Exam 6 CAS Lists of Things

identify commons uses/functions of Schedule P and the applicable Schedule P Part

D: Development of reserves over time attributable to specific years and lines (Part 2,3,4)

T: Trends in frequency and severity (Part 1,2,5)

R: calculate RBC loss-sensitive discount (Part 7)

A: evaluate Adequacy of recorded reserves (Part 2,3,4,5)

P: determine Payment patterns for discounting (Part 3)

I: observe split between actuarial reserves (IBNR) and case reserves (Part 2,3,4)

D: Disclosures for the SAO (Part 1)

identify the contents of each Part of Schedule P

Part 1: tables for everything (losses, expenses, premiums, claim counts)

Part 2,3,4: triangles for losses (2: ultimates, 3: paids, 4: IBNR)

Part 5: triangles for claim counts (closed with payment, outstanding, reported)

Part 6: triangles for earned premium

Part 7: tables and triangles for loss-sensitive contracts

identify cautions or limitations when using Schedule P to assess reserve adequacy

• talk to people! numbers don’t tell the whole story - must also talk to management

• maximum 10 years of data carried in Schedule P, long-tailed lines need external data to estimate tail factors

• pooling: internal pooling can distort data, participation in voluntary/involuntary pools may distort data, company’s level of participation in pool may change over time

• commutations: can cause a sudden increase in net reserves

• Parts 2,3,4 include DCC, can’t separate DCC trends from loss trends

• preparation of Schedule P allows choice in allocations and presentations

briefly describe the RBC risk categories

• R0: subsidiary risk (investment in affiliates, misc off balance sheet items)

• R1: asset risk - fixed income (default risk and risk of change in interest rates)

• R2: asset risk - equity (risk of changes in market value of equities like stock, real estate)

• R3: asset risk - credit (default risk for receivables, reinsurance recoverables and estimation of amounts)

• R4: UW risk - reserves (risk of adverse development of reserves)

• R5: UW risk - NWP (risk that premiums that future business won’t cover future losses)

• Rcat: catastrophe risk (risk of loss due to hurricanes and earthquakes)

• operational risk: risk of loss from operational events not already included in other categories (includes inadequacy and failure of internal systems, does not include reputational risk)

describe “operational risk” and specifically how the $-charge can be reduced

• financial loss from operational events not already reflected in other risk charges: inadequacy or failure of internal systems, personnel, procedures or controls, external events, legal risk

• basic operational risk charge = 3% of pre-operational risk RBC charge

• can be reduced by offset amounts reported by life insurance subsidiaries

identify 10+1 areas of difference between U.S. GAAP and U.S. SAP that actuaries should be familiar with

• Balance sheet presentation of reinsurance

• Anticipated salvage/subrogation

• Structured settlements

• Invested assets

• Ceded reinsurance

• Deferred acquisition costs

• Deferred tax assets

• Discounting loss reserves

• Non-admitted assets

• Goodwill

• Premium Deficiency Reserve

SAP vs GAAP differences: Balance sheet presentation of reinsurance

SAP:

• liabilities are shown NET of reinsurance on the balance sheet

GAAP:

• liabilities are shown GROSS of reinsurance on the balance sheet (with an offsetting asset for anticipated reinsurance recoveries)

SAP vs GAAP differences: Anticipated salvage/subrogation

SAP:

• choice: Schedule P reserves show net OR gross of salvage/subrogation

GAAP:

• subtract salvage/subrogation from unpaid losses (net basis)

SAP vs GAAP differences: Structured settlements

same treatment in SAP, GAAP if full release from claimant is obtained, when full release from claimant is not obtained:

SAP:

• record annuity costs as paid loss (disclose in Notes to Financial Statements)

GAAP:

• record annuity costs as reinsurance (retain loss reserves and book payments as recoverable)

SAP vs GAAP differences: Invested assets

SAP:

• Investment-grade bonds: amortized cost

• Below investment-grade bonds: min(cost, amortized cost, fair value)

• common stocks, non-redeemable preferred stocks, SVO-identified investments: fair value

GAAP

• Held for trading (intent to sell within hours/days): fair value

• Available for sale: fair value, changes in FV flow through OCI (other comprehensive income), direct charge to surplus

• Hold to maturity (intent to keep until maturity): amortized cost, realized gains at maturity flow through income statement

SAP vs GAAP differences: Ceded reinsurance (prospective)

SAP:

• liabilities are shown NET of reinsurance

GAAP:

• liabilities are shown GROSS of reinsurance (offset by a ceded reinsurance asset)

SAP vs GAAP differences: Ceded reinsurance (retroactive)

SAP:

• record ceded reserves as negative write-in liability (contra-liability)

• gain goes into “other income”

• change in surplus goes into “special surplus”

GAAP:

• record ceded reserves as reinsurance asset

• gain is deferred, no immediate impact on income or surplus

SAP vs GAAP differences: Deferred acquisition costs

SAP:

• recognize immediately (no DAC asset under SAP)

• supports SAP purpose because money has been spent

• funds would not be available to policyholders if company goes insolvent

GAAP:

• defer and amortize over life of asset (create a DAC asset)

• supports GAAP purpose because assets and liabilities are matched

• gives more accurate picture of company as a going-concern

SAP vs GAAP differences: Deferred tax assets

SAP:

• DTAs subject to strict admissibility test

GAAP:

• DTAs fully recognized

SAP vs GAAP differences: Discounting loss reserves

no discounting for SAP or GAAP except in certain cases

SAP:

• tabular discount rate: few state regulations

• non-tabular discount rate: formula based and capped

• supports SAP purpose because cross-company comparison is easier

GAAP:

• options: use SAP or reasonable alternative

• supports GAAP purpose because it can be more tailored to company

SAP vs GAAP differences: Non-admitted assets

SAP:

• disallows certain assets of low liquidity

• supports SAP purpose because nonadmitted assets are not liquid after an insolvency

GAAP:

• all assets are admitted

• supports GAAP purpose because all assets should be considered in evaluating a company as a going-concern

SAP vs GAAP differences: Goodwill

SAP:

• Goodwill = min (purchase price of company - statutory surplus of acquired company, 10% x statutory surplus of acquiring company)

• record as a contra-asset and amortize to unrealized capital gains over 10 years

GAAP:

• Goodwill = P - (net assets) = P - [FV assets - FV liabilities]

• do not amortize under GAAP

• if goodwill > 0, establish an asset equal to the goodwill amount

• if goodwill < 0 (no goodwill), offset book value of the acquired non-current assets, recognize residual amount as operating income gain

SAP vs GAAP differences: Premium Deficiency Reserve

SAP:

• premium deficiency is either included in the UPR balance or reported as a write-in liability item

• commissions and other acquisition are not included if those amounts have been expensed (rather than established as an asset)

GAAP:

• DAC is established as an asset and is presented net of ceded DAC

• if a PDR is calculated, it first lowers the recorded DAC asset

• once the DAC asset is exhausted, a separate PDR liability is established

identify loss-sharing criteria in the TRIA legislation

1. certification: terrorist act must be certified (certification is done by Secretary of Treasury in consultation with Secretary of Homeland Security and Attorney General), losses must be >= $5 million in the US, air or sea vessels

2. federal government threshold: aggregate industry losses >= $200 million for federal assistance to begin

3. coverage: covers only commercial P&C

4. deductible: insurer’s deductible = 20% of direct earned premium

5. coinsurance: insurer pays 20% of losses above deductible

6. federal government limit: no federal coverage for aggregate losses >=$100 billion, insurers are not required to provide coverage beyond this point

7. surcharges: Secretary of Treasury must establish surcharges to recoup 140% of federal outlay when aggregate losses are <=$37.5 billion, for aggregate losses >$37.5 billion, the SoT may establish surcharges but it is not mandatory

ways insurance companies are regulated by states

• financial regulation: capital requirements, restrictions on investments

• market conduct: sales and advertising, underwriting, claims handling

• licensing: insure licensing, producer licensing

identify parts of Schedule F

• Part 1: total assumed reinsurance balances by reinsured

• Part 2: detailed listing of portfolio reinsurance transactions

• Part 3: calculation of provision for reinsurance

• Part 4: listing of issuing or confirming banks for letters of credit as collateral

• Part 5: interrogatories for Part 3

• Part 6: restatement of balances to gross of reinsurance (as if reinsurance didn’t exist)

describe the pitfalls in a risk transfer test

• profit commission: do not include in risk transfer test

• reinsurer expenses: do not include in risk transfer test

• interest rates: (same as discount rate) do not vary with scenario, should only consider insurance risk (UW and timing risk)

• commutation timing: do not use prescribed payment patterns, do include commutation fees

• evaluation date: risk transfer test should be based on circumstances at evaluation date

• premiums: use present value of gross premiums, apply premium adjustments to undiscounted premiums

issues and barriers to private flood insurance

1. coverage must be “at least as broad” as NFIP coverage (barrier: hard to determine)

2. continuous coverage requirement (barrier: does private insurance “count”)

3. non-compete clause (barrier: WYO can’t sell NFIP-type policies, removed beginning fiscal year 2019)

4. NFIP subsidized rates (barrier: private insurers can’t compete with that)

5. regulatory uncertainty (barrier: states all have different rules)

6. accurate assessment of flood risk (barrier: private insurers don’t have credible data)

7. participation rates (barrier: must be high to spread risk)

how barriers to private flood insurance can be addressed

1. replace “at least as broad” with “comply with state regulations”

2. pass a federal law that private insurance counts when assessing continuous coverage

3. eliminate the non-compete clause (or give WYOs temporary reprieve) non-compete clause removed beginning fiscal year 2019

4. reform NFIP rate structure so that prices match what a private insurer would change

5. don’t change anything - state level authority may be better in the long-term because it encourages state-specific solutions

6. remove personally identifiable information from NFIP data then make data public

7. expand mandatory purchase requirement

identify conditions that may make an insurer subject to BEAT

• a U.S. insurance company that makes a tax-deductible payment to a related foreign company

• insurer is part of a U.S. group of companies with average gross receipts in past three years >= $500M

• base erosion payments >= 3% or more of the total deductions taken by the U.S. group on its current tax return

identify the items required in the RELEVANT COMMENTS section of the SAO

1 & 2: MAD (Material Adverse Deviation)
  - MATERIALITY STANDARD regarding risk of MAD
  - RISKS that may result in MAD
3: Exhibit B
  - significance of Exhibit B disclosure items including
    - anticipated salvage & subrogation
    - discounting (tabular & non-tabular)
    - insurer's share of reserves for (pools & associations)
4 & 5: Reinsurance
  - retroactive reinsurance
  - uncollectible reinsurance
6: IRIS
  - ratios 11, 12, 13
7: Changes
  - material changes in reserving assumptions / methods since prior opinion
8: UEP (Unearned Premium)
  - UEP for long-duration contracts

briefly describe the PARTS of IEE

PART I:
  - allocates expenses (from Part 3) into 22 different expense groups
  - doesn't show profit (loss)
PART II:
  - shows pre-tax profit (loss) net of reinsurance (see columns 41, 42)
PART III:
  - shows pre-tax profit (loss) direct of reinsurance (see columns 33, 34)
  - excludes all investment gain
Interrogatories:
  - explanatory notes for Parts 1,2,3 (comes before Parts 1,2,3 in Annual Statement)
  - interrogatory question #4 is very important: provides info on the allocation method of profits & expenses to line
  - if the allocation is done in a standard way then no further info is required

identify reasons FOR & AGAINST the IEE surplus allocation method (4)

FOR:
  - not distorted by Reinsurance
  - uses 2 years of data to smooth results (reduces distortions)
  - easy to obtain Data (from annual statement)
  - easy to Calculate & compare across companies & lines of business
AGAINST:
  - does not reflect Future business or growth (it is retrospective)
  - does not allow for Actuarial/management input (method is formulaic)
  - does not reflect Risk characteristics of line of business (Ex: short vs long-tail)
  - does not recognize Catastrophe potential

describe differences between IEE & UIE (U/W and Expense Exhibit) (3)

other U/W expenses:
   IEE separates into:
    - acquisition , field supervision, and collection expenses
    - General Expenses
    - Investment Expenses
   U&IE does not separate to that level of detail
LOB breakout:
   IEE shows expenses by LOB
   UIE does not
reinsurance:
   IEE shows direct & net
   UIE shows net only
display format:
   IEE in 000's
   UIE to nearest dollar

identify the balance sheet liabilities that come from Schedule F

line 2: reinsurance payable on paid losses and loss adjustment expenses (from Schedule F, Part 1)
line 9: unearned premiums for ceded reinsurance (from Schedule F, Part 3)
line 12: ceded reinsurance premiums payable net of ceding commissions (from Schedule F, Part 3)
line 13: funds held by company under reinsurance treaties (from Schedule F, Part 3)
line 16: provision for reinsurance (from Schedule F, Part 3)

describe the practical considerations in a risk transfer test - abbreviated list

Parameter Selection: (interest rate, payment pattern, loss distribution)
Parameter Risk
Pricing Assumptions
Commutation Clause

how does Gramm-Leach-Bliley regulate banking participation in insurance

==> REQUIRES disclosure of information-sharing practices between banks and insurer affiliates

==> PROHIBITS formation of insurance-underwriting subsidiaries by national banks

(GLB considers underwriting and selling to be different)

==> PROHIBITS paying claims with bank funds (if holding company holds bank & insurer)

==> PROHIBITS preventing banks from selling insurance (i.e. states can't make such laws)

What are the potential benefits of using predictive analytics in insurance?

• Reveals insights into insurance costs
• Encourages better risk management
• Lowers many consumer costs

What is the purpose of regulatory best practices for predictive models?

• Support parameter valuation.
• Improve model understanding
• Provide a baseline for state regulators

identify the key components of the 'Solvency Modernization Initiative

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

identify criteria for evaluating the success of solvency regulation

- frequency of insolvencies
- interventions/rehabilitations that prevented insolvencies
- overall level of market competition
- regulatory cost versus regulatory benefit

identify & briefly describe the 7 CORE PRINCIPLES of U.S. insurer financial solvency

1.Reporting: (includes disclosure & transparency)
    - public financial statements
2. Off-site exams:
    - regulators maintain an insurer profile using NAIC tools such as FAST (Financial Analysis Solvency Tools.)
3. On-site exams:
    - risk-focused exams covering governance, management, financial strength
4. Capital adequacy:
    - RBC and other tools
5. Regulatory control of risky transactions:
    - require regulatory approval for transactions that could affect insurer's ability to fulfill policyholder obligations
6. Prevention & correction:
    - timely action to address potential risks (may include regulatory enforcement powers)
7. Exiting market:
    - framework for orderly exit (includes receivership scheme for policyholder obligations)

identify priorities in the Solvency Modernization Initiative

- create a document explaining the U.S. insurance regulatory system
- examine international developments
- comply with ICPs (Insurance Core Principles) promulgated by the IAIS (International Association of Insurance Supervisers)
- learn from the global financial crisis

identify provisions of NRRA (Nonadmitted and Reinsurance Reform Act of 2010)

a state cannot deny credit for reinsurance if certain conditions are met:
  - if domiciliary state has already granted credit
  - if domiciliary state is an NAIC-accredited state
a NAIC-accredited state may proceed with reinsurance collateral reforms on an individual basis
a state is given sole responsibility to regulate solvency for reinsurer

describe pillar 2 of Solvency 2 (Governance pillar)

Governance: → supervisory activities - requires adequate governance in 4 functional areas:
  ♦ internal audit
    (report failure to follow company policies, deficiencies in internal controls)
  ♦ actuarial
    (ensure reasonability of DAM when calculating technical provisions - Data, Assumptions, Methods)
  ♦ risk management
    (perform ORSA to identify unique risks of company)
  ♦ compliance
    (report failure to comply with regulations to board of directors)

describe differences between RBC & Solvency 2 that could result in difference regulatory action

[1] method:

Solv2 - principle-based

RBC - rule-based

[2] method:

Solv2 - can be tailored with ORSA

RBC - same formula for all insurers

[3] risks:

Solv2 - more comprehensive (includes interest rate)

RBC - omits important risks

[4] reserves:

Solv2 - discounted + margin

RBC - not discounted

[5] assets available:

Solv2 - use IFRS assets (handles risk-transfer testing differently)

RBC - uses SAP assets

[6] assets required:

Solv2 - based on 99.5 percentile on loss distribution

RBC - not based on modeled results

[7] action levels:

Solv2 - 2 action levels (SCR, MCR)

RBC - 4 action levels (CAL, RAL, ACL, MCL)

[8] disclosures:

Solv2 - requires more info to be made public

RBC - results are public but calculations aren't

describe the key provision of NRRA: 1-state compliance

insured's home state has exclusive authority to regulate nonadmitted insurance:
  - only home state can require a broker's license to sell nonadmitted insurance
    (but note that WC is an exception)
  - only home state can collect premium taxes

describe the key provision of NRRA: uniform eligibility standards

NRRA default standards: (all states are currently using these)

U.S. domiciled (foreign) insurers:

==> must have ≥ 15m in capital & surplus (or the state minimum if it's higher)

==> must be authorized to write in its domiciliary jurisdiction

non-U.S. domiciled (alien) insurers:

==> if insurer is listed the Quarterly Listing of Alien Insurers, states can't prohibit placing insurance with them

describe the key provision of NRRA: Exempt Commercial Purchaser (ECP)

definition of ECP: any person purchasing commercial insurance that..

- employs a NRRA-qualified risk manager

- has paid aggregate commercial premiums ≥ $100,000 (in past 12 months)

- the person's company is "large"

(high net worth ≥ ~20m or high revenues or lots of employees,..)

the related NRRA provision is:

- states cannot force a broker to do a diligent search if the purchaser is an ECP and:

==> the broker has disclosed to the purchaser that coverage may be available in the admitted market

==> the purchaser has then instructed the broker to purchase insurance in the nonadmitted market

identify the 2 categories and 10 Notes to the Financial Statements that are covered in Odomirok

Category 1: (requires direct involvement by actuaries)
  Change (incurred loss & LAE)
  Asbestos (& environmental) reserves
  Reinsurance
  Discounting (unpaid loss & LAE)
  PDR (Premium Deficiency Reserves)
Category 2: (relevant to actuaries)
  Summary of significant accounting principles
  High deductibles
  Intercompany pooling
  Events subsequent (usually known as 'subsequent events'. why back-asswards here?)
  Structured settlements

Identify the contexts where a 'retained risk' actuarial analysis is generally used

• Adequacy of Accruals for Financial Reporting
• Internal Financial Reporting and Cost Allocation
• Regulatory Filing for a Qualified Self-Insurance Designation

identify services provided by 'insurance advisory organizations' (other than prospective loss costs)

- education of the public, industry, & regulators
- actuarial services
- filing support
- development of policy forms

describe items a regulator might review before approving reinsurance accounting treatment for runoff agreement

from paragraph 82 of SSAP-62R: (many possible answers)
  - reinsurer is properly licensed (obvious!)
  - contract must meet normal risk transfer requirements (obvious!)
  - policy limits & coverage don't change (the liabilities are being transferred "as is")
  - reinsurer must be rated at least as high as cedant by 2 different rating agencies

describe NAIC functions

fundamental goals:
  - promote public interest (fair & equitable treatment of consumers)
  - promote insurer solvency
  - promote state insurance regulation
types of regulatory assistance:
  - Develop uniform financial reporting standards
  - Assist states with pricing/coverage
  - Maintain databases to track solvency

what does a state DOI do

Group 1: licensing & regulation
  - licensing of insurers (for insurers doing business in their state)
  - licensing of producers (sellers may have to pass exams, pay licensing fees, perform continuing education)
  - regulation of rates & coverages (see below for 4 types of rate filings)
  - regulation of claims adjusters (market conduct exams may include claims adjusting & settlement practices)
Group 2: insurer solvency
  - financial exams (includes financial statements, IRIS,..
  - monitor sale of insurance securities (stocks, bonds, real estate, loans)
  - determine need for receivership (either rehabilitation or liquidation of an impaired insurer)
Group 3: other services
  - fraud prevention (NAIC has an online fraud reporting system)
  - consumer services (education, complaint resolution)

in specific terms, identify what should be disclosed in any actuarial report

Obvious items:
  - name of actuary, date of report, subject of report
CRISIS-LQ:
  - Conflicts of interest
  - Risks
  - Intended user
  - Scope
  - Info that actuary used but doesn't assume responsibility for
  - Subsequent events
  - Limitations on applicability of findings
  - Qualifications of actuary

identify the levels in the hierarchy of accounting rules

Level 1: SSAPs
Level 2: Emerging Accounting Issues Working Group
Level 3: NAIC Annual Statement Instructions
Level 4: SAP Statement of Concepts
Level 5: Sources of nonauthoritative GAAP accounting guidance & literature

Briefly describe the main responsibilities of the FIO in the U.S. insurance regulatory framework

• Analyze and report industry data
• Monitor systemic risks in the insurance industry
• Ensure insurance accessibility for underserved communities
• Represent the U.S. in international insurance matters

identify some items that are discussed in the General Interrogatories

Regulatory exams
  –
Merger activity
Exemptions from regulation
Sales commissions (if they're excessive just to acquire business)
Suspension of licenses (if applicable)