Exam 6 CAS

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