that management believes that surplus is inadequate. Surplus aid may improve the results of the other ratios to such a degree that it conceals important areas of concern If surplus aid ratio is unusual you should remove surplus aid from surplus before calculating the NWP/PHS ratio

10% of EBUB in excess of the collateral held is nonadmitted. If any EBUB over this level is not anticipated to be collected, it should also be written off.

jsyk

10% of the EBUB in excess of the collateral held is nonadmitted. If any EBUB over this level is not anticipated to be collected, it should also be written off.

jsyk

A Monte Carlo simulation can be used for risk transfer analysis

jsyk

A large change in Net Written Premium may indicate a lack of stability in the insurer's operations

jsyk

Amounts withheld by the ceding company need to be recorded as funds held by the entity under reinsurance treaties

jsyk

An Actuarial Report includes (among other things) 1. Appointed Actuarys range of reserve estimates 2. Company's held reserves 3. Appointed Actuary's role in setting reserves 4. Exhibit Reconciling data with Schedule P

jsyk

An insurer should not have huge holdings of real estate, particularly if it writes mainly short-tailed lines

jsyk

Assumptions estimating reinsurance recoverables should be the same as those used in estimating the related liabilities

jsyk

Both GAAP and SAP Accounting both require insurance risk to demonstrate risk transfer. Contracts that qualify according to GAAP are assumed to qualify according to SAP and vice versa

jsyk

By investing in insurance companies investors incur double taxation

jsyk

Ceded premiums payable, net of associate ceding commisions, need to be recorded as a liability

jsyk

Commision and brokerage expnses should be allocated to "Acquisition, Field Supervision and collection expenses" in the IEE

jsyk

Commissions payable on ceded business are treated as an offset to Agents balances. Commissions recievable on ceded business are treated as an offset to Ceded Reinsurance Balances payable.

jsyk

Compared to personal investors, insurers have a higher relative tax on stocks and a lower relative tax on bonds

jsyk

DCC getes allocated to claims and AAO cant really be allocated, kind of like ALAE and ULAE

jsyk

Economic income = PV(Future Premiums) - PV(future losses)

jsyk

For IRIS ratios: If 11 and 12 increase while ratio 13 decreases, this indicates that reserve strengthening is probably taking place

jsyk

For a question in which you are given data for two years and investment gain ratio for the most recent year. If you are supposed to calculate the investment gain attributable to insurance transactions, take the avg of all values between the two years and multiply it by the one investment gain ratio that you are given. If only given one prepaid expense ratio, use it on the avg of UEPR.

jsyk

For a structured settlement, if the claimant signs the release, the SAP and GAAP treatment is the same

jsyk

Funds held or deposited with reinsured companies are admitted assets as long as: -they do not exceed the liabilities that they secure -the reinsured is solvent

jsyk

GAAP does not have a non admitted assets category. This is a SAP concept

jsyk

IFRS and GAAP dont allow insurers to maintain reserves for a future unknown catastrophe

jsyk

If Ceding commissions>Anticipated Acquisition Costs, the ceding company needs to establish a liability to equal the difference between the two. This liability is amortized prorata over the effective period of the reinsurance agreement.

jsyk

If GWP/PHS is in the unusual range but NWP/PHS is not, it may indicate that the insurer is relying too heavily on reinsurance

jsyk

If the US switches to IFRS it will affect SAP since SAP is currently based on GAAP accounting.

jsyk

If the insurer is a member of an insurance group, a separate SAO is required for each company in the group

jsyk

If the reinsurance agreement involves multiple cedents, an allocation agreement is required

jsyk

In IFRS 4, policies that do not transfer significant insurance risk should be accounted for as financial instruments instead of as insurance contracts.

jsyk

In Schedule P Part 1: Case and IBNR reserves are net of tabular discounts but gros of non tab discounts (untill col 32 & 33) and Net( in col 35 & 36)

jsyk

In Schedule P Premiums are by Calendar Year and Accidents are by accident year for occurence policies but report yeaar for claims made policies, tail policies by policy year and Fidelity and Surety policies by discovery year.

jsyk

In Shcedule P: paid losses are net of Salv and sub while unpaid losses are net of anticipated S&S (in the "bulk and IBNR")

jsyk

In a No file state, Insurance regulators still have legal authority to disapprove and require withdrawal of a rate or coverage being used.

jsyk

In a move to IFRS accounting, private companies will most likely at least have an understanding of the rules, if not will follow them to remain competitive in raising capital in foreign markets and conducting transactions with international companies.

jsyk

In a reinsurance contract if there are features like low loss ratio caps and swing ratio premiums, then risk transfer is not reasonably self evident

jsyk

In the SAO the actuary is only opining on the aggregate reserves

jsyk

Interest due and accrued over 90 days overdue is non admitted and 10% of unsecured accrued retrospective premium is non admitted

jsyk

Large growth in written premium during a soft market may indicate that the insurance company is making concessions on rates or commisions

jsyk

Liabilities need to be recorded when incurred

jsyk

Long duration contracts in the Relevant Comments section of the SAO include the UEPR

jsyk

Loss reserves for policies with high deductibles are held net of the portion within the deductible.

jsyk

Negative change in adjusted PHS with positive change in PHS may indication that capital may have been injected into the insurer

jsyk

One of the disadvantages of RBC is that most of the factors that enter the calculation are based on industry wide experience instead of the company's own

jsyk

Portfolio reinsurance (transfer of entire segments of business) is also treated as retroactive reinsurance

jsyk

Provision for reinsurance and premium deficiency reserves are direct charges to surplus`

jsyk

Rapid premium growth precedes nearly all major failures

jsyk

Reinsurance premiums receivable are combined with the receivables from the direct business, and the total is reported as agents balances

jsyk

Relevant comments is considered to be the most valuable section of the SAO

jsyk

Reserves for high deductible policies should be established throughout the whole period, as opposed to the point at which the deductible levels are breached.

jsyk

Run-off Agreements are reinsurance or retrocession agreements intended to transfer almost all the risk of a line of business that is no longer actively marketed. The transferring insurer is still primarily liable (as opposed to a novation)

jsyk

SAP rarely allows loss reserve discounting except for certain workers comp and long term disability claims that have fixed and reasonably determinable payment patterns

jsyk

SSAP62 states that reinsurance contracts that have prescribed payment patterns do not qualify as having risk transfer.

jsyk

The AOS is confidential and not filed with the NAIC

jsyk

The Actuarial Report and underlying workpapers supporting the SAO need to be maintained at the company for 7 years

jsyk

The NAIC Financial Analysis Handbook suggests that if 10% of the net loss and LAE reserves exceed the difference between the total adjusted capital and the company action level capital, there is a presumption of a risk of material adverse deviation.

jsyk

The RBC charge for investments in common stock in excess of the amount allocated to R0 is allocated to R2

jsyk

The Scope paragraph of the SAO mentions the reserve elements upon which the actuary is opining

jsyk

The permanent excess of book over the market value of real estate is a non admitted asset

jsyk

The steps to calculate the RBC charge are virtually same for the R1 and R2 charge. The only difference is whether its the carrying value of bonds or stocks

jsyk

The use of non-tabular discounts is a sign that the regulator may have solvency concerns about the insurer

jsyk

The usual range for liabilities to liquid assets is below 1

jsyk

The usual range of investment yield is between .03 and .065

jsyk

To estimate the duration of cash flows, Durations of cf = Duration loss - Duration premium

jsyk

Total investment gain - the investment gain on funds attributable to insurance transactions=investment attributable to capital and surplus

jsyk

Workers comp in some states is an example of the gov acting as a competitor to private insurers

jsyk

an insurer with excessive growth is defined as one with 3 yr avg growth rate in gwp above 10%

jsyk

Schedule E

lists information about the counterparties for all derivatives that are open at year end

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

low NWP:PHS ratio adequate reserving profitable operations stable product mix

non-tabular discounts for discounting liabilities for unpaid loss and lae

much less common than tabular and mainly only used with permission from the state regulator. It is primarily used in workers comp and medical professional liability

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

name & address federal employer identication number whether the party holds an exclusive contract type of business written type of authority granted total premium written

Lost some of the most significant effects on P&C "actuaries":

• Dual regulation: there could be regulations impacting accounting and solvency standards that could result in an inconsistent & non-level playing field • Dual regulation: due to the additional federal regulatory body, regulations would be overly restrictive & expensive to follow • Increase in capital requirements • Standardization requirements drive commoditization • significant increase in compliance costs for insurers that own banks

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

• Financial strength • Timely claims payment history • Requirement that insurer is domiciled & licensed in a "qualified jurisdiction"

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

• Inefficient • Single regulator would reduce cost, increase uniformity & provide a national voice

List some qualitative disclosures contained in the reports provided to regulators (U.S. Insurance Solvency Framework Part 1):

• Interrogatories • Notes to the Financial Statements • Management's discussion & analysis • SAO • Annual Audit Opinion (from the CPA)

Financial Sector Assessment Program

periodic peer reviews of financial services regulatory regimes. As part of this, insurers need to be benchmarked against Insurance Core Principles developed by the International Association of Insurance Supervisors.

IASB defines significant insurance risk as

significant iff an insured event could cause an insurer to pay significant additional benefits in any scenario, excluding scenarios that lack commercial substance This standard is actually weaker than GAAP, as GAAP requires that it is reasonably possible that the *reinsurer* may realize a significant loss

Advantages of the black box device:

suited for rst notice of loss (FNOL) because it is fixed in the car chassis, and therefore can provide early notice of theft, as well as valuable information for forensic crash reconstruction in the event of an accident.

If liabilities are discounted the following additional disclosures need to be made

tables used rates used the discounted liability from the financial statement the amount of tabular discount by line of business and reserve category (i.e. case and IBNR)

The relevant comments section of the SAO should address the Risk of Material Adverse Deviation

the actuary must disclose: -the materiality standard -how the standard was derived -whether she believes if there are significant risks and uncertainties that could produce material adverse deviation -Major factors, combination of factors, or particular conditions underlying the risk and uncertainties that the actuary considers relevant

How are premium/ liabilities recorded under Tail Coverage contracts with a fixed period:

the premium should be earned over the term losses should be recorded when reported.

How are premium/ liabilities recorded under Tail Coverage contracts with an indefinite period:

the premium should be fully earned at inception the liabilities for unreported claims should be recognized at inception

daily pro rata methods of recognizing earned premium

the unexpired portion of the premium is determined by comparing the number of days that have elapsed to the number that are remaining

monthly pro rata methods of recognizing earned premium

these methods assume that the same amount of business is written on any day of the month, and therefore the mean will be written in the middle of the month. Therefore at the end of the year 1/24 of the Jan premium is unearned and 3/24 of the Feb premium is unearned and so on

IRIS ratios 1: GWP:PHS

this equals GWP/PHS where GWP is the sum of : Direct written premium, reinsurance assumed from affiliates and non-affiliates. This ratio measures the adequacy of surplus on a direct and assumed basis, excluding the effects of ceded premium. If this is greater than 9 it is unusual

IRIS Ratios 2: NWP:PHS

this equals NWP/PHS and this measures adequacy of surplus on a net basis If this is greater than 3 it is unusual

Reinsurance section of the Relevant comments in SAO

this includes comments on: -retroactive reinsurance -financial reinsurance -reinsurance collectability

Loss reserve discount factor

this is applied to the undiscounted reserves to derive the discounted reserves. Loss reserve discount factor = (Discounted unpaid losses as % of incurred losses)/(Undiscounted unpaid losses as % of incurred losses)

Under SAP the insurer has the option about wether to record reserves in Schedule P gross or net of anticipated salvage and subro

under GAAP the insurer must subtract the anticipated balance of salvage and sub

Coverages in Beach and windstorm plans

• AL, LA, NC offer Fire, lightning, windstorm or hail, explosion, riot, aircraft, vehicles, smoke, and vandalism or malicious mischief • All other states offer only windstorm and hail (NC gives this option, too) • Limits and deductibles vary • Plans safeguard against short-term adverse selection by rejecting applications when potential storm damage is imminent • Property subject to inspections

Standards of Financial Regulation - State DOI's must meet three criteria to be accredited

• Laws and 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

The regulatory system needs to have requisite authority to achieve its mission. List the components of "Requisite authority":

• Legal basis • Independence & accountability • Adequate powers • Financial resources • Human resources • Legal protection • Confidentiality

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

• Licensing requirements • Change in control • Dividends • Transactions with affiliates • Reinsurance

Cancellation of beach and windstorm plan coverage is commonly subject to 30-day statutory notice with three exceptions

• Nonpayment of premium • Material misrepresentation • Evidence of arson at direction of or by the owner/occupant

National Conference of Insurance Legislators (NCOIL)

• Organization of state legislators whose prime 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' prerogative in making state insurance policy ⇒ Speaking about Congressional initiatives that might affect state insurance regulation

Advantages of Personal Lines Insurer over RRGs

• Private insurer can offer property coverage in addition to liability; RRG can only offer liability coverage • Private insurers are covered by guaranty funds which provide additional protection in case of insolvency; RRGs are not • Private insurers allow for risk transfer; RRGs offer risk pooling (with potential for adverse experience) • Private insurers more likely to have a financial rating, allowing the insured to more easily assess financial strength; RRGs less likely to have a financial rating

NAIC fundamental insurance regulatory objectives

• Protect the public interest • Promote competitive markets • Facilitate the fair and equitable treatment of insurance consumers • Promote the reliability, solvency, and financial solidity of insurance institutions • Support and improve state regulation of insurance

Advantages of RRGs over Personal Lines Insurers

• RRGs can offer cheaper premiums because they do not have commissions/marketing expenses/profit loads like private insurers do • RRGs only insure specific types of risks, therefore they can provide coverage tailored to the insured's specific insurance needs • RRG is owned by insured's and therefore provides greater incentive than private insurance to implement strong risk controls, which could reduce cost of insurance • RRGs were formed to increase the availability of insurance and are less subject to the insurance rate cycle than private insurers, also providing more stable pricing

Law requires commissioner to submit an annual report to legislature which summarizes activities of department and status of insurance industry in state

• Requirements ⇒ Statement of income and expenses of the insurance department ⇒ Exhibit summarizing the financial status and business transactions of licensed insurers in state ⇒ Listing of insurers closed for that business year ⇒ Names of insurance companies in receivership or other official financial difficulty with a brief explanation of status ⇒ Recommendations by insurance commissioner about insurance laws and the department's operations ⇒ List of other insurance matters of general interest determined by commissioner

List some preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and offsite regulatory monitoring:

• Requiring the insurer to provide an updated business plan • Requiring the insurer to file interim financial reports • Prohibiting the insurer from certain investments or investment practices • Restricting/ suspending the business that can be written/ renewed • Ordering an increase to the capital & surplus • Ordering the insurer to correct corporate governance practice deficiencies • Requiring replacement of senior management • Seeking a court order to place the insurer under conservatism/ rehabilitation/ liquidation

Steps that the appointed actuary should take if the SAO issued is found to be in error and the timeframe in which they should be completed

• The actuary should notify the company (board of directors, internal audit committee, etc.) within 5 days of determining that the Statement of Actuarial Opinion was submitted in error • The notification should include a summary of the reason for the error and an amended Statement of Actuarial Opinion • An insurer who is notified pursuant to the preceding paragraphs shall forward a copy of the summary and the amended Statement of Actuarial Opinion to the domiciliary commissioner within 5 days and shall cc: the Appointed Actuary. If the Appointed Actuary is not made aware that the domiciliary commissioner has been notified, the Appointed Actuary shall notify the domiciliary commissioner within the next 5 days that the submitted Statement of Actuarial Opinion should no longer be relied upon.

What do regulators look at during Market Regulation:

• Treatment of policyholders & claimants in product development & pricing • Competition • Statistical reporting • Administration of residual markets • Licensing of insurance producers • Consumer assistance & information services

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

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

There are 6 principal functions of reinsurance:

Increase large line capacity Provide catastrophe protection Stabilize loss experience Provide surplus relief Facilitate withdrawal from a market segment Provide underwriting guidance

Deciding whether company should elect to discount loss reserves using its own loss payment patterns or the IRS's. You are given Loss Paid and Loss incurred data for past years as well as an IRS promulgated discount factor and a discount rate r.

(1) Loss Paid (2) Loss incurred (3) (1)/(2) (4) (3)Current - (3)Next (5) 1-(3) (6) PV of all past (4)'s including current. Sum((4)x(1+r)^(-(diff in yrs-0.5))) THIS DOES NOT INCLUDE THE MOST RECENT ROW (7) is (6)/(5) If (7) of most recent year is lower than IRS promulgated discount factor then company should use IRS promulgated discount factor since it will result in higher losses, lower net income, and therefore lower taxes

Question says Calculate the fair value of the loss and LAE liabilities from the homeowners line from Annual Statement. You are given: there is no margin included in the recorded reserve of $R. Payments are made halfway through each period. Required Capital ratio is C%. Cost of Capital is W%, this is reduced by the discount rate associated with the average duration of capital to produce the risk cost of capital of RC%. Return on capitlal is paid at the end of each future period

(1) Payments in period for each year will be given. (2) Payment duration for each period= (period yr - current yr) - .5 (3) Discount rates will be given (risk free + illiquidity premium) (4) PV of payment = (1) discounted using (3) and (2) (5) Undiscounted future payments = (1) from 2 yrs ago minus (1) from prev yr. IF first yr just use first (1) available (6) Required cap ratio = C% (7) Average Required Capital = C% x Avg((5),Next yrs (5)) (8) Risk cost of capital = RC% (9) Cost of capital in period = (7) x (8) (10) Duration = (period yr - current yr) (11) Discount rate is given (12) Associated Risk Margin = (9) discounted using (10) and (11) (13) Total Fair Value Reserve equals sum of (12) from each period + the sum of (4) from each period If payment is at the end of the period (7) = C% x (5)

2 yr Expense ratio

(Other Underwriting Expenses + Write ins - Other income)/ Premiums written in 2yrs

How to derive the margin needed on the premiums as a percentage of investment yield

(yield x (corporate tax))/(1-corporate tax)

Contracts of Reinsurance can be divided into a number of categories

*Treaty (pro rata)*: this is proportional reins including: -Quota Share: a fixed percent of each risk is ceded -Surplus Share: the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. *Treaty (Excess of loss)*: non-proportional ins including: -Excess per risk:covers the portion of each individ loss that exceeds a certain retention, usually capped at a limit Agg Excess of loss: covers the portion of agg losses that exceed a certain retention, usually capped at a limit *Treaty (Catastrophe)*: indemnifies losses exceeding a specified retention from a single catastrophic event or events *Facultative (Pro rata)*: ceds a specific percentage of losses from a specific insuracne policy *Facultative (Excess of Loss)*: ceds losses exceeding a retention from a specific policy

Price optimization poses several problems to regulators:

- Because price optimization impacts the selections as opposed to the cost based indications, regulators may be challenged when reviewing the insurer's rates, as it may not be clear how exactly optimization influenced the selections. - There is a large amount of information related to the price optimization process to consider. - Regulators must rely on the insurers to provide accurate and complete information on the rates, as well as the adjustments required to produce those rates. - Regulators currently do not have the necessary data for an independent evaluation of a large portion of the insurer's modeling & calculations.

Disadvantages of dongle:

- Can only be used in modern vehicles - Vulnerable to fraud - It will soon (12-18 months as of time of writing) will be technologically obsolete

When examining balance sheet strength the regulators will also look to the investable assets

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

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

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

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

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

List some options for potential regulatory responses to price optimized rating schemes that were recommended by the Price Optimization Task Force:

- Determine which price optimization practices, if any, are allowed in the state - Define any constraints on the price optimization process & outcomes. - Develop regulatory guidance on statutory rate requirements, to ensure that the rates are not excessive, inadequate, or unfairly discriminatory - Enhance ling requirements - Require explanation/ reasoning to support any proposed rate that deviates from the actuarially indicated rate - Change the ling laws to require more transparency (after considering state laws on confidentiality):

There are several reasons for the actuaries to be familiar with the note on Discounting of Liabilities for Unpaid Loss & LAE (Notes to the financial Statements)

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

Provide some recommendations for regulatory framework for telematics programs:

- Establish data ownership & privacy standards - Establish standards for permitted and prohibited uses of consumer data - Collect & analyze granular data on offers and sales of UBI programs related to prohibited risk classification factors - Require that insurers include variables for race and income in GLMs - Create standards for disclosure of telematics results and ratings programs, to ensure that consumers have the necessary feedback to alter their behavior - Replicate the analyses that are presented by insurers in summary form - Stop offering \discounts" unless the rating factor can be correlated with lower claims

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

- FL OIR didn't have the authority to prevent use of credit scoring as underwriting/rating tool - Office did not have authority to define term "unfairly discriminatory" as in statute - Insurers didn't have necessary data to demonstrate effect of credit scoring on protected classes - Definition of "disproportionate impact" was too vague

List some benefits of UBI to society:

- Fewer accidents - Less congestion - Lower carbon emissions & dependence on fossil fuels - Rates that are more socially equitable (eliminate the cross subsidy between low mileage and higher mileage drivers).

List disadvantages of embedded devices:

- Higher cost for the consumer (this option is often subscription based) - Not standardized - Potential issues with compatibility with insurance - Obsolescence (automobiles often have a long product cycle, and so the technology is often outdated by the time the car is released)

2 parties that can own an RRG:

- Individuals or businesses that are insured by the RRG; - Organization that is owned solely by insureds of the RRG

List some reasons that premiums may reduce:

- Participation discounts - Improved driving performance - Voluntary reductions in mileage driven - Subsidy elimination

List some Consumer benefits of telematics:

- Possible lower premiums - Ability to control premiums - Enhanced safety & improved claims experience - Households with young drivers will appreciate the focus on education and promoting safety - Benefits due to the continuous connection of the telematics device (Faster emergency response time/ Road side assistance / Stolen vehicle recovery/ Fuel efficiency/ Vehicle maintenance support)

List examples of factors that regulators should prohibit be used in price optimization:

- Price elasticity of demand - Propensity to shop for insurance - Retention adjustment (at the individual level) - Propensity to ask questions or file complaints

List some consumer concerns about the UBI programs:

- Privacy and the insurer's ability to protect their personal data. - Distribution of data by insurers for purposes other than loss mitigation and pricing - Reduced offerings of UBI programs to consumers in low & moderate income and minority communities - Failure to achieve material loss mitigation, due to the black box approach - Use of telematics as just another data mining exercise that penalizes consumers because of where and when they drive, which is heavily impacted by where they work and live - Limited regulatory oversight to date

List advantages of embedded devices:

- Product differentiation - Improved customer relationship management - Potentially lower costs if there are product recalls

Describe the intention of the Liability Risk Retention Act (LRRA)

- Provide businesses (especially small businesses) the opportunity to reduce insurance costs - Promote greater competition among insurers when setting rates - Elimination of regulation by multiple states designed to facilitate formation and interstate operation of RRGs

What constitutes a credit-based insurance score?

- Ranking assigned to an insurance risk based on that risk's underlying characteristics - Common purpose to produce useful information in underwriting and pricing insurance - Provides a relative measure of the expected cost of the risk - Uses items found in a typical individual's credit report, such as number of inquiries into opening new accounts and accounts 30 days or more past due

Insurer benefits include:

- Reduced claim costs - Better risk pricing - Mitigate adverse selection and moral hazard - Modify risky behavior - Improved brand recognition/ awareness & loyalty - Differentiate their product offerings - Create new revenue streams

A consideration for analyzing IRIS ratio 3 is to look at IRIS ratio 9 to determine whether the insurer's assets are properly valued and sufficient liquidity is available to meet cash demands. Briefly describe two other considerations.

-Look at IRIS 2. Large growth or change in NWP may not be a concern if ratio to PHS is in line. -Look at reserve adequacy to make sure reserves are currently adequate. i.e., ratios 11-13 -Look at the profitability of the company, if the company is profitable may be able to sustain a higher ratio. -Look for a stable mix of business for the company. If have long tailed lines, should keep a lower ratio since harder to predict and reserve for. -Did insurer recently enter/exit new LOB or territory? Would cause an abrupt premium change and may not be a cause for concern.

It is recommended that management seek feedback from the actuary prior to setting the reserves. Advantages include:

-Management can benefit from the actuarial analysis to help make the best decision -Helps avoid the scenario where management derives a reserve that requires them to put pressure on the actuary to come up with a larger range of reserves that they normally would have

Explain why high ratings are important for reinsurance

-Many reinsurers are not licensed in the US -Often cover long-tailed, catastrophe, or other large claim risks -Also strongly capitalized reinsurers can charge higher premiums -Also Reinsurance treaties may specifically link ratings and security

How do individual insurers and producers become involved in shaping insurance regulation?

-NAIC solicits advice from some insurers because of their expertise -Might also lobby state legislatures and insurance departments -May also testify before state and federal legislative committees about issues affecting the insurance industry and public

Examples of gov partnering with private insurer

-NFIP, TRIA, Federal crop insurance (Federal) -FAIR, WC, Windstorm plans, Residual Auto plan (state)

Within 5 days of the appointment of the appointed actuary, the company needs to provide the following information to the insurance commisioner:

-Name & title -Manner of appointment of the actuary -State that the person meets the requirements to be a qualified actuary

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

-Nature of the agreement -Total outstanding amount under the arrangement -Carrying amount of the insurers liability -Nature of any recourse provisions that would enable recovery from other entities of the amount paid. -In the period where the liability was initially recognized and measured: the corresponding entry, and where the entry was recorded in the financials

What needs to be disclosed in the Notes about Type 2 events subsequent?

-Nature of the event -Estimate of its financial impact, or a statement that the estimate can not be made Reminder: The impact of Type 2 events is not included in the financial statements

Reasons for the development of the Reinsurance Regulatory Modernization Framework of 2008.

-Needed to reduce penalties associated with unauthorized but strong reinsurers -Better reflect the globalization of insurance by recognizing foreign reinsurers -Allow reinsurers to receive collateral reductions when they meet certain standards -Promote competition in the reinsurance market -Standardize treatment/streamline regulation for domestic and alien reinsurers

Regarding the calculation of the SCR:

-Non insurance assets are valued using IFRS -Reinsurance assets are valued the same way as insurance liabilities -The liabilities are divided into the following components *Techinical Provisions* : represents the fair value of liabilities *Minimum Capital Requirement* *SCR (Which includes the MCR)* *Free surplus (Assets - Tech provisions - SCR)*

Why is there a need to balance regulatory costs vs benefits

-Over regulation imposes unnecessary costs -Insufficient regulation causes unnecessary harm to consumers and taxpayers

Reasons why the IRS discounting procedure uses Schedule P part 1 instead of the paid loss triangles in Schedule P, Part 3

-Part 3 contains only DCC, not AAO. Part 1 contains all LAE -Part 1 is audited, whereas part 3 is not -Part 3 may rely on judgement to select paid LDFs.

Surplus lines laws have the following common characteristics:

-Permit only specially license producers to place surplus lines business -Licensees must make placement with unauthorized/nonadmitted insurers that meet specified financial and managerial requirements -Before placement can occur, risk must be declined by admitted market through a diligent search of states admitted insurance market

Solvency II is a principle based system of solvency regulation used in Europe. It is used to link the required capital to the specific risk profile. It consists of 3 pillars:

-Pillar 1: Quantification: Quantitative capital requirements (Solvency Capital requirement & Minimum capital requirement) -Pillar 2: Governance: Supervisory Activities (Internal control & risk management; Supervisory review process) -Pillar 3: Transperancy: Supervisory reporting and public disclosure

Explain how the reinsurance facility plan works

-Premiums and losses are ceded to facility -Producer accepts applications for auto insurance and submits to insurer -Insurer can choose to handle submission as voluntary business or cede premium to facility and just service the policy - when claims occur, servicing insurer handles and pays claim (insurer is reimbursed by facility) -Operating losses and expenses of the facility are shared by all insurers based on a formula -Insured cannot readily detect whether he is in the shared market -Rates are not uniform

What factors can be used to derive the projected loss payment patterns for risk transfer analysis

-Previous experience of the ceding insurer -industry benchmarks -combination of the two

Besides improving efficiency, describe two objectives of the NAIC.

-Promoting public interest through fair and equitable treatment. -Ensuring strength & solvency of industry

Insurance Industry Trade Associations Functions

-Prompt access to legislative developments -Can use association personnel as their lobbying forum -Participate on committees in drafting new legislation or influence changes to pending legislation -Continually watch for new regulations promulgated by state insurance depts.

Repetitive loss properties

-Properties that experience several losses are called repetitive loss properties (RLP) and severe repetitive loss properties (SRLP). -These properties make up a disproportionately large share of flood insurance claims.

House Energy and Commerce Committee identified three principal causes of Product liability insurance price and availability crisis of the 1970s. List two

-Questtonable ratemaking and reserving practices of insurers -Unsafe products -Uncertainties in the tort and legislation system

Things to look for in the written premium section of the 5 years of historical data exhibit

-Rapid change of revenue -Changes in level of reinsurance protection -Increase in exposure to riskier/unprofitable lines -Shifts from liability to property lines (increased cat loss) -Shifts from property to liability lines (more uncertain reserves)

FIO preemption of state laws can not apply to extend to state law that governs

-Rates -Premiums -Underwriting -Sales practices -Coverage requirements -Application of state antitrust laws -or state capital or insolvency requirements

According to McCarty, briefly describe two conditions for insurance rates to be considered equitable to consumers.

-Rates should not be based on factors that correlate highly with race, ethnicity, religion and other protected factors. -Should not discriminate towards certain socioeconomic groups -Not unfairly discriminatory towards certain protected classes of people

Some actions that FEMA has taken to address the problem of repetitive loss properties

-Reconstruct/ elevate or flood-proof substantially damaged structures to prevent future damage -Phasing out premium subsidies to RLPs -Provide data to communities to help them address RLPs

List cases in which the Federal Govt regulates the insurance industry

-Regulation of Securities -Federal taxation of insurance companies -Employee Retirement income security Act of 1974 -OSHA -Federal regulation concerning discrimination in employment relationships -Federal agencies affecting the insurance industry because they administer federal laws that apply to insurers

4 elements of building an effective system of regulation (that emphasizes coordination & cooperation)

-Regulators must have confidence in each other -Free sharing of information among supervisors -Ability for other countries to take action if they are dissatisfied with actions of another supervisors -Must be credible mechanism to resolve situation where assets are insufficient to fund all of the claims

2 assets that need to be adjusted in part 8 of schedule F

-Reinsurance recoverable on Loss and LAE payment -Net amounts recoverable from reinsurers

Key features of business of insurance under SEC vs National Securities Inc

-Relationship between insurer and insured -Types of policies that can be issued -Reliability, interpretation, and enforcement of policies

The ceding company should account for retroactive reinsurance in the following manner

-Reserves are recorded on a gross basis. The recoverables are recorded as a contra liability. -Any surplus gain from the retroactive transaction should be recorded as a special surplus fund. -this gain shall not be classified as unassigned funds until the actual retroactive reinsurance recovered exceeds the consideration paid. -The Special Surplus also 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

There are several provisions in Dodd-Frank that preempt state law governing reinsurance arrangements. All laws/ regulations/ actions of the non-domiciliary state of the ceding (except tax related laws) are preempted if they:

-Restrict/ eliminate rights of ceding insurer & reinsurer to resolve disputes in accordance with contractual arbitration clauses -Require that a certain state's law governs the reinsurance contract/disputes arising under the reinsurance contract/requirements of the reinsurance contract -Attempt to enforce reinsurance contract on terms different than those set forth in the contract -Apply the state's laws to reinsurance agreements of ceding companies not domiciled in the state

Several methods may be used to derive an estimated discount rate

-Risk free -Anticipated return on a selected asset portfolio -Discount rates requested by another party: The actuary should disclose that he/she is not responsible for these rates

The insurer may be exempt from producing an SAO for these reasons

-Small companies can submit an affadavit under oath of an officer of the insurer that specifies the direct and assumed written premium, and direct and assumed loss reserves -Insurers under supervision or conservatorship -Nature of the business written

Top-down approach used by the rating agencies

-Start with economic and industry forecasts -Go to insurers position within the industry

Examples of NAIC activities that have attempted to improve the efficiency of state government regulation of insurance.

-State accreditation has sought to improve uniformity & overall quality -Promulgation of model laws have sought to add efficiency and quality to states insurance laws

Briefly describe reasons why some NAIC model laws are not universally adopted by states.

-State may already have laws addressing the issue -State legislators may have other issues in front of them they feel are more important -State legislators may feel NAIC is usurping their powers and changes to law or their own laws better serve their constituents than the model law

The main purposes of the Statement of actuarial opinion are:

-State the actuary's opinion about the reasonableness of the insurers reserves -Notify the stakeholders about significant risks/ uncertainties that may impact the reserves -Disclose whether the risks could produce significant material adverse deviation

Identify the source publication(s) for preparing and issuing statutory financial statements for insurance companies in the U.S.

-Statements of Statutory Accounting Principles (SSAPs) -NAIC's Accounting Practices and Procedures Manual (APPM)

If there is an error in the AOS the revised AOS needs to be submitted to the regulator within 10 days it should state:

-That it is a revised document -Explanation for the change -Revised date

States are given primary regulatory control over the "business of insurance" with the following exceptions (where the Federal Govt is involved)

-The Sherman Act prohibits boycott, coercion, and intimidation -Federal antitrust laws apply to the extent that state laws do not regulate such activities -Federal laws enacted specifically to regulate the business of insurance preempt any state laws apply to the same activities addressed by the Federal Laws

The assuming company should account for retroactive reinsurer in the following manner:

-The assumed retroactive reinsurance is excluded from the existing reserves. Instead it is recorded as a liability, retroactive reinsurance reserve assumed -It is recorded as a write in item (income statement), "Retroactive Reinsurance Loss" under Other Income -The consideration received increases the assets

retroactive reinsurance under GAAP

-The ceded reserves are 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 the amortization is based on the portion of the actual recoveries to the estimated total recoveries

Some explanations for the low market penetration of NFIP

-The insurance is seen as not being worth the cost -People have misperceptions about low probability risks and lack information about the NFIP -Private insurance agents do not market the NFIP

2 factors that would alleviate a regulators concern about high GWP/PHS

-The insurer is profitable -The insurer mainly writes short tailed lines

Reinsurance premiums over 90 day overdue shall be nonadmitted unless:

-The reinsurer maintains UEPR and loss reserves due to the ceding entity -The ceding entity is licensed and in good standing

Motivations to enter into a commutation

-The reinsurer or insurer may wish to exit a line of business -There may be concerns about the other party's solvency -The parties may wish to end a troubled relationship -Each side may believe that they are benefiting from the commutation, due to different ultimate loss projections

The NAIC has some concerns about using IFRS as a basis for SAP

-The switchwill incur significant transaction costs -Reserve calculations will be more complex in that reserves will be valued at market value, even though there is not really a market.

SAB 99 provides the following guidance about determining whether something is material

-There should not be exclusive reliance on a percentage or numerical threshold -However, a percentage or numerical threshold may provide the basis for an initial assumption about materiality -Something is material if it is reasonably likely that a reasonable person would consider it important -Both quantitative and qualitative factors should be considered when making a decision about materiality

Reasons for the Codification of SAP

-To provide further national uniformity to financial reporting -To Allows regulators and NAIC to aggregate financial information more easily -To Require certain disclosures for regulators to easily detect risks -Ease regulatory burden of insurers that operated in multiple states

Retro active reinsurance under SAP

-Undiscounted ceded reserves are recorded as negative write in liabilities -Schedule P is not impacted -A gain may be generated if the consideration paid is less than the negative write in liability. This is treated as a write-in gain as part of "other income" and surplus benefit is treated as a special surplus until the paid reinsurance recovery exceeds the consideration paid

Sections of the Reinsurance Sections of the Notes to the financial statements

-Unsecured Reinsurance Recoverables -Reinsurance Recoverables in Dispute -Reinsurance Assumed and Ceded (Ceding Commisions) -Uncollectible Reinsurance -Commutations of ceded reinsurance -Retroactive Reinsurance -Reinsurance accounted for as a deposit -Disclosures for the transfer of p&C run-off agreements

What types of property are considered to be uninsurable under FAIR

-Vacant or open to tresspass -In poor physical condition or has unrepaired fire damage -Subject to poor housekeeping (including overcrowding, storage of trash, flammable materials) -In violation of law or public policy -Not built in accordance with building and safety codes

2 ways that premium subsidies to RLPs have been phased out

-Voluntary buyouts -Charging full actuarial rates to owners who do not accept FEMAs offer to mitigate the impact of flood damage

State laws and regulations can be void under the US Constitution under the following circumstances

-When a state law contradicts a federal law -When the 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 a state law imposes an improper burden on interstate commerce, even though a federal law does not exist

Describe how assigned risk plans work

-When rejected in voluntary market, driver applies for coverage through plan -plan assigns application to insurer -Insurer obligated to accept specified percentage based on market share -Insurer handles policy as if written voluntarily (voluntary insureds required to subsidize assigned risk drivers) -Rates in a state are usually uniform

Considerations for a preparer of statutory financial statements when making a judgment about whether an error contained in a financial statement is material. (NAIC Preamble)

-Would the error change a profit into a loss? -An error is material if it affects the decision-making of an end-user -Would it cause the insurer to breach IRIS or RBC ratios? -Whether the error, although small, arose out of unusual activity

A large decrease in net written premium (Large IRIS Ratio 3) can be caused by

-a sign of financial distress -pulling out of a line of business -reducing writings due to large losses in certain lines -loss of market share -higher amounts of reinsurance

4 functions of the FIO

-aggregates insurance information from various sources -The FIO monitors the insurance industry -Monitor the availability and affordability of insurance. -work with the US Trade Representative to negotiate covered agreements with foreign regulators

Some examples of factors that can cause material adverse deviation

-asbestos and environmnental losses -construciton defect -other mass torts -high excess layers -large deductible workers comp -Med Mal Legislative issues -rapid growth -lack of data

How should the actuary determine reinsurance collectibility for commenting in the relevant comments

-ask management about any collectability problems -review reinsurer ratings -examine Schedule F for evidence of regulatory action or paid losses over 90 days past due

Under McCarran-Ferguson federal regulation does not apply to the business of insurance when

-business of insurance is regulated by the states -No boycott, coercion, or intimidation has occurred

If there is no specific contract with a due date for reinsurance premiums, they are deemed due 30 days after either of the following dates:

-date at which notice of premium is provided to the ceding entity -date at which the assuming entity books the premium

Briefly describe 4 positive attributes of the system of regulation in the US

-duplication reduces the chance that a problem goes unnoticed -peer review also increases the chance of finding problems. In addition, it produces peer pressure on regulators to take action -diversity of perspective means that regulation is less likely to tend to an extreme -difficulty of obtaining federal funds increases the market discipline and reduces moral hazard

Four reasons for govt participation in insurance

-fill the gap unmet by private insurers: insurers may not have the capacity to cover the risk -compulsory (insurance should be available and affordable) -convenience/efficient -social purpose make sure that coverage is available

*Disclosures regarding loss contingencies* If the contingency involves a guarantee, the insurer needs to disclose the following, even if it has a remote possibility of occurring:

-nature & amount of the guarantee -approximate term -how the guarantee arose -the events that would require the guarantor to perform under the guarantee -the current status

Combinations of factors that can cause material adverse deviation

-rapid growth in a soft market in a line of business where the company has limited experience -risk of adverse medical inflation on a large excess workers compensation book -Risk of increased sustained unemployment, combined with reductions in home price on a mortgage book -Significant shift upwards in policy limits and attachment points sold combine with a reduction in reinsurance protection purchased

List 3 reasons that regulation fails and suggest a solution to each

-regulator fallability: regulators are human and therefore make mistakes -implement a series of peer reviews/ duplication of work, where several regulators will independently review the same insurers -regulator forbearance: failure to take prompt & stringent action in the face of a potentially troubled firm -allow regulators to take action against all insurers operating within their state (even insurers domiciled in other states). This peer pressure should encourage the regulators to take action -regulator capture: tendency of regulators to side with an interest group -use an appointed commissioner instead of an elected, as an appointed would be less likely influenced by interest groups

Suppose an insurer has an unusual value for IRIS Ratio #13. Briefly describe: • What the unusual value may indicate • A possible mitigating factor for the unusual value • An additional area of investigation

-reserves are deficient -rapid growth in premium -investigate premium changes, and the historical mix of between short & long tails

Identify two sources of income that are taxed more heavily by the alternative minimum income tax than by the regular income tax.

-tax free bonds, -stockholder dividends earned by company

When entering into a structured settlement the following needs to be disclosed: (Notes to the financial Statements)

-the amount of reserves which the company no longer needs to carry because it has purchased annuities with the claimant as payee -the extent to which it is contingently liable for the liabilities -If the aggregate value of annuities from a given life insurer exceed 1% of the surplus it must disclose the name, location of the insurer and aggregate value of annuities

The identification paragraph of the SAO should identify:

-the appointed actuary -the actuarys relationship to the company -the actuary's qualifications for acting as appointed actuary -date of appointment -state that the appointment was made by the board

The FIO is authorized to issue subpoenas. The Director of the FIO must first make a written finding that:

-the information is required -they have already coordinated with the relevant agencies (most probably to see if the subpoenaed information can not be obtained elsewhere)

SAB 99 also advises that it is possible for a small misstatement of a financial statement to be material, depending on whether:

-the misstatement arises from an item that is capable of precise measurement - it arises from an estimate. If so, what is the degree of imprecision associated with the estimate - it hides a failure of the company to meet analyst's expectations - it changes loss into income, or vice versa - it concerns a segment that is believed to have a significant role in the insurer's operations or profitability - it affects the insurer's compliance with regulatory requirements - it involves concealment of an unlawful transaction - it has the impact of increasing management compensation

SAB advises that it is possible for a small misstatement of a financial statement to be material, depending on whether:

-the misstatement arises from an item that is capable of precise measurement -it arises from an estimate. If so, what is the degree of imprecision associated with the estimate -It hides the failure of the company to meet analysts expectations -It changes loss into income, or vice versa -It concerns a segment that is believed to have a significant role in the insurers operations or profitability

Disclosures that need to be made about the SAO

-the title should mention the words "statement of actuarial opinion" (or similar) - the intended users of the SAO - the intended purpose of the SAO - the reserves being opined upon - stated basis of reserve presentation - if there have been changes in accounting procedures since the prior statement - if the reserves are deficient (redundant), the minimum (maximum) amount that the actuary believes is reasonable - if the actuary issues a qualified opinion, the item to which the qualification relates, the reasons for the qualification, and the amount for such items, if known. - significant risks that could cause material adverse deviation - if the actuary used the analysis/ opinion of another actuary, whether the actuary reviewed the other's analysis

Types of insurance risk

-the ultimate amount of net cash flows (underwriting risk) -the time of those cash flows (timing risk) investment returns are not an element of insurance risk

Factors that insurers should consider when determing how much stock versus bonds to hold

-yield: stocks have higher expected yields -Diversification -Asset liability management: P&C reserves are inflation sensitive, therefor they may need stocks since they are also inflation sensitve -SAO: This doesn't affect P&C insurer as much as life since only the Life SAO discusses the Assets -Management dislike of erratic income would encourage them to own bonds instead of stocks

Describe impacts of some of the prior approval states changing their focus from promotion of rate adequacy to insure solvency; to more restrictive controls with the goal of limiting rate increases (in the 70s and 80s):

- Resulted in changes in methods of rate regulation - Emphasis on insurance affordability led most prior approval states to consider investment income formally in the rate review process - Some states limited amounts and types of expenses that could be included - Some states restricted insurer exit in response to regulatory rate suppression

The FIO can preempt state law if the director of the FIO determines that a state law measures:

- Results in less favorable treatment of a non-US insurer domiciled in a foreign jurisdiction that is subject to a covered agreement compared to a US domiciled insurer in the state - If the state law is inconsistent with a covered agreement

What questions do the interrogatories contain about the board of directors:

- Role of the board in approving the purchase/ sale of investments - Does the company have a process in place to notify the board of conflicts of interest within senior management - Whether the permanent records of the board proceedings are retained

List the five sections of each part of part 7 (Schedule P)

- Section 1: net loss & LAE unpaid and NWP on loss sensitive contracts, relative to all contracts, for each Schedule P line - Section 2: incurred loss & DCC on loss sensitive contracts, in the same format as Part 2 - Section 3: loss & DCC IBNR on loss sensitive contracts, in the same format as Part 4 - Section 4: net earned premiums on loss sensitive contracts, in the same format as Part 6 - Section 5: triangle of net reserves for premium adjustments& accrued retrospective premiums for each of the last ten years that the policies were issued

Some criticisms of Schedule F

- The Provision is formulaic, and therefore ignores management input - The formula has no statistical, historical or actuarial basis. It may therefore underestimate the credit risk - Unauthorized reinsurance may provide higher quality protection and/ or lower prices - Slow payers that are financially strong may eventually pay, whereas a reinsurer that is current may not be able to withstand a stress event

Signs of undue management influence that may be apparent during an executive session:

- The actuary is not provided with comprehensive information on emerging problem areas - Information is provided late to the actuary, leaving inadequate time for the analysis - The actuary is denied access to certain employees - Management makes it clear to the actuary that his continued employment is contingent on agreement with managements reserves - The opining actuary is replaced, and the new actuary immediately agrees with managements position

Why is schedule F important for Actuaries

- The actuary needs to comment on the reasonableness of the Loss & LAE reserves. These reserves include business that the insurer has assumed. Schedule F provides information on the assumed reinsurance that may be useful -Because the loss & LAE reserves are net of reinsurance, the collectability of recoverables is important. -The actuary needs to opine on the collectibility of reinsurance recoverables

Briefly Describe Deposit Accounting for the assuming company

- The assuming company will record the consideration to be returned to the ceding company as a liability - If the total losses are valued upwards, the assuming company will record an interest expense

If the insurance purchaser meets the definition of an exempt commercial purchaser, in what cases does the surplus lines broker not have to satisfy the state requirement to conduct a due diligence search for admitted insurance:

- The broker has informed the purchaser that the insurance may or may not be available in the admitted market - The purchaser had subsequently requested the non-admitted coverage in writing

Insurers that offer Telematics based UBI will have several competitive advantages:

- They can identify the lowest risk drivers and increase the retention for this group - They may gain more business, as potential customers may be attracted by the potentially lower premiums. - Insurers are provided with new methods in which to communicate with policyholders. - Claims management will be enhanced. - Since the insurer can analyze the real time driving data, it can more accurately estimate accident damages and reduce fraud & claims disputes - Programs will help for stolen vehicles to be tracked & recovered - Early adopters will benefit from the rich driving behavior data that will be collected. Competitors who lack similar data will struggle to price appropriately.

List some reasons that Schedule T is useful to actuaries

- They can see where the company writes business, so that they can research the relevant insurance laws of the state. - By looking at historical schedules, they can see if the insurer has changed its geographic exposure - When industry factors are used, this can help derive the weight to apply to the industry factors from each state

Issues with using information in parts 2 and 4 to develop losses

- Various allocations in the creation of Schedule P are based on the interpretation of the person completing it - Schedule P only contains 10 accident years of data, but long tail lines may experience development later than 10 years. - Commutations will distort the reserves - The data combines losses and DCC, potentially hiding trends in either component

What should the actuary comment on if mass tort

- Whether there is material exposure - The aggregate amount of money held - The significant variability & uncertainty inherent in the estimate - Whether the actuary believes the liability is actuarially estimable - The difficulties involved in providing an actuarial estimate of these liabilities - Whether the liabilities are being handled by a dedicated and experienced claims/ legal unit

If the premium is unstable, the following areas need to be analyzed:

- are the assets properly valued & liquid enough to meet cash demands - are the reserves adequate? To determine this, the analyst can look at Ratios 11, 12 & 13 (the reserve ratios), and also Schedule P.

Describe how ling requirements can be enhanced to accommodate price optimization:

- consider whether the actuarial indication is the point estimate, or any selected value within the confidence interval around the point estimate - consider whether to require actuarial certification that the indications in the rate ling are based exclusively on the cost considerations, and are not otherwise adjusted - consider requiring disclosure of any adjustments to rates that are not based on expected costs - consider disallowing non cost based adjustments to selected rates or rating factors

List ways in which regulators can ensure that optimization is more transparent:

- disclosure of whether price optimization is used - disclosure of differences in proposed prices for the existing and new customers that have the same risk profile - file a report to show the distribution of the expected loss ratios under both the current and proposed prices. - disclosure of all data sources, models and risk classifications used by the insurer to calculate the premium - disclosure of which rating factor(s) are impacted by price optimization; the magnitude of the impact by factor; and the cumulative impact of price optimization for all existing and new applicants for insurance - require a certification by an actuary that all non cost based considerations impacting the proposed rates and rating factors are documented in the ling.

Factors incorporated in Hybrid Optimization models:

- expected retention - profitability - rate of change from the current premium to the proposed premium - premium volume - expense

Non admitted balances of recoverables from high deductible policies depends on whether or not the insurer holds collateral

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

Recommended criteria in which a selected rate that is not between the current and indicated rate may be acceptable if:

- it is disclosed - it complies with state law - it is demonstrated to be consistent with actuarial ratemaking principles and Standards of Practice

List examples of constraints that regulators can apply to optimization:

- limit the price adjustment to be between the current rate and actuarially indicated rate, and always move towards the actuarial indicated rate - require that the rating factors selected be: between the current and actuarial indicated factors; or within a confidence interval around the current/ indicated factors; or directionally consistent with the current factors - limit the variables that can be used in defining a risk class - only allow price optimization to be applied to classes of at least a certain size - price optimization adjustment to rating factors must produce rates that maintain cost based differences

List some criticisms against price optimization:

- penalizes customers, as it involves insurers attempting to charge the highest possible price without causing the consumer to switch. - can result in unfairly discriminatory rates - Insurers may raise prices of those who are less likely to shop around, many of whom are low income and minority consumers.

List the benefits of the "Funds held or deposited with reinsured companies" form of collateral:

- reduces credit risk - reduces administrative burden of having to continually collect money from reinsurer to make payments - reinsurer gets paid interest

Advantages of dongle:

- relatively low cost - high reliability - Can be installed by the driver - Re-usable - Can be transferred to another vehicle - Automatically turns on with the car's ignition - Generates high quality & secure data on location & driving style

List some Regulator Concerns of UBI:

- storage & reporting of private data - rating factors used to calculate the UBI premiums

Normally Novations are accounted for as prospective reinsurance agreements

- the amounts paid shall be recorded as a reduction of 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, and obligations assumed as incurred losses

List advantages of the Smartphone option:

- they are usually equipped with relevant sensors, including GPS, accelerometers and gyroscopes. - they have large data storage capacity (infinite with the cloud), and superior communication capabilities. - there are no device, installation, nor data connectivity costs to the insurers (and no additional costs to consumers). - the smartphones can do a large amount of the data processing, which will help reduce the data handling and storage costs.

Usual range for Net change in adjusted PHS

-.1 to .25

Paul v Virginia

-A 1869 Supreme court review constitutionally of VA licensure law -Paul applied to become licensed insurer in home state of VA for NY insurers: -VA denied because insurers had not deposited required insurer bond - Paul sold policies anyway and was arrested -The supreme court affirmed the lower courts ruling - Insurance was ruled to not be considered interstate commerce The implication of this was that states could continue to regulate own insurance market without violating constitution

Things that must be included in the Actuarial Report

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

The appointed actuary who creates the statement of actuarial opinion needs to be a qualified actuary. A qualified actuary is defined as:

-A member in good standing with the CAS -A member in good standing with the AAA, and who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the AAA. An actuary who qualifies under this requirement needs to annually attach to the SAO a copy of the approval letter from the Academy

Three essential components of liabilities

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

Statement of principles regarding P&C ratemaking

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

Regulation S-K provides the requirements for the non financial portions of the 10-K. The following needs to be disclosed

-A tabular analysis of the changes in aggregate reserves for unpaid loss and lae for each of the latest 3 one year periods -A 10 yr loss development table that shows reserve estimates at annual evaluations. This can be used to evaluate managements record of setting reserves. -Method to estimate the effects of inflation -Reconciliaiton between SAP and GAAP reserves -The amount of discount in the GAAP loss reserves

How are guaranty funds operated?

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

Accounting unique to prospective reinsurance agreements: prospective reinsurance covers future insurable events

-Amounts paid for prospective reinsurance shall be reported as a reduction to written and earned prems -Changes in the estimated reinsurance recoverables are recognized as changes in losses incurred in the income statement -Reinsurance recoverable on unpaid losses is recognized by reducing the respective reserves

List some properties of rates in the JUA

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

Regulation S-X requires the insurer to state the following in its notes to the financial statements

-Basis of assumptions -Deferred acquisition costs amortized during the period -Statutory stockholders equity

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

-Between 2008 and 2010 in advance of the reporting deadline. there may have been an increase in Claims closings and Lump-Sum payments -> This jump will distort paid and reported losses -Since then there may have been a slowdown in claim settlement rates due to the change in MSA procedures -A portion of the increasing WC medical trends may be due to the new MSA requirements -There is also a risk that injured workers who are currently recieving medicare may have the payments reclassified as workers comp

Describe two different approaches an insurer may use to establish a structured settlement

-Buy an annuity and use it to fund payments to claimant. -Buy an annuity where the claimant is owner and payee and obtain a release of liability from claimant.

Under IFRS the liability is established as soon as the insurer enters the insurance contract (as opposed to the effective date). Liabilities are measured using three steps:

-Calculation of unbiased prob weighted expected cash flows -Application of discounting: use a risk free rate with adjustments to reflect currency, liquidity and cash flow timing -Application of margins

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

-Ceded Reinsurance Premiums Payable -Funds held by the company under reinsurance treaties -Provision for reinsurance

Common reasons for disapproval of rates

-Contrary to public interest -Illegal -Unfairly discriminatory -Rates are not actuarially sound -Form lacks required provisions

reasons that rating bureaus could be considered anti-competitive for the insurance industry.

-Could be seen as rate-setting in concert, with the use of the one published rate for all insurers; or -Collusion to set rates; or -Since rating bureaus compile data from numerous insurers, some might see this practice as being collusive

Briefly describe two NAIC responses to the McCarran-Ferguson Act.

-Development of model laws and encouraged states to adopt them via accreditation Program

Briefly describe two constraints that DOIs and state governments face in dealing with the NAIC's regulation standards

-Difficult to keep current with continuously changing NAIC standards which require regular attention from DOI's and legislatures. -DOI/state government may not have the resources (funds or manpower) to meet and keep up with standards

Pre-SEUA Decision facts

-Early to mid 1800s saw fierce competition and many insolvencies so insurers formed compacts and associations to control rates. -Insurers not party to agreements underpriced agreed-to-rates. So competition began anew and cycle continued. -*Two schools of thought: Compacts deter open and free competition but they are in publics best interests if they deter insolvencies*

The insurer cant make the company experience adjustment in the calculation of the company RBC loss ratio if:

-Either the net earned premium or loss and lae ratio is 0 or negative -More than 1 years net earned premium for a line is under 20% of the all year average for that line -More than 3 years net earned premium for a line is under 20% of the all year average of all lines

Fully describe how the Biggert-Waters Flood Insurance Reform Act of 2012 addressed premium subsidies within the NFIP.

-Eliminate insurance premium subsidies, especially on repetitive loss properties -Allowing rates to be more actuarially based (reflecting the true risk), in part by utilizing updated Flood Risk Maps -Allowing CAT years to be priced in with average loss years when setting rates -Created a reserve fund to offset CAT years -Authorized the study of an insurance voucher system to address affordability issues

New York was a leader in insurance regulation in the early years of insurance regulation

-Established a process for managing insurer liquidation -Imposed a 10% retaliatory premium tax -mostly imposed on fire insurers domiciled in other states -Required filing of annual statements -First to require insurers to maintain reserves for unearned premiums -1859 created first Department of Insurance

Critique the performance of crop insurance

-Even though crop insurance has existed since 1938, the federal govt has periodically had to pass disaster bills to cover uninsured losses -Many farmers had felt that the insurance did not provide sufficient coverage when natural disasters occur -Opponents of crop insurance felt that it encouraged overproduction

Issues with current NFIP

-Even though residents who have a federally backed mortgage and live in a floodplain need flood insurance, many dont purchase -Many misunderstand flood risk, thinking once a 100 year flood occurs, there will be no more for 100 years -Many individuals misunderstand the risk spreading function of insurance, and are too optimistic about the chance of damage to their property -NFIP rates may not adequately reflect the flood risk because congress requires that the coverage is widely available and affordable -public cost of post disaster recovery financing is increasing

The actuary needs to identify the purpose or use of the unpaid claim estimate. This may include:

-External Financial Reporting -Internal Management Reporting -Special Purposes

Briefly explain the difference between the accounting of Deferred Tax Assets under U.S. GAAP and statutory accounting.

-GAAP will recognize DTA if it is more likely than not that amount will be recovered -SAP recognizes amounts which are more certain of being immediately recoverable.

Volatility of results after IFRS is used should increase for the following reasons

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

The SAO must consist of these sections

-Identification paragraph -Scope paragraph -Opinion Paragraph -Relevant Comments

Describe how the Biggert-Waters Flood Insurance Reform Act of 2012 addressed the participation rate in the NFIP.

-Increased the amount of civil penalties against lenders that fail to enforce the flood insurance requirement (from $350 to $2,000) which could result in an increase in participation -The act authorized the creation and distribution of updated flood maps, which in turn would better educate consumers on the true financial risks of flooding which could result in an increase in participation

2 changes made to the NFIP by the Biggert Waters Flood insurance reform act of 2012

-Increasing the premiums -Reducing incentives for rebuilding in flood risk zones

In order to charge a loss contingency/asset impairment to operations, you need to meet two conditions:

-Information prior to the issuance of the financial statements indicates that the assets have been impaired/ liability incurred at the date of the financial statements. -The amount of the loss can be reasonably estimated:

Describe how the FAIR plan operates:

-Insureds apply directly to the plan -The plan services policies as a syndicate -Each insurer in the state is assessed to pay for the rate loss in the plan

Describe an A.M. Best interactive rating

-Insurer's senior management has an interactive meeting with rating analysts, so analysts can understand the company's business strategy, experience with adverse conditions and integrity. Insurer also submits proprietary info to rating analysts. Analysts determine rating based on findings from meeting, background research and proprietary info.

Earliest years of Insurance regulation facts

-Insurers had to obtain charters under the British Crown -The Philly Contributionship for the insurance of Houses for Loss by Fire was the first American Property insurer -Penn was the first state to charter insurers

(ASOP 43) With unpaid claim estimates the actuary needs to identify the following with regard to the scope

-Intended measure of the unpaid claim estimate (eg high estimate, low est., median, mean etc) in addition to whether it is discounted. -Whether the reserve is gross or net of specified recoverables -Extent of reinsurance collectability risk -Types of unpaid claim adjustment expenses included -The claims covered by the estimate

There are certain risks that are accounted for in the life RBC formula but not the PC version

-Interest rate risk is a bigger factor in life insurance as the policies are often purchased for investment purposes -business risk: this isnt explicitly addressed but certain aspects are implicitly included in the underwriting risk charge. For example, changes in operations may impact the written premium and reserving charges via their impact on loss experience

Invested Assets under SAP Accounting

-Investment grade bonds and higher rated redeemable preferred stocks are valued at amortized cost -Lower rated bonds and preferred stocks are valued at min(amortized cost, fair value) -Common stocks and higher rated non redeemable preferred stock are valued at fair value

R0 covers the risk from

-Investments in a subsidiary -Investments in alien insurance company affiliates -Off-balance sheet items

Questions and concerns raised by the facts that storms of Sandy's strength are expected to occur more frequently

-Is flood risk possible for the private market to underwrite? -Could flood risk be effectively transferred to the private sector (via reinsurance) or to the capital markets (via cat bonds) -Should NFIP debt to the treasury be forgiven -Are consequences of flood risk and the level of protection offered by hurricane protection systems effectively communicated to the public?

List some issues of contention that still exists after the Biggert-Waters Act:

-It is difficult for Fema to assess the levee-specifc risk and corresponding risk premium -The premium adjustments necessary to strengthen the financial solvency of the NFIP could result in property owners dropping their policies -Experts believe that even if FEMA increases the rates up to the maximum amount allowed (20% per year), they would still have insufficient funds to cover the obligations -FEMA owes $17.5B to the Treasury for losses due to Katrina. Many experts do not believe that FEMA will be able to repay this within 10 years

Describe the Operation of Beach and Windstorm Plans

-LA and MS use single servicing carrier for UW, services, and claims -Other states, the plan issues and services policies -In all plans, property insurers share in plan losses according to premium volume

Explain how the JUA works

-Limited number of servicing insurers are designated to handle all residual auto insurance business -Servicing carriers get fee for handling policies -Applicants found unacceptable to voluntary insurer are forwarded to JUA servicing carrier -Servicing insurer issues policy, collects premium, provides service, pays claims -Results of business in pool shared by all insurers based on voluntary market share

Segments of unearned premium reserve:

1. Amount unearned (1 yr or less from the effective date of the policy) 2. Amount unearned over 1 yr from eff. date of the policy 3. Earned but unbilled premiums (EBUB) arise from policies that are subject to exposure audit 4. Reserves for rate credits and retrospective adjustments based on experience

Additional requirements that an alien insurer has when filing for a license

1. Appointment of a US manager 2. Provide a trust agreement 3. Certificate of alien funds on deposit

List 3 reasons why Financial Strength Ratings are important to insurers

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

The structural organization of schedule F (8 parts)

1. Assumed reinsurance 2. Portfolio reinsurance 3. Ceded reinsurance 4. Aging of ceded reinsurance 5. unauthorized reinsurance 6. Overdue authorized reinsurance 7. Slow paying authorized reinsurance 8. Restatement of balance sheet to gross of reinsurance basis

Briefly describe the 5 steps of the interactive rating process by the rating agencies.

1. Background research by the analytical team. This uses both public data and proprietary data from the insurer. 2. Interactive meetings between ratings analysts and senior managers of the insurer. The agency may request certain items be discussed, but ultimately the insurer determines the content. The purpose is to assess the insurer's knowledge & integrity 3. Preparation of ratings proposal by lead analyst. Presented to ratings committee 4. Decision by the ratings committee after lead analyst presents proposal. During this process, the lead analyst acts as the insurer's advocate. The committee will focus on the hard data to determine rating. 5. Rating published (determined by majority vote). The initial rating may be private or public, but all future ratings are public. Insurer can only appeal this if they believe that there is a material error and they provide data correcting the error

Briefly describe the 2 categories of current loss cost models for telematics UBI products:

1. Based on total mileage, time of day, and a set of predefined events. 2. Based on more granular data about the vehicle use.

Examples of high level requests that agencies may make during the interactive meetings

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

2 Causes of regulatory forbearance

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

Depending on different RBC Ratios different actions are permitted/required

1. Company Action level: 150%<RBC ratio<200%, No action required by DOI, Company should submit action plan to commisioner explaining how it will obtain needed capital or reduce risks 2. Regulatory action level: 100%<RBC Ratio<150%, DOI has right to take corrective action, Company should submit action plan to commisioner explaining how it will obtain needed capital or reduce risks 3. Authorized control level: 70% <RBC Ratio<100%, commisioner is authorized to take control of the insurer, no action required by comp. 4. Mandatory control level: Rbc ratio < 70%, commisioner of domiciliary state must rehabilitate or liquidate the insurer. no action required by comp

If IRIS ratio 1 provides a high result the following needs to be considered

1. Comparing this ratio to ratio 2 2. The line of business: insurers which primarily write long tail lines should maintain lower ratios of GWP to surplus, because it is usually harder to estimate losses for these lines. 3. Profitability of the insurer: insurers who are more profitable, and have adequate reinsurance coverage, can sustain higher ratios. 4. % of assumed business versus direct: an insurer has less control over the business that it assumes, than the business that it writes itself.

How do consumer groups have influence on state insurance departments

1. Complaints alert regulators to industry problems 2. Insurance regulators focus on matters of greatest appeal to the general public

List 3 recommendations of the Task Force for the states:

1. Consider issuing a bulletin to discuss insurer's use of methods that may produce non cost based rates 2. Consider enhancing requirements for personal lines lings to increase disclosure and transparency around rates/ rate indications/ rate selections 3. Analyze models used by insurers in ratemaking to ensure that the model meets state law and conforms to actuarial principles

Identify two contractual features that should be considered when determining whether a short-duration reinsurance contract can be accounted for as reinsurance for GAAP purposes.

1. Contractual features that limit the amount of insurance risk to which reinsurer is subject •E.g., experience refunds, cancellation provisions, adjustable features 2. Contractual features that delay the timely reimbursement of claims by the reinsurer •E.g., payment schedules or accumulating retentions from multiple year

List 4 priorities of SMI:

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

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

1. Create jobs 2. Give regulator easier access

Examples of programs where govt has subsidized losses

1. Crop insurance 2. Flood insurance 3. Federal Crime Insurance Program (Expired in 1995 as private market could profitably insure)

5 Requirements for a system to benefit most from peer review process

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

Sections of Part 5 of Schedule P

1. Cumulative number of claims closed with loss payments 2. Number of claims outstanding 3. Cumulative number of claims reported These are used to determine trends as well as to identify changes in the way claims are settled and reserved.

Two Components of LAE

1. Defense and cost containment (DCC) (Investigation, appraisal, attorney fees due to duty to defend) 2. Adjusting and Other (AAO) (fees of adjuster salaries includes attorney fees incurred in determination of coverage)

Growth of competitive rating in P/C markets during latter half of 20th century reflected variety of forces. Describe two.

1. Growing evidence that prior approval rate regulation could neither persistently lower average rate levels nor expand availability 2. Restrictions on insurer rate classification were costly to enforce, inconsistent with widespread availability of coverage in voluntary market, and inconsistent with enhancing overall affordability of coverage

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

1. High Level Requests (Business strategy, risk concentration guidelines, how information travels from management to employees) 2. Insurer specific based on business written

How does the FIO monitor the insurance industry

1. Identifies insurance activities that could contribute to a financial systemic crisis 2. Develops federal policy on nationally or internationally important issues 3. Consults with state governments on insurance matters There is a concern that the monitoring authority is so broad that the FIO can monitor anything it wants

3 goals of assessing the financial condition of an insurer (U.S. Financial Solvency Framework):

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

If IRIS ratio 2 provides a high result what needs to be considered?

1. If the insurer is a member of a group of affiliated companies, what is the ratio for the group on a consolidated basis? A high Ratio 2 for the insurer is more serious if the affiliated companies also have high ratios. 2. A profitable insurer can sustain higher Ratio 2's. 3. Insurers with larger portions of the business in long tail lines should maintain lower ratios. 4. How adequate is reinsurance protection against large losses, catastrophes, etc? If not adequate, the insurer really should not receive the benefit for reinsurance. 5. Similarly, the analyst needs to determine the quality of the reinsurers

Describe the effect on the market of RRGs

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

Reasons why unrated insurers can be at a disadvantage

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

2 circumstances in which Socialization is difficult

1. Individuals have the choice to pick insurer or to not purchase insurance 2. Insurers can circumvent the socialized insurance plan or withdraw from market

3 adverse effects of Prior approval with binding rate floors:

1. Inefficient non-price competition 2. Slower expansion of efficient firms 3. Higher prices

4 reasons why it is difficult to shut down a troubled insurer

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

Disadvantages of guaranty funds to insurers

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

Certain transactions are exempt from disclosure in part 3 of schedule F

1. Intercompany cessions with affiliates, 2.Cessions to an organization of insurers that underwrite jointly which is subject to a state regulatory authority, 3. Those where under 5% of the gross annual premium is ceded, 4. Cessions to captive insurers that are regulated in their domiciliary state.

How does the Exhibit of net investment income divide the investment income from bonds?

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

3 reasons that public data is insufficient for the rating agency analysis

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

2 Changes the NAIC made to Schedule F in 2012 (This exam is based on the 2011 version though)

1. It added a new part 6 2. It shifted original parts 6-8 to 7-9

Describe two ways in which the provision for reinsurance encourages solvency.

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

Describe two ways in which the provision for reinsurance may actually damage a company's ability to stay 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.

Briefly describe three insurance trends in the 1990s.

1. Large catastrophe losses led to expanded state intervention of HO pricing and u/w 2. However, some movement towards less invasive regulation (or even deregulation) in other lines 3. Loss trends for auto insurance improved - rate decreases more prevalent and reduced public pressure for using rate regulation to lower rates 4. Favorable cost trends in WC, partly due to state reform legislation. Many states modified rate regulation to permit higher rates and provide greater incentives for loss control. 5. Some states substantially deregulated WC rates for voluntary market. Changes were followed by substantial reductions in WC residual market size 6. Deregulation in many states for large commercial lines. This reflected recognition that rate and form regulation served no useful purpose and were instead counterproductive

State insurance regulatory systems contain the following

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

The US financial regulatory system consists of a 3 stage process. List the 3 stages:

1. Limitation of risks through design of the system 2. Financial oversight 3. Regulatory backstops and safeguards (eg guaranty funds and RBC)

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

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

Describe the structure of the tria program

1. Only applies to commercial lines 2. A single terrorist act must be certified by the secretary of treasury, secretary of state and attorney general. Losses must exceed $5M to be eligible for TRIA coverage 3. Aggregate industry certified losses must exceed $100M for govt coverage to begin 4. Each insurer has a deductible of 20% of its annual premium 5. If aggregate industry losses do exceed $27.5B, it has the discretion to apply surcharges to recoup the money paid 6. The govt will only cover up to $100B of losses. After that point, there is no federal coverage.

Reasons why flood insurance is considered to be uninsurable in the private market

1. Only people with the highest risk levels purchase coverage 2. Possibility of cat loss 3. Difficult to accurately price the risk due to limitations in hazard assessment 4. Because the risk of losses among the insureds are not independent, a very high risk load is required

4 criteria for socialization of insurance costs to be feasible

1. Participation is compulsory 2. Single entity providing insurance has no competitors 3. Govt can expropriate the profits and equity of private insurer 4. It is believed that benefits outweigh costs of socialization

Why does regulatory action need coordination:

1. Past: regulators who learned of severe weakness of an insurer might have been discouraged to take action by domiciliary commission due to local effect 2. FAWG: ensure domestic regulators are effectively dealing with financially troubled, nationally significant insurers

2 things that Claimants must agree to once the MSA is approved

1. Pay the workers compensation related medical bills using the MSA 2. Complete the reporting of the payments

2 responsibilities of NAIC's Financial Analysis Division (FAD)

1. Performs ongoing financial analysis of all nationally significant insurers 2. Identifies trends, benchmarks, identifies troubled companies

Internal controls for corporate governance regarding all material balance sheet estimates including reserves

1. Segregation of duties: ideally there are different people performing the reserving and pricing roles in order to ensure objectivity 2. Use of reserve committees: committees may include executive management, reserving actuary, and heads of key operating functions. 3. Internal audit 4. Actuarial Peer Review 5. Report from the Appointed Actuary

2 Examples of gov acting as exclusive insurer

1. Social security (Federal) 2. Gov run workers comp program (State)

3 methods to calculate the SCR

1. Standard formula: a spreadsheet provided by the regulator 2. Internal models 3. Mix of Both

2 types of insurers that the Fed is authorized to regulate:

1. Systematically Important Financial Institutions (SIFIs): institutions that could cause a national systemic economic disruption if they fail. 2. Insurance holding companies that own banks or thrifts

To derive the due date in order to calculate the age of a reinsurance recoverable use the following hierarchy:

1. Terms of the reinsurance contract that specify when the reinsurer needs to pay, if specified; or 2. Terms of the reinsurance contract that specify when the insurer needs to report the claim to the reinsurer, if specified; or 3. The date at which the amount recoverable from a certain reinsurer exceeds $50K and is entered into the insurer's account as a paid recoverable If no dates are mentioned and also if the recoverable is under $50K, the amount will be recorded as "currently due". Recoverables from mandatory pools and associations are always treated as currently due.

What type of MSAs will be reviewed by CMS

1. The claimant is already a Medicare beneficiary and the settlemtn exceeds 25K or (2) the claimant is expected to be Medicare eligible within 30 months and the settlement or expected future medical cost & lost wages exceeds 250k

3 arguments for rate regulation

1. The limited exemption from federal antitrust law facilitates collusion among insurers to increase price 2. Protection of consumers against inadvertently purchasing from high price insurers 3. When purchase of insurance is compulsory, rates need to be regulated to prevent excessive profits to insurers

List 2 advantages of UBI models that are based on more granular data:

1. The researcher can identify predictive variables more quickly, because once they identify one that could potentially be predictive, they should already have the data available to test their hypothesis 2. The researcher can identify specific risky driving behaviors and convey this information to the driver, so that the driver may be coached to make corrections to improve their driving safety.

List 3 points to support the argument that the US regulatory system has been "successful":

1. There is a strong track record of protecting consumers and overseeing solvency 2. There is a strong depth & breadth of the US insurance industry 3. Capacity of the insurance guaranty system

5 principles of nationwide regulation proposed by NAIC to help achieve uniformity and reciprocity

1. There need to be uniform standards where appropriate, although local standards may apply where necessary 2. States should have the responsibility for setting/enforcing standards 3. State regulators should have equal standing regarding the regulation of holding company structures 4. Structure should provide mechanisms for collaboration & interaction with international & financial services regulators on matters that impact US insurance 5. The system shouldn't reduce states authority to impose taxes and fees

Describe the regulatory environment in the 1970s and 1980s and the effect on the insurance market.

1. There was rapid growth in claim costs. Some states increased intensity and scope of rate regulation attempting to limit rate increases 2. In addition to limiting rate increases, many states placed limitations on underwriting and rate classication in auto 3. Work comp rates were suppressed causing large growth of residual market

2 reasons that insurers should not have large investments in mortgages

1. They are not part of the core business strategy 2. they are illiquid

Concerns of seriously injured claimants for asbestos

1. Those with detectable and indisputable injuries need to be compensated 2. Resolve quickly due to short life expectancy 3. High transaction costs lead to reduced funds available for their needs 4. If they develop serious illness in future years there is a risk that the companies responsible will have gone bankrupt 5. Awards used to pay nonmalignancy claims leave less to pay more serious diseases

Auditors may want to become familiar with the context of reserves, in order to be able to ask probing questions of management & the actuary about the booked reserve & associated risks. Information that the auditors may be interested in includes:

1. segmentation of the reserves into coverage/ product line 2. recent industry trends of the different products (eg profitability, underwriting, claims, reserving issues) 3. if there have been any recent changes in the insurer's experience in the lines in regards to profitability, claim handling or reserve development 4. major risk factors in reserving for the lines 5. whether the competitors are experiencing the same risk factors, changes, etc, that the insurer is seeing 6. the causes of recent changes in the reserve estimates 7. whether the competitors have cited similar causes 8. questions raised about the reserves by the major stakeholders

4 additional criteria that retroactive reinsurance require for risk transfer:

1. the premium paid must be a specific, fixed amount stated in the agreement 2. direct or indirect compensation to the ceding company or reinsurer is prohibited 3. also prohibited is a provision for adjustment based on the actual experience, (except in the case where the ceding company can participate in the reinsurers prot) 4. the contract shall not be cancelled or rescinded without approval of the commissioner of the domiciliary state of the ceding company.

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

1. the reinsurance agreement must contain an insolvency clause 2. recoveries due to the ceding company must be available without delay 3. the agreement should provide no guarantee of profit for either party 4. the agreement must provide for reporting of premiums & losses at least quarterly, unless there is no activity.

Discounted loss reserves are determined from three components

1. undiscounted loss reserves (from Schedule P part 1 (If they are discounted they need to be grossed up before the applicaiton of IRS discounting procedure)) 2. Discount rate promulgated each year by the treasury (varies by AY, for each AY the rate is the 60mnth moving avg of the "federal mid-term rates" ending Dec 1 of the prior AY. This rate is then applied to the AY for all future Calendar Years) 3. Loss payment pattern by LOB: The IRS discounting procedure applies a CY Payment pattern to an AY of loss reserves. This makes the following assumptions: -A payment date of July 1 each year -A 10 year loss payment pattern

The statutory financial statements provide 2 views of financial health of the insurer

1.Balance sheet strength: areas that can impair solvency are loss and LAE reserve adequacy and unearned premium reserve adequacy 2. Earnings potential

Examples of Nonadmitted assets

1.Investments that exceed state limitations 2.Furniture equipment and supplies 3.balances due from an agent from sale of a security over due by over 15 days from settlement 4. 10% of deductubles recoverable in excess of collateral. 5. Funds held at a reinsured company that exceed the associated liabilities 6. DAC

Regulatory Actions are addressed by 3 NAIC Model acts

1.Model hazardous condition regulation 2. Model Supervision Act 3. Model Rehabilitation Act

uses for Schedule P (important)

1.Support and provide disclosure for the SAO 2. Shows how reserves have developed over time, and indicates where the development is coming from (what line of business or year) 3. Provides the source of payment patterns to be used in the tax discounting calculations 4. Shows the split between case reserves and IBNR 5. Provides historical claim count data 6. Provides data to calculate the RBC loss sensitive discount

A large increase in net written premium (Large IRIS Ratio 3) can be caused by

1.abrupt entry into new lines or territories 2.insurer may be attempting to increase cash flow to meet loss payments

Risk margins for measuring liabilities under IFRS should be higher if

1.less is known about the estimate 2.low freq/high sev 3.longer duration 4.wide prob distribution 5.emerging experience increases uncertainty

Monthly pro rata method of calculating unearned premiums

1/24 is earned in the month premium is written 1/12 is earned over the next 11 months 1/24 is earned the following month

Schedule T

2 parts of this: 1. Exhibits of Premiums written 2. Interstate compact - exhibit of premiums written

IRIS Ratio 6: investment yield

2 x (Net investment income earned most recent yr/avg cash and invested assets between current and prior yr)

IRIS Ratio 5: Two year overall operating ratio

2 yr loss ratio + 2 yr expense ratio - 2 yr investment income ratio This ratio is unusual if it is greater than 1.00 The loss ratio also includes policyholder dividends

By when must the RBC report be filed:

3/1

When does the IEE need to be filed

4/1 following the Annual Statement date

List 3 sources from the annual statement that can be used to assess loss reserve adequacy, and state one advantage of each.

5yr historical data exhibit: provides several years worth of data, so it gives the user a better idea of how the reserves developed compared to the historical average Notes to the financial statements: provides insight from management, including information that can not be found in the numbers alone. Schedule P: the triangles allow the users to conduct their own analysis, so they don't need to rely on the estimates provided by the company

Preferred stock investment in insurance subsidiaries

A R0 charge for this is only generated if there is excess RBC, RBC = min(Pro rata share x excess RBC, book/adjusted carrying value of preferred stock) Where the pro rata share is the share of the total outstanding preferred stock that is owned by the insurer

The 10-10 rule

A benchmark used in the industry to determine if risk transfer does not exist. According to the rule, there needs to be at least a 10% chance of a 10% or greater loss

Insurance contract under IFRS 4

A contract under which one party (the insurer) accepts a significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future even ( the insured event) adversely affects the policyholder. Notice that insurance risk does not include timing risk. And compensate does not necessarily mean indemnify (make them whole)

Goodwill under P-GAAP

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

Prudent Person Guidlines

A principles based investment guidelines approach which enables the insurer to develop its own guidelines.

Risk Margin

A provision for uncertainty in an unpaid claim estimate

"Slow Paying" reinsurers

A reinsurer is classified as slow paying if the ratio of (recoverables over 90 days overdue) to (all recoverables on paid losses and LAE + amounts recieved in the last 90 days) >= 20%. The reason to include the amounts recieved in the last 90 days is to avoid discouraging reinsurance claims settlement. Amounts in dispute are subtracted from all parts of this equation

premium deficiency reserve

A separate liability that the insurer needs to create if the premium is insufficient to cover losses, expenses and other costs

Commutation of ceded reinsurance

A settlement between an insurer and reinsurer to discharge all remaining obligations.

Briefly describe a Receivership

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

2 reasons that Receivership laws exist

1. Prevent insolvencies 2. Minimize losses and protect policyholder before/during insolvency

NAIC Actions that seek to meet their fundamental objectives

1. Protect public interest - prepares special reports on insurance issues such as redlining and auto competition 2. Promote competitive markets - model laws, regulations and guidelines promote uniformity among states and reduced expenses for insurers to comply 3. Facilitate the fair and equitable treatment of insurance consumers - keeps Complaints Database System which contains info about complaints made against insurers on a state or national basis 4. Promote the reliability, solvency, and financial solidity of insurance institutions - maintain computerized databases to help regulators track insurers' financial solvency 5. Support and improve state regulation of insurance - accreditation program to promote consistent, effective regulation across all states

3 requirements that the LRRA sets for the RRG:

1. Provide a plan of operation to insurance commissioner of each state in which it plans to do business 2. Provide a copy of group's Annual Statement to insurance commissioner of each state in which it plans to do business 3. Submit to financial exam of nondomiciliary state if domiciliary state refuses to do so

3 types of optimization used in ratemaking:

1. Ratebook Optimization: cost and demand models are utilized to adjust the factors in an existing structure. 2. Individual Price Optimization: creates a price based on cost & demand models at the individual policy level. 3. Hybrid Optimization: create a new rate factor based on a demand model that supplements a cost based rating algorithm.

Criticisms of using rating agencies

1. Recent downgrades of highly rated debt 2. Oligopolistic nature of rating agency industry 3. Greater efficiency of free markets in determining bond yields

2 Changes made to the Crop insurance program in 2005

1. Reduced the reimbursement rate to insurers for administrative and operating expenses 2. The risk sharing between the gov and insurers was rebalanced

2 fears of business due to WC laws that encouraged the govt to set up state funds

1. Refusal of coverage by private insurers 2. high rates

7 core principles of the insurance solvency framework

1. Regulatory Reporting, Disclosure & Transparency 2. Off-site Monitoring & Analysis 3. On-site Risk focused Examinations 4. Reserves, Capital Adequacy and Solvency 5. Regulatory Control of Significant, Broad-based Risk-related Transactions/Activities: 6. Preventive and Corrective Measures, including Enforcement 7. Exiting the Market and Receivership

List and very briefly describe 5 core principles of the US Insurance Financial Solvency Framework

1. Regulatory Reporting, Disclosure & Transparency: this includes providing information to the regulators, and other stakeholders, in order to help ensure that the company is working in their best interest 2. Off-site Monitoring & Analysis: assess the financial condition of the insurer on an ongoing basis; and identify/ assess the risks 3. On-site Risk focused Examinations: on site exam to evaluate the insurer's solvency/ develop view of risks 4. Reserves, Capital Adequacy and Solvency: ensure that the insurer has enough reserve and surplus to produce a margin of safety 5. Regulatory control of significant, broad-based and risk-related transactions/activities. 6. Preventive and Corrective Measures, including Enforcement: take preventative/ corrective measures based on the risks identified during the on site and off site regulatory monitoring, in order to prevent insolvencies 7. Exiting the Market and Receivership: help orchestrate the insurer's exit from a market due to insolvency; or look for alternatives to the insolvency

3 problems with regulation

1. Regulatory fallibility 2. Regulatory forbearance 3. Regulatory capture

Characteristics of reinsurance agreements that affect accounting practices

1. Reporting responsibility of the ceding entity: contains the time schedules to report losses 2. Payment terms: contains time schedules to make payments, currencies that the payments must be made in, and the rights of parties to withhold funds 3. Payment of premium taxes: indicates which party needs to pay the premium taxes (usually the ceding company) 4. Termination: This can either be on a cut-off or run-off basis -Cut-off: the reinsurer will not be responsible for losses after termination of the contract -Run-off: The reinsurer will be responsible for loss from reinsured policies in force at time on termination of the contract 5. Insolvency clause: claims that the reinsurers obligations will be maintained (without any reductions) in the event of insolvency of the ceding company

3 reasons that premium subsidies are often thought to be appropriate for flood risk

1. Residents of flood-prone areas did not understand the flood risk when they built there 2. There were no public safeguards restricting construction in the floodplain 3. premium subsidies on pre-FIRM (flood insurance risk map) structures could motivates communities to participate in the program

When a bond is first purchased it is recorded at actual cost

Actual cost included brokerage an other fees

Actuaries involvement in the creation & use of the balance sheet

Actuaries play a big role in determining the reserves. The balance sheet provides some of the data used to assess the adequacy of capital.

Financial section of common interrogatories

Address whether the accounting method used is under SAP

Iris Ratios: Ratio 9: Liabilities to liquid assets

Adjusted liabilities/Liquid assets Adjusted liabilities = liabilities - liabilities equal to deferred agents balances Liquid Assets = liquid assets - investments in parents, subsidiaries, affiliates This ratio measures the ability to meet financial demands. Also provides a rough indication of the possible implications for policyholders if liquidation is necessary

Codification of SAP

Adopted by NAIC on 1/1/01. This is a set of accounting principles for insurance companies. These can provide an early warning of impending financial problems to protect policyholders. Insurers still have to follow GAAP rules as well.

Briefly describe advantages and disadvantages for a mid-size mutual insurance company to obtain an interactive rating from A.M. Best.

Advantages -Insurer has some control over information reviewed -Easier to obtain credit for the company -Fewer chances of error -Agents may be wary of insurers without an interactive rating Disadvantages -It has a cost -It requires time, effort, and personnel -It is intrusive

(ASOP 36) The scope of the SAO should list the review date, which is the date through which material information known to the actuary is included in forming the reserve opinion

Also, if separate reserve amounts for different reserve items, such as losses and loss adjustment expenses, are disclosed in the SAO, whether the actuary's opinion applies to those items in the aggregate or individually; and any other items that, in the actuary's professional judgment, are needed to describe the scope of the actuary's analysis sufficiently.

Encumbrances

Amount owed on real estate (like mortgage payments)

RBC Charge for investment affiliates (R1)

An Investment Affiliate is an entity that exists only to invest funds in the parent. It does not include brokers or fund managers that manage investments for other parties. The RBC Charge is the same as if the insurer owned the investments directly

What is A.M. Best

An agency that provides financial strength ratings for Life and P/C insurers

Intercompany pooling

An arrangement among a group of companies where each member fully cedes all business to a pool leaderwhichthen retrocedes a portion to each member company

Provision for Reinsurance

An estimate of the minimum bound of uncollectible reinsurance. This provision is detailed in Schedule F parts 5-7.

What is a "loss contingency" or "asset impairment"

An existing condition involving uncertainty as to possible loss that will ultimately be resolved when future event(s) occur or fail to occur.

% of assumed business versus direct

An insurer has less control over the business that it assumes than the business that it writes itself. If the insurer has a large poriton of assumed businesss the user should review & understand the types of business assumed/attachment points/layers & limits of coverage/underwriting & price monitoring controls on the assumed book

Optimal Tax investment Strategy

An insurer will maximize its after-tax income by having a bond portfolio that causes RIT to equal AMT RIT = AMT when AMTI = RTI x 1.75

AAA Materiality

An item is defined as being material if it has an impact on the users decision/conclusion. When determining of something is material, it is necessary to study its: -purpose -intended users

Briefly define "Market Regulation":

Analysis/ oversight of insurer's behavior in the market.

Current Definition of the Business of Insurance

Any activity that has one or more of the following characteristics -Insurer spreads or underwrites the policyholders risk -Insurer and the insured have a direct contract agrment -Activity is unique to entities within the insurance industry Business of insurance receives protection form federal intervention as allowed under McCarran

Mark-to-market accounting

Any changes in fair value are recorded as unrealized gains

Are these things included in SOA or AOS?

Appointed Actuary's best estimate of loss reserves and/or range of reasonable reserve estimates AOS The amount of discount included as a reduction to loss reserves SOA Companys booked loss reserves BOTH Materiality Standard for risk of material adverse deviation SOA Company's range of reasonable reserve estimates NIETHER Amount of surplus SAO Name of Appointed Actuary BOTH Anticipated salvage & subrogation included as a reduction to loss reserves SAO

Define an Insurance cooperative:

Arrangement where members pool funds to spread and assume their own commercial liability risk. Members engaged in businesses and activities with similar or related risks

Explain the implications of the IFRS requirement that insurance contracts that have both insurance and investment features be unbundled and accounted for separately.

As a result, some products, that may be less profitable on a stand alone basis, may need to be modified or discontinued. In addition, some products (eg life insurance contracts) may need to be modified (shortened) to reduce the volatility.

Solvency II Pillar 2 requires that firms conduct an Own Risk and Solvency Assessment which is an internal assessment of the solvency need based on the risk profile

At the minimum the ORSA should contain the overall solvency need, compliance with capital requirements, and the extent to which the risk profile deviates significantly from the assumptions underlying the SCR

How could specific parts of Schedule P be used to calculate a triangle of average case outstanding per open claim and average paid per reported claim?

Average case outstanding is Schedule P (part2-part3-part4)/part5. (Incurred Losses-paid loss-IBNR)/open claims Average paid per reported part3/part5 (paid losses over reported claims)

Company RBC Loss ratio

Average of: Industry RBC loss and lae ratio (provided by NAIC) Industry RBC loss and lae ratio adjusted for company's experience. Adjustment for company experience is derived by first calculating the company average loss and lae ratio. (Ratios for each year are capped at 300% before averaging) Adjustment for comp experience = comp avg loss and lae ratio / industry avg loss & lae ratio

Two definitions of surplus

Balance Sheet: Surplus=Admitted Assets - liabilities Income Statement:Surplus = Prior years surplus + This Years Income To reconcile the income statement surplus with the balance sheet surplus you need to subtract the annual change in direct charges to surplus

Deferred Premiums

Balances due after the financial date

Uncollected Premiums & Agents Balances

Balances due before the financial statement date. Premium that is over 90 days overdue is nonadmitted. The insurer should treat all premium that it believes it will not collect as bad debt.

Possible wording in the SAO if there is material amount of ceded reinsurance with none to troubled reinsurers:

Ceded loss reserves are all with residual market pools, with companies rated XX or better by A.M. Best Co. (or its substantive equivalent), or fully collateralized. Past collectability levels and current amounts in dispute have been reviewed and found to be immaterial relative to surplus. Therefore, reinsurance collectability does not appear to be an issue.

Prior Years Row in Part *3* of schedule P formula for year X

Cell A of the row will equal: Cell A from prior years row of year (x-1) + Cell A from Row (x-9) for year (x-1) - Cell (A-1) from Row (x-9) for year (x-1)

Real Estate, Schedule BA and Miscellaneous Assets factors for RBC Charges

Certain factors are applied to the book value of these investments: Real Estate .1 Other long term invested assets other than collateral loans .2 Receivables for securities 0.05 Aggregate write-ins for invested assets 0.05 Derivatives 0.05

Certified reinsurer ratings

Certified reinsurers recieve a rating between 1&6 where the rating impacts the amount of capital that they have to post. As a result: The insurer has a lower provision and the reinsurer does not need to post as much collateral.

IRIS Ratios 3: Change in net writings

Change in net writings = (Current NWP - Prior NWP)/(Prior NWP) If this is greater than 33% then it is unusual

Excessive premium growth charge formula for NWP:

Charge = Average growth rate factor × 0.225 × NWP

Clayton Anti trust Act

Clayton Anti-Trust made illegal activities that lessened competition or created monopoly power. Tying of purchases explicitly prohibited.

Briefly described the purpose of NAIC's Financial Analysis Working Group (FAWG)

Collaborate to work on problems of potentially troubled insurers

Dodd-Frank established the Federal Insurance Office (FIO). FIO is responsible for:

Collecting information Monitoring the insurance industry Making recommendations on improving/modernizing insurance regulation FIO has authority for all lines of business except health insurance, most long term care insurance, and crop insurance

Dene "Rating cell":

Combination of rating variables from a rating plan

Under SAP Accounting the goodwill depends on how the business combination is accounted for: Statutory Merger

Combinations where equity of one entity is exchanged for equity of another (with the equity in the second then cancelled)

Combined Ratio formula for use in trend test

Combined Ratio = Loss & LAE Ratio + Dividend Ratio + Expense Ratio; Loss & LAE Ratio = (Net Incurred Loss & LAE) / Net Earned Premium; Dividend Ratio = Policyholder Dividends / Net Earned Premium; Expense Ratio = (Other U/W Expenses + Aggregate Write-ins for U/W Deductions)/Net Written Premium

What approach did regulators determine is the best way to achieve the U.S Insurance Regulatory Mission:

Combining Financial Regulation and Market Regulation

Contingent Commissions

Commisions paid to reinsurers that is based on the profit of the ceded business

Three approaches to determine risk margins for IFRS liabilities

Confidence level (VaR) technique: the extra amount that needs to be added to the expected value to result in a specific probability that the insruer has sufficient funds to pay for the liabilities Conditional tail expectation (CTE)/tail value at risk (tVaR): this equals prob weighted avg of all scenarios in the tail - Mean estimate. This has the Advantage of VaR that it reflects the skewed dists. Cost of capital method: the amount necessary to produce an adequate return, after factoring in the investment return. According to the international Actuarial Association this is the most risk sensitive method and is most closely related to pricing in other industries, however it is the most difficult to implement.

How does the NAIC affect insurance through its activities in the promulgation of model laws

By drafting model laws and recommending that each of the several states pass them, the NAIC strives *to enhance the quality and uniformity of insurance regulation* across the several states, this has benefit to large, national carriers in that they can spend less on getting rates approved since there are more consistent filing packages that they must prepare.

Reasons why Municipal bonds yield 70-80% of the pretax yield of corporate bonds, even though they should yield 65-68.6% (in order to produce the same yields after tax) from a pure tax analysis

Callability: Most munies are callable. This feature is a disadvantage to the bondholder, so they deman a higher yield Liquidity: Munies are less liquid Tax Legislation: the Proration Provision reduced the tax advantage of municipal bonds

Why are the regulatory requirements for captives less restrictive than for RRGs:

Captives are wholly owned insurance subsidiaries. If fail, only assets of parent at risk

SEUA decision

Case initially dismissed based on US Supreme Court decision in Paul v VA Then on appeal, Sup Court agreed to hear the SEUA case in 1944 Court considered 2 key questions when making the decision: (1) Did Congress intend the Sherman Act to prohibit insurers conduct of restraining/monoplizing business (2) Do insurance transactions across state lines constitute commerce among several states which will subject them to congressional regulation

Briefly describe a reciever

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

Calculating Net Deffered Tax assets

DTA= Tax% x (Loss Reserve Discount - (DAC - .2x(Net UEPR)) - Unrealized Gain on Investments - Accrual of market discount not for tax purposes)

Potential distortions to IRIS ratio 13

Distortions may arise when there are changes in exposure: -Significant changes in premium volume: An increase in premium will show a deficiency greater than the true number -Shift in product mix: for example a shift from property to liability lines will understate the deficiency, therefore in cases of a shift in product mix, it may be a good idea to calculate the ratio separately by line

Schedule A

Contains details of real estate transactions and holdings.

Schedule D

Contains details of the stocks and bonds held by the insurer

Schedule F

Contains details on prospective reinsurance transactions

Methods and assumption section of the Relevant Comments in SAO

Describe any significant changes in assumptions or methods unless it is not likely to have a material effect. The following do not constitute a change: the changes in assumptions or methods for new reserve segments, periodic updating of experience data, factors or weights.

Sherman Antitrust Act in 1890

Did not directly apply to insurers because insurance was not considered interstate commerce. However, it gave states motivation to pass own antitrust laws against controlling rates

P&C claims made contract

Covers losses reported during the policy period, regardless of when the claim occurred. The retroactive date is the date at which coverage begins, so losses that after the retroactive date can be reported. Tail coverage can cover events that are reported outside of the termination of the policy.

Define Fidelity Coverage

Covers the policyholder for a loss incurred due to the fraudulent act of specified individuals

Taxable Income can be determined on a direct or indirect basis

Direct calculates taxable income directly Indirect calculates the taxable income by making adjustments to the statutory income

Part 4 of Schedule F

Discloses info on aging of ceded reinsurance. Includes balances in dispute.

part 3 of Schedule F

Discloses info on ceded reinsurance

Schedule DB

Discloses the derivatives held by an insurer

Footnotes of part 3 of schedule F

Discloses the top five commission rates of contracts where the ceded premium exceeds $50K. These contracts generate large amounts of surplus relief, so these footnotes can help identify companies that are using reinsurance to conceal high operating leverage.

NAIC Model Investment Law

Allows insurers to adopt one of two types of investment guidelines: Defined Limits (Quantitative limits) or Prudent Person

The Dodd-Frank Act included the federal Nonadmitted and Reinsurance Reform Act (NRRA), which prohibits a state from denying credit for reinsurance, if the domiciliary state:

Has recognized credit for reinsurance, and Is an NAIC accredited state The NRRA also assigns the domiciliary state the sole responsibility for regulating the reinsurer's financial solvency.

In addition to the main SAO qualification standards, AAA has produced "Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States Including Continuing Education Requirements. GENERAL STANDARDS

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

Criteria to classify an insurer as an "exempt commercial purchaser":

- Insurance Purchaser who employs a qualied risk manager to negotiate insurance coverage - Has paid over $100K in P&C premiums in the past 12 months - Meets at least one of the following criteria: -net worth at least $20M -annual revenue at least $50M -over 500 employees -a member of a group with over 1K employees -not for profit organization/ public entity with budgeted expenditures of at least $30M -municipality with population of at least 50K

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

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

Asbestos/Environmental Reserves (Notes to the financial statements)

- Lines of business affected - Nature of the exposures - Reserving methodology In addition to this, it needs to provide a table that contains the following information, separately for asbestos and environmental, and also separately for direct, assumed and net, for each of the past 5 years: - Beginning loss & LAE reserves - Incurred loss & LAE - Calendar year payments for losses & LAE - Ending loss & LAE reserves - Pure IBNR

List some factors that could impact premium in UBI programs:

- Location of vehicle - Number of trips - Mileage - Driver behavior (how well they drive)

(The Appointed Actuary must meet the general and specific qualification standards, basic and continuing education requirements and other requirements described in section 3 of the US Qualification Standards.) NAIC SAO U.S. Qualification Standards - General

- MAAA, FCAS, ACAS or fully qualified member of another IAA-Member organization -Three years of responsible actuarial experience, defined as work that requires knowledge and skill in solving actuarial problems -Knowledge of the applicable law through examination or documented professional development -And either: 1) Have attained highest possible level of membership in an IAA full-member organization and have one year responsible actuarial experience in the relevant area under the review of an actuary qualified to issue the SAO at the time 2) Have a minimum of 3 years of responsible actuarial experience in the relevant area under the review of an actuary qualified to issue the SAO at the time the review tool place under standards in effect at that time -30 hours of relevant continuing education: 1) >=6 organized 2) >=3 professionalism 3) <=3 general business

List some ways in which different regulators have responded to price optimization:

- Many states defined price optimization and prohibited the defined practice - Some state regulators believe that the existing state laws are sufficient to cover price optimization. No bulletin/ public announcement specific to optimization is necessary - Many states have not yet received a filing that mentioned that price optimization was used in the rating process

IFRS recommendations regarding risk margins for measuring liabilities

- Margins should be calculated using consistent methodology over the life of the contract - Margins should be calculated using consistent assumptions to those made in the calculation of the liability, - Margins should be consistent with sound insurance pricing - Margins should vary by product to reflect the difference in risk of the different products

List some components of Other Income

- Net Gain from Agents' or Premium Balances Charged Off - Finance & Service Charges not included in Premiums - Aggregate Write-ins for Miscellaneous Income - Dividends to policyholders - Federal & Foreign Income Taxes

Disadvantages of black box device:

- Not portable - Most expensive (high installation & administration costs)

List 4 inherent weakness in the credit reporting system

1. 2000 study by Consumer Reports showed 50% of credit reports contained errors 2. Identity theft 3. Excessive access to credit as evidenced by the problems in the mortgage industry 4. Credit reports disproportionately negatively affect certain parties

3 Objectives of reinsurance facilities

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

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

1. All are owned by their shareholders and permit shareholders to invest in an array of securities 2. All employ the services of a management company to administer operations

Change in incurred Loss and LAE (Notes to the financial statements)

1. Amount of the change 2. Segments/ lines that lead to change 3. Reason for the change This note is important for the following reasons: -Changes can distort the current year's underwriting income -Recurring material changes may indicate that there are issues with the reserving process. The user would need to refer to Schedule P or the Five-Year Historical Data Exhibit

Pricing a commutation

1. Each has has to first estimate the future claim payments from the reinsurer to the ceding. 2. They next have to estimate the timing of the payments and apply a discount factor that accounts for both the time value of money and risk. 3. The parties also need to adjust the price to reflect their unique tax treatment. 4. Finally, each party must reflect factors related to the motives for entering into a commutation

Consumers have two main public policy goals for insurance:

1. Ensuring that all consumers have access to essential insurance products. 2. Insurance is the core method for loss reduction and risk mitigation.

5 justifications of the socialization of insurance costs

1. Equal sharing more fair than pricing on relative risk or benefits 2. Risk-based pricing may harm low or middle-income individuals 3. Limit to what someone should pay regardless of risk 4. Risk based prices discourage some from buying insurance 5. Price should be affordable if insurance is compulsory

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

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

2 purposes of the onsite exams:

1. Evaluate the solvency of the insurers, based on the view of strengths & weaknesses 2. Develop a prospective view of the insurer's risks and risk management practices

3 levels of govt participation in insurance

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

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

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

External controls for corporate governance regarding all material balance sheet estimates including reserves

1. External audit: auditors will typically review the reserves in each reporting cycle since the reserves have such a material impact on the earnings and solvency 2. Attestations: NAIC requires the larger insurers to provide attestations about the effectiveness of the control structure. In addition Sarbanes Oxley also requires attestations by independent auditors. 3. Financial Examinations: a key part of the exam is the review of previously recorded reserves. 4. Replacement of the Appointed Actuary: when the appointed actuary is replaced both the insurer and the outgoing actuary need to provide letter to the regulator discussing any disagreements

Steps of regulatory intervention procedure

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

List 3 federal workers comp programs

1. Federal Employee Compensation Act 2. Longshore and Harbor Workers Comp Act of 1927 3. Black Lung Benefits act

List some services of insurance advisory organizations

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

3 components of the risk focused surveillance by regulators:

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

List 3 exclusions from the definition of long duration contracts

1. Financial guaranty 2. Mortgage guaranty 3. Surety

Regarding loss and LAE reserve adequacy regulators can refer to:

1. Five year historical data exhibit :shows how losses have developed over time 2. Notes to financial statements: includes managements discussion about changes in incurred loss 3. Schedule P parts 2-4: provides data to perform tests of reserve adequacy 4. Schedule F part 3

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

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

Competition creates strong incentives for insurers, list 2:

1. Forecast costs accurately 2. Price and u/w so as to avoid adverse selection

Types of security (collateral) used when buying reinsurance

1. Funds held or deposited with reinsured companies 2. Letters of Credit (letter from bank saying that they will pay if reinsurer cannot) 3. Amount of assets pledged or collateral held in trust

Identify six loss reserve items that appear in Exhibit A: SCOPE of the statutory Statement of Actuarial Opinion.

1. Loss Reserves gross 2. LAE reserves gross 3. Loss reserves net 4. LAE reserves net 5. Retroactive reinsurance reserves 6. Other loss reserves

Two most common sources of Deferred Tax Assets

1. Loss reserves are discounted in tax accounting but not in SAP accounting 2. Carryforward net operating losses from prior years: this occurs when the insurer has net operating losses in one year and expects these to offset future gains and therefore future taxes

The three levels of regulatory action to control financial difficulties

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

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

1. May be used directly as a rating factor (a.k.a. risk classication factor) 2. May be used to assign risk to the appropriate tier

3 ways in which states restrict insurer exit

1. May require insurer to exit all lines in the state if exiting for a regulated line 2. Permitting only gradual withdrawal 3. Levying exit fees to fund future residual market deficits or guarantee fund assessments

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

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

2 problems with the implementation of MSAs

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

2 problems of the implementation of MSAs

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

List 4 alternatives to the insolvency that regulators will consider:

1. Mergers or acquisitions 2. Reinsurance arrangements 3. Non-renewal of part/ all of the business 4. Placing the insurer into run-off mode

3 stages of Financial Regulation (long explanation):

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

3 Advantages of Model Laws, Regulations and Guidelines

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

2 reasons that premium deficiencies are rare

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

Other Underwriting Expenses need to be allocated in three ways:

1. NAIC Operating Expense Classifications. 2. Expense Categories by operational function (LAE, investment, other) 3. Line of business

Initiatives that the NAIC has undertaken

1. ORSA - own risk and solvency assessment. 2. IMF FSAP - financial sector assessment programs is an international in-depth look at regulation, especially on group comparisons 3. Solvency maintenance - create document laying out US insurance structure, look for ways to use international developments in insurance regulation in US and apply lessons from global financial crisis 4. Review IFRS accounting standards and improve uniformity in global insurance market, while improving assessment of short and long term profitability of insurers 5. Improve RBC calculation - introduce operational risk charge, and improve the square root formula

List 4 counterarguments to the argument that rate regulation is needed because the limited exemption from federal antitrust law facilitates collusion among insurers to increase price:

1. Unless prevented by price regulation, modern P/C insurance markets are characterized by substantial heterogeneity in prices and u/w standards 2. Structural characteristics of insurance markets are inconsistent with collusion to raise rates 3. Rate advisory organizations promote healthy competition by providing valuable, low cost info to insurers concerning loss costs, thereby reducing insurer risk, need for capital, and the cost of ratemaking and entry in market 4. If antitrust exemption were associated with anticompetitive behavior, solution would be to deregulate prices and modify exemption

2 questions regarding the feasability of catastrophe disaster insurance

1. What is the best approach to address the misperceptions about the nature of the NFIP, and barriers to public understanding about flooding? 2. Should the NFIP cover all claims arising from catastrophes or just the claims in an average annual loss year?

Three things that should DEFINITELY be disclosed in the relevant comments section of the SAO

1. Whether or not there is exposure to asbestos/exposures 2. Whether Reinsurance is collectible/valid 3. Yes or no pool/association involvement

2 implications of the fact that RRGs are prohibited from participating in state guaranty funds:

1. Will provide strong incentive to establish adequate premiums and reserves 2. RRG insureds and their claimants could be exposed to all losses resulting from claims above what RRG can pay

4 types of residual auto plans (involuntary market mechanisms)

1. assigned risk plans 2. Reinsurance facilities 3. Joint Underwriting associations (JUAs) 4. Maryland Automobile fund

2 Reasons LOC's are expensive to the reinsurer

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

List & briefly describe 3 types of receivership:

1. conservation = safeguard the insurer's assets while the regulator determines the best course of action 2. rehabilitation = In rehabilitation, there's hope of saving the insurer. Rehabilitator tries to stabilize the insurer's cash flow and protect its assets. They often try to find an investor for additional capital. 3. liquidation = the receiver either transfers all of the insurer's business, including reserves and assets, to other insurers or sells the insurer's assets and terminates the insurer's business.

List 4 types of telematics devices being used today:

1. dongle 2. black box 3. embedded 4. smartphones

2 implications to the govt in markets where insurance purchase is mandatory

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

3 Sources to determine reinsurer collectability

1. management 2. reinsurer ratings 3. Schedule F (look for regulatory action or overdue paid losses)

Describe "covered agreements"

Agreements between the US and foreign nations to allow non US insurers to operate in the US, subject to the prudential measures that would provide protection comparable to the level of protection provided by state regulation.

What topics does interrogatory 2 cover?

Asks if the LAE is being defined as DCC and AAO

Main purpose of off-site solvency monitoring:

Assess the financial condition of the insurer on an on-going basis, and also to identify & assess current & prospective risks.

P&C RBC formula consists of these risks

Asset Risk, Underwriting Risk, Covariance adjustment

Why do finite reinsurance contracts require a reinsurance attestation supplement

Because finite reinsurance deals can be manipulated to increase surplus.

In 2012 the NAIC introduced a new category of reinsurers "certified reinsurers" to be used in the calculation of the provision for reinsurance. Describe a benefit that this new "certified" category provides to the reporting entity and a benefit it provides to reinsurers.

Benefits to Reporting Entity: • Will reduce the provision for reinsurance • Do not have to carry as large a provision for certified reinsurers as they do for unauthorized • Will have less penalty in reinsurance provision for unauthorized reinsurer • Reinsurer has lower collateral costs which they can pass on to the reporting entity through lower premiums Benefits to Reinsurers: • Being certified will require the reinsurer to post less collateral • Can attract more business since ceding company may see them as more desirable due to certification • Don't have to provide as much collateral (which is costly) as unauthorized reinsurers • Can market their certified status and gain business • If declared a certified reinsurer and ranked #1, reinsurer need post no collateral

Generally, insurance through FAIR plans cannot be refused due to environmental hazards.

Environmental hazards are defined as any condition beyond control of property owner that might give rise to a covered loss

Solvency Capital Requirement for Solvency II (Pillar 1)

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

Source of underwriting expense ratio in NWP RBC calculation:

Companys actual ratio of other underwriting expenses incurred in the current year to the total net written premium in the current year (capped at 400%).

Briefly describe a contract of adhesion

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

Define "long duration contracts"

Contracts with terms greater than 13 months where the insurer can not cancel or increased the premium

Purpose of the preventative/ corrective measures that regulators can take, based on the risks identified during the onsite and offsite regulatory monitoring:

Correct problems to prevent insolvencies

Cost of double taxation on a before tax basis

Cost of double taxation on an after tax basis / (1- personal tax) or corporate tax rate x investment yield

IRS cumulative % losses paid at each Valuation date (if there are no random loss fluctuations)

Cum % losses paid at each valuation date = (cumulative paid losses)/(cumulative incurred losses)

Avg cash and invested assets between current and prior year

Current year cash and invested assets + Prior year cash and invested assets + current year investment income due and accrued + prior year investment income due and accrued - Current year borrowed money - prior year borrowed money - Net investment income earned most recent yr

In addition to the main SAO qualification standards, AAA has produced "Qualification Standards for Actuaries Issuing Statements of Actuarial Opinion in the United States Including Continuing Education Requirements. STANDARDS SPECIFIC TO THE SAO

Either: -successfully completed exams administered by the AAA or CAS on: * Policy forms and coverages, underwriting and marketing * Principles on ratemaking * Statutory insurance accounting and expense analysis * Premium, loss and 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 actuary's professional history and that the actuary has obtained sufficient alternative education to satisfy the basic educational requirement for the specific qualification standard * At least 3 years of responsible experience related to the subject of the SAO under the review of an actuary qualified to issue the SAO * 15 CE (Continuing Education) hours per year related directly to the particular topic * At least 6 CE hours per year of "organized" activities related directly to the topic

US vs SEUA with regards to the business of insurance

Fixing rates by insurers is part of the business of insurance

Additional premiums due to endorsements and changes in coverage are recorded on the effective date

Flat fee service charges on installment premium are not recorded as premium but instead are included in the other income of the Underwriting and investment exhibit

After a bond is purchased it is carried at adjusted carrying value

For NAIC bond class 1 & 2: Amortized cost For NAIC bon class 3-6: min(amortized cost, Fair value)

How is the discount rate to be used in tax calculated?

For each AY, the discount rate is the 60mnth moving average of the "federal mid-term rates", ending Dec 1 of the prior AY

The accounting treatment of a run-off agreement

For the transferring entity: -the payment to the reinsurer is recorded as a paid loss -if the payment is less than the reserves transferred, the difference is recorded as a decrease in the losses incurred -the reinsurance recoverable increases by the amount of the transferred reserve For the Reinsurer: -the transactions need to be recorded in the same line of business and the same level of detail as recorded by the transferring entity.

Things to look for in the balance sheet section of the 5 years of historical data exhibit

Has there been a move to riskier assets The change in loss reserves, unearned premium, and surplus relative to the business mix

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

Hazardous financial condition

List and briefly describe examples of Managed care plans

Health Maintenance Organization (HMO): Must use network providers HMO with Point of Service Option (POS):May go outside of network for substantially higher out-of-pocket costs Preferred provider organization (PPO):Lower deductible and coinsurance if stay in network Provider sponsored organization (PSO): closed network operated by healthcare providers

IFRS requires that the investment of assets of insurers are grouped into the following categories (Very similar to GAAP requirements)

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

Purpose of Financial interrogatories:

Help users understand: - If the insurer has nancial obligations that were not reported in the Annual Statement - If the insurer has been providing signicant nancial support to its stakeholders/ aliates

Levels of regulation for Inland marine, Commercial General Liability, and Private Passenger Auto

Inland marine: low/ minimal regulation • Highly individualized risks • No statistical info to justify rates • Diverse coverages and classifications CGL: moderately regulated • Sophisticated buyers PPA: most regulation of the 3 lines • Legally required or socially desirable for consumers to purchase

Surplus Lines

Insurance coverage obtained from nonadmitted insurers when protection is not available from admitted insurers. A key characterisitc is freedom from state-imposed rate and form requirements for nonadmitted insurers. The rates and forms are not regulated and there is flexibility to adjust and quickly meet insured's needs

FAIR plans

Insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties -Especially those susceptible to loss by riot or civil commotion

Why are insurers subject to "market discipline":

Insurance reporting is very transparent: consumers can access the annual & quarterly statements. The market discipline will arise from analysis by the industry, financial markets and public.

Explain Doctrine of reasonable expectations

Insured's reasonable expectation of coverage will be honored

Compliance responsibilities of insurers regarding Guaranty funds

Insurers cant use the fact that the guaranty fund exists to help sell business. Needs to provide new policyholders with a guaranty fund disclaimer

Briefly describe U.S. Insurance Solvency Framework Principle 1 (Regulatory Reporting, Disclosure & Transparency):

Insurers regularly provide standardized financial reports to regulators to help assess risk & financial condition.

Requirements for a "small company" exemption from producing an SAO

Insurers with under $1M of total direct & assumed premiums in a CY, and under $1M total direct & assumed loss & LAE reserves at year end

Describe Regulatory Capture

Tendency of regulators to side with an interest group

Things the insurer must disclose about asbestos and env exposure

Lines of business affected, Nature of the exposures, reserving methodology.

Formula for liquid assets used in IRIS ratio 9

Liquid Assets = Cash, cash equivalents, short term investments + Stocks + Bonds + receivables for securities + Investment income D&A

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

Loss and LAE and Unearned Premiums

Two important court cases are: • 1868 - U.S. Supreme Court, Paul v. Virginia, and • 1944 - U.S. Supreme Court, U.S. v. South-Eastern Underwriters Association. briefly describe the impact of each case on the regulation of insurance

Paul v Virginia - regulation of insurance by individual states - US v SEUA - Regulation by fed govt; bureau rates were illegal b/c they violated the anti-trust laws

Two important court cases are: • 1868 - U.S. Supreme Court, Paul v. Virginia, and • 1944 - U.S. Supreme Court, U.S. v. South-Eastern Underwriters Association. For each case, briefly describe the opinion of the court with regard to insurance and interstate commerce.

Paul v Virginia: Insurance was not interstate commerce, so not subject to federal regulation; regulated by state US v SEUA: Insurance was interstate commerce, so subject to federal regulation - Sherman act, Clayton Act, FTC Act applied to insurance

Medigap Insurance

Pays part or all of the covered charges not paid by Medicare

List a counterargument to the argument that rate regulation is needed because mandatory purchase requirements make it desirable to gov't to ensure coverage is affordable to all:

Price regulation is a crude method of providing subsidies to low income buyers

Commutations result in distortions to the paid loss triangle

Primary -downwards delivery of paid loss -net ultimate losses increase, despite a constant gross ultimate Re: -jump in paid losses -ultimate loss decrease purely due to the commutation price being lower than the reserve -jump in claims closure count

List a counterargument to the argument that rate regulation is needed because it protects consumers against inadvertently purchasing from high price insurers

Prior approval rate regulation is an inappropriate tool to address this: If difficulty in price comparisons justifies gov't action, the preferred mode is greater information disclosure

Creating Schedule P Part 2 using last years part 2, part 3 and current year part 3 and CY paid, IBNR, and case reserve info

Prior years first column: last years 2nd column of prior years row - last years 2nd column prior years row of part 3 + last years 2nd column 2nd row - last years 2nd column 2nd row part 3 Prior years Column of year A: current part 3 equivalent cell + prev part 2 prior years row year A column - prev part 3 prior years row year A column + prev part 2 2nd row year A column - prev part 3 2nd row year A column prior years last column: Equivalent Cell of current part 3 + CY IBNR prior years row + CY Case outstanding Prior years row Lowest diagonal shifts up diagonally Other Cells left are: equivalent part 3 + Same row CY Case Outstanding and IBNR

Describe the structure of crop insurance

Private insurers sell & service the policies, the federal govt reinsures the losses

Define "Risk profile":

Set of characteristics listed in the insurer's rating plan required to calculate the premium. People with the same risk profile should have the same expected risk, loss & expenses.

(The Appointed Actuary must meet the general and specific qualification standards, basic and continuing education requirements and other requirements described in section 3 of the US Qualification Standards.) NAIC SAO U.S. Qualification Standards - Specific

Successfully complete relevant examinations administered by the Academy or the CAS on: (a) policy forms and coverages, underwriting, and marketing; (b) principles of ratemaking; (c) statutory insurance accounting and expense analysis; (d) premium, loss, and expense reserves; and (e) reinsurance; OR obtain a signed statement from another actuary who is qualified to issue the SAO, NAIC P/C Annual Statement, indicating that the writer is familiar with the actuary's professional history and that the actuary has obtained sufficient alternative education to satisfy the basic education requirement for the specific qualification standard. This statement should be obtained before issuing an SAO. -Three years of responsible experience relevant to the subject of the SAO under the review of an actuary qualified to issue the SAO at the time the review took place under standards in effect at that time -Obtain 15 CE hours per year related directly to the particular topic -Minimum of 6 CE hours of "organized" activities related directly to the particular topic

Calendar Year earned Premium in year X Formula

Sum of Calendar year x column entries - Sum of CY x-1 column entries + Calendar year x prior years row

Iris Ratio 4: Surplus aid:PHS

Surplus Aid/PHS Where Surplus Aid = Ceding commissions ratio x Sum of unearned premium (Non Affiliates) Where Ceding Commisions = reinsurance ceding commisions (including contingent commisions)/reinsurance premiums ceded (to affiliates AND non affiliates) If this is greater than 15% then it is unusual

Allocating surplus to a line of business

Surplus is allocated proportional to the sum of Mean net loss and lae reserves+ mean uepr + ep for the year R = Ratio of Total (Mean PHS across all lines)/(sum of mean net loss and lae reserves+ mean uepr + ep for the year) across all lines Surplus allocation = R x sum of (Mean net loss and lae reserves+ mean uepr + ep for the year) for the line

Acct treatment is different between stat and tax acct regarding investment income on assets backing loss reserves

Tax accounting: The investment income on the assets backing the loss reserves offsets the amortization of the interest discount of the reserves Statutory accounting: the company earns positive investment income. There is no change in reserves to offset this.

Different Taxable income adjustments on a direct and indirect basis

Tax impact of incurred losses on UW income: Direct = -1x(Paid loss + change in discounted reserves) ind = Stat income + change in reserve discount Bond income: Direct = 15% x municipal bond income ind = Stat income - 85% municipal bond income Common stock dividends: direct = 40.5% of unaffiliated common stock dividends ind = Stat income - 59.5% of dividends Revenue Offset: Direct = WP - 80%x Change in UEPR Ind = Stat EP + 20% Change in UEPR

Cost of double taxation on an after tax basis formula

Taxes paid on direct investment = investment yield x perosnal tax rate Taxes paid on indirect = invest yieldx[corporate tax + (1-corporate)xpersonal tax] *Cost of double taxation* = indirect taxes - direct taxes

What must the insurer do if subject to a trend test

submit a plan to the commissioner of its domiciliary state explaining how it will either raise the capital, or reduce its risks

Excess RBC

The total RBC after the covariance adjustment in excess of the value of the stocks For R0: Excess after common stock = Total RBC of subsidiary- R0 charge for common stock Excess after preferred stock = Excess RBC after Common Stock - R0 charge for preferred stock

Define Telematics:

The use of wireless devices to transmit data in real time back to an organization. The data recorded in telematics devices can be used to develop more accurate pricing, improve the granularity of risk management techniques and reduce losses by enabling better claims assessments.

Invested Assets under GAAP Accounting

The valuation rules for financial instruments depend on the purpose: -Available for sale: purchased with the intention to sell before maturity but after a year. fair value, with changes to fair value recorded as other comprehensive income -Held to maturity: amortized cost -Held for trading: fair value, with changes to fair value recorded as income

List issues if the international standards do not reflect the current state based regulation:

There could be: • Less product innovation • Higher costs • Few options for consumers • Insurers could be forced to consolidate, resulting in fewer insurance options; and larger insurers that are more likely to become systemically important.

Analyst team system IRIS

This team from the NAIC categorizes insurers into three categories by analyzing IRIS ratios, RBC and other monitoring tools Level A: requires immediate attention and financial analysis Level B: does not require immediate attention but may have poor results Reviewed: no level

Federal Insurance Office (FIO)

This was created by the Dodd-Frank. The functions of the FIO include: -coordinate federal efforts and develop federal policy on the prudential aspect of international insurance matters. This includes representing USA in IAIS -Determine whether state insurance measures are preempted by covered agreements -Consult with the states regarding insurance matters of national importance

Prescribed Accounting Practices

Those included directly in state laws and applicable to all insurers domiciled in the state

Permitted accounting practices

Those that have been specifically requested by the insurer, that are inconsistent with the NAIC SAP and the state prescribed accounting practices

An Increase in the following things also increases surplus (equity)

Unrealized Capital Gains, Net Unrealized Forex Capital Gains, Net deferred income tax (Deferred tax assets), Cumulative effect of changes in accounting principles, issued stock, return of capital

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

Users should benefit from the increased transparency

Assume the insurance company's surplus decreases by 6, with no revision to either booked reserves or the RBC Authorized Control Level.

With Q's like this is Booked Reserve + (materiality standard for risk of MAD) - 6 falls within the range of reasonable estimates, then there is significant risk of MAD.

Explain whether a significant risk of material adverse deviation exists for this company

With Q's like this is Booked Reserve + (materiality standard for risk of MAD) falls within the range of reasonable estimates, then there is significant risk of MAD

Policies with coverage periods equal to or in excess of 13 months

With the policies revenues usually are not received in proportion to the exposure level. Therefor a liability needs to be established for expected future benefits, in order to get a more accurate indication of the true economic profitability of the contract. Examples include home warranty and mechanical breakdown.

Where can a user of the financial statements see increased exposure to catastrophic/ large events:

Writings by state in Schedule T; or by line of business in the Underwriting & Investment Exhibit. General interrogatories, Part 2 provides details about the probable maximum loss, and the provisions that had been implemented to protect the company against such a loss

Iris ratio 11 & 12: one and two year reserve development to PHS

one year reserve development / prior phs and two year reserve dev/second prior phs these reserves need to be net of salvage and subro and gross of discounts below .2 is the usual range

When stocks are issued the amount collected associated with the par value is recorded as

paid in capital

2 parts of General interrogatories

part 1 (common interrogatories): general questions applicable to all insurers part 2: questions that are industry sepcific

Actuarial Standards of Practice that apply to the analysis of year end unpaid property and casualty claim estimates. (What are the asop numbers and descriptions)

• ASOP 20 - Discounting of Property/Casualty Unpaid Claim Estimates o Provides information on discounting procedures and disclosures; o Addresses discounting to present value of unpaid claim estimates for property/casualty coverages • ASOP 23 - Data Quality - provides guidance on the preparation of data to complete analysis • ASOP 36 - Statements of Actuarial Opinion Regarding Property/Casualty Loss and Loss Adjustment Expense Reserves o Provides guidance on the preparation/requirements of the Statement of Actuarial Opinion o standard applies to actuaries when providing written statements of actuarial opinion with respect to property/casualty loss and loss adjustment expense reserves • ASOP 41 - Actuarial Communications o Provides guidance on disclosures and items required for communication of actuarial opinions o This standard applies to actuaries issuing actuarial communications within any practice area • ASOP 43 - Property/Casualty Unpaid Claim Estimates o Guidance on development of unpaid claim estimates including methodologies and assumptions o This standard applies to the actuary when estimating unpaid claims for all classes of entities

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

• Adverse findings in financial analysis or exams/ audit/ actuarial opinion/ cash flow & liquidity analyses • Insolvency of the insurer's reinsurer, or within the 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

Comment on the success of the NAIC State accreditation program

• All states have enacted laws to bring them closer to compliance • Critics say this is response to criticism of state regulation and calls for federal regulatory oversight

What type of information is included in the public exam report: (NAIC Solvency)

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

Identify four of the activities of the SEUA that led to criminal indictments of the SEUA and its members.

• Boycotting of agents who sold non-SEU insurance. • Collusion to set rates • Fought rate filings from non-SEU members • Mandated inclusion in rating bureau

Requirements of insurers regulated by the Fed:

• Develop living wills (resolution plans) to be used if there is a bankruptcy • Meet liquidity requirements • Undergo stress testing • Meet capital standards

SEC vs. National Securities, Inc. (1969)

• Company-stockholder relationships are not part of the business of insurance • Court summarized its prior definition of the business of insurance as the fixing of rates; selling & advertising of policies; and the licensing of companies/ agents • Activities that affect insurance companies as they would any other business are not part of the business of insurance

Arguments the supreme court used in its ruling against SEUA

• Congress intended the Sherman Act / Anti-trust law to prohibit conduct that restrained/monopolized interstate trade • Insurance not distinct to a given state—the same insurer can write business with insureds in different states • Only a small number of members of the SEUA were domiciled in one of the SEUA states • Other intangible products were subject to the commerce clause • Other businesses sell products in non-domiciliary states; these businesses are subject to the commerce clause

List some items that are evaluated during the onsite exams:

• Corporate governance • Management oversight • Financial strength • Risk identification & mitigation

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

• Costs & benefits of regulation • Fair & equitable treatment of insurance consumers • Financial stability & reliability of insurance institutions

Compare the "defined limits approach" to the "defined standards approach" of investment regulation:

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

Reasons that the classification of insurers as SIFIs turned out to be quite controversial:

• Designation results in significant additional regulation • The business models between insurers & banks are very different • It has been acknowledged that insurers made minimal contribution to the crisis • The criteria to be classified as a SIFI is unclear: there have been no guidelines published that would allow insurers to get off or stay off the list

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

• Frequency & extent that the regulation helped by identifying and correcting the insurer's problems before they caused harm to policyholders and claimants • Frequency of insolvencies, and payments to policyholders in those insolvencies • Effective & efficient rehabilitation actions • Market health • Levels of competition • Perceived and actual cost-benefit of regulation

Reasons why financial ratings agencies do not have implicit regulatory power over insurers

• It is not required that the insurer receive a financial strength rating, so any sense of regulatory power the agencies have is not universal and absolute. • Insurance companies pay for ratings so there is some chance of moral hazard for rating agencies giving higher than actual deserved rating to obtain market share. This contradicts regulators goal in maintaining an insurer's solvency.

Structure of the FIO

• It is part of the Federal Dept. of the Treasury. • Its director serves as an advisor to the Financial Stability Oversight Council (FSOC).

Group Life and Health Insurance Co. vs. Royal Drug Co. (1979)

• McCarran exempted the "business of insurance" not the "business of insurance companies" • Business of insurance is characterized by 3 criteria ⇒ Spreading and underwriting of risk ⇒ Direct connection between insurer & insured ⇒ Activity needs to be exclusive to entities within the insurance industry

Major steps in NAIC's State DOI accreditation program

• State insurance commissioner submits a request for a review to NAIC • NAIC review team comprised of experts visits company • Review involves ⇒ Interviewing department personnel ⇒ Reviewing laws and regulations ⇒ Reviewing prior examination reports ⇒ Inspecting regulatory files for selected companies ⇒ Reviewing organizational and personnel policies ⇒ Gain understanding of document and communication flows ⇒ Discussing comments and findings from the review ⇒ Conducting closing conference with the state to discuss findings and prepare a report • After meeting between Financial Regulation Standards Accreditation Committee and the Review Team ⇒ State becomes accredited or must make required changes and go through review again

Examples of ways NAIC staff supports state insurance regulatory officials

• Supporting NAIC's committees and task forces • Maintain databases to help regulators track financial adequacy of insurers • Scrutinizing alien or E&S insurers seeking to do business in U.S. • 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 and coverage • Assisting states in responding to federal reporting requirements • Producing various publications about insurance issues • Developing statistical reports dealing with financial and market matters • Giving expert advice about financial regulation, market conduct regulation, and computer usage to state insurance officials

Insurers were likely included in the scope of Dodd Frank because the "Financial Products" division of the insurer AIG was heavily involved in the crisis. List 2 reasons that this may have been inappropriate:

• This division was a banking division which was unrelated to AIGs insurance operations. • When the crisis started, the Financial Products division was actually already under federal regulation by the Treasurys Office of Thrift Supervision (OTS)

Union Labor Life Insurance Co. vs. Pireno

• Three criteria from Royal Drug decision aren't determinative in their own right ⇒ Each case must be independently considered

Which insurers are exempt from the RBC procedure?

• Title insurance companies • Monoline financial guaranty insurance companies • Monoline mortgage guaranty insurance companies

Reasons why terrorism risk might be considered uninsurable by the private insurance market

• lack of available data • losses are not reasonably predictable • losses are not fortuitous • losses are catastrophic

Goals of TRIA and how they are accomplished

• provide a program of temporary coverage for terrorism risks while the private market stabilizes after 9/11 through a partnership between government and private insurers • preserves state regulation of insurance as states still regulate terrorism rates • protect consumers by ensuring the availability and affordability of insurance for terrorism risks - required insurers to offer the insurance

List some impacts of the Dodd Frank act:

• provided the Federal Reserve System (Fed) limited regulatory authority • established the Federal Insurance Office (FIO), part of the US Treasury, to monitor the insurance industry • allows the Fed & FIO to influence/ be influenced by the International Association of Insurance Supervisers (IAIS)

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

• the CPA audit report • results of the most recent on-site regulatory financial exam • SEC filings • Corporate reports • Financial statements of controlling companies • Market conduct reports • Rate and form filings • Consumer complaints • Independent rating agency reports • Correspondence from agents & insurers

National Conference of State Legislators (NCSL)

⇒ Also informs legislators about insurance like the NCOIL does ⇒ Facilitates communication among legislators involved in insurance legislation

Many states have concerns with NAIC accreditation program

⇒ May create resentment due to some legislators who may feel accreditation usurps legislative authority ⇒ Additional and revised model law requirements create a continual need for new legislation