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Examen 6 Partie C/D > CAS Financial Reporting > Flashcards

CAS Financial Reporting Flashcards

1
Q

List 5 Primary financial statements

A 
1  - BS
2 - Income statement
3 - Statements of Capital and surplus
4 - CF statement
5 - Notes to FS
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2
Q

Briefly discuss Balance sheet (Primary FS)

A
  • Presents all of a company’s assets/liabs as of a specific point in time
  • Diff between the assets/liab = equity (under SAP = PHs surplus)
  • Unique aspect of insurance = uncertainty with the estimation of liabs for unpaid claims
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3
Q

Briefly discuss Income statement (Primary FS)

A
  • Reveals a company’s financial results during a specific time period
  • Difference between the revenues and expenses = net income/loss
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4
Q

Briefly discuss Statements of Capital and surplus (Primary FS)

A

Reflects certain changes in surplus that are not recorded in the income statement and reconciles the beginning surplus to the ending surplus for the reporting period

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5
Q

Briefly discuss Cash flow statement (Primary FS)

A
  • Timing of the receipt or payment of cash (doesn’t coincide with the recognition in income statement)
  • Presents all operations strictly from a cash perspective
  • Associated revenue is generally recognized at the time the good or service is provided
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6
Q

Briefly discuss Notes to financial statements (Primary FS)

A

Include quantitative and qualitative disclosures regarding the significant accounts presented in the FS

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7
Q

What are the differences between Principle-Based Accounting and Rule-Based Accounting ?

A
  • Principle-Based describes general accounting approach that must be interpreted and applied since its not just a set of rules. More adaptable to changes in the business environment
  • Rule-Based depends on rules that provide specific guidance on how something should be done. Easier to audit and understand
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8
Q

What is the difference between Canada and the US regarding FS focus ?

A
  • Canada: Desire to achieve consistency with published FS (use CGAAP and IFRS)
  • US: Focus on insurer solvency (use SAP to report to the state)
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9
Q

Compare Statutory Accounting Principles(SAP) with Generally Accepted Accounting Principles(GAAP)

A

SAP
• Focus on insurance company solvency
• Monitoring tool to provide regulators an early warning of deterioration
• Build on principle of conservatism (certain non liquid assets not in BS)
• Loss reserves are recorded on a net of Re basis

GAAP
• Canada desire to achieve consistency with published FS
• Match revenues and expenses
• Loss reserves are recorded gross of Re

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10
Q

What does NAIC stands for ? What is the role of NAIC ?

A

National Association of Insurance Commissioners

Serves as an organization of state regulators that coordinates governance across US. Each state in the US has a state regulator. NAIC’s role is to facilitate governance between them.

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11
Q

Explain different key accounting concepts: Liquidation vs going-concern

A
  • Either methods is appropriate
  • Investors are more interested in the value of the company on the « going concern »
  • Regulator may think in term of liquidation perspective, given they are primarily interested in satisfying PHs obligations
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12
Q

Explain different key accounting concepts: Fair value vs historical cost

A
  • Recording an asset or liab at fair value means recording it at a value that it would be bought or sold for in the open market
  • Recording at historical cost means valuing it at the original purchase price less depreciation
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13
Q

Discuss about OSFI, his mandate and how it differs from NAIC

A

His mandate is to:
• Supervise all fed regulated FI
• Provide actuarial advice to the Gov of Canada

Differ from NAIC in US:
• OSFI covers all fed regulated FI (not just insurance)
• OSFI has authority over the entities (not just a coordinating body)

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14
Q

What makes the BS unique for insurers when compared to other industries? Why is it important to the actuary to understand the policy liabilities ?

A

Uncertainty in the estimation of liabs of loss reserves makes it unique

Actuary must give an opinion on policy liabs (premium liabs and claims liabs) because they are the largest liabs on the BS

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15
Q

What is the intent of accounting standards?

A

To promote a consistent framework for reporting insurance cie transactions such that comparisons of financial performance and health of insurance cies can be made within the industry

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16
Q

What is the primary focus of GAAP ?

A

Presentation of a cie financial results in a manner that more closely aligns with the cie financial performance

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17
Q

What body defines Canadian GAAP ?

A

CICA - Canadian Institute of Chartered Accountants

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18
Q

What accounting standards apply in Canada ?

A

In 2010, the Canadian Accounting Standards Board adopted IFRS, regulated insurance cies meeting the definition of public accountable entities were required to adopt IFRS as of January 1 2011.

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19
Q

If someone has performed work in accordance with Accepted Actuarial Practice in Canada, what does this mean they’ve done ?

A

In accordance with the rules and the Standards of Practice (SOP) of the CIA

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20
Q

Requirements regarding Annual Return in Canada

A

All insurers are required to file an AR (PC-1) based on IFRS in each province where they are licensed and with OSFI if they are fed regulated

21
Q

Discuss about the commutation of claims in the Canadian Annual Statement

A

Process in which one party is relieved of its obligations in respect of the claim in exchange for a cash payment. Allow Re to settle its obligations within a finite period to bring certainty to its result. Benefit to the insurer:
• If there is a concern in respect of the creditworthiness of the Re
• Save administrative costs

Items to consider when determining the price:
• Undiscounted value of future loss and LAE
• Payment pattern
• Expected II on assets supporting these CF
• Income tax
• Appropriate risk load to provide for volatility

22
Q

Commuted value formula

A

CV = PV(Claims CF) + PV(Risk margin)

PV(Risk margin) = (Regulatory capital × risk cost of capital)/(1+d)^D

Regulatory capital = Undiscounted claims CF × Required margin ×TCR

23
Q

Discuss about the impact of Re in the Canadian Annual Statement

A

Objectives of Re
• Limit risk to loss from certain events
• Manage risk and capital in accordance with its own objectives
• Reduce volatility in insurance results

If registered insurer ceded business to a non-registered insurer, it will have to secure adequate collateral from the non-registered to receive full capital credit for the cession of this business

24
Q

List the 4 (+) items from which the Net Premium Liabilities are derived

A
  • Net UEPR (liabs)
  • Expected loss and external LAE costs after the valuation date on in-force policies (net , dsc + PFAD)
  • Expected XS Re cost after the valuation date on in-force policies (net only)
  • Expected internal LAE
  • Expected maintenance cost
  • Contingent commissions (liabs)
  • Unearned Re commissions (liabs) (net only)
  • DPAE (assets)
  • Premium deficiency reserves (liabs)
25
Q

Discuss about BS in the Canadian Annual Statement

A 
Claims liabs:
• Direct/Assumed/Ceded unpaid claims and adj expenses
• Other amounts to recover
Premium liabs:
• Gross/Net UEPR
• Premium deficiency reserves
• Other net liabs
• DPAE
• Unearned commissions

Liabs are reported at gross (discounted + PfAD). Expected IRR for calculation of the PV of CF is that to be earned on the assets, taking into account Re recoverables, that support the IC liabs

26
Q

Discuss about Income Statement in the Canadian Annual Statement

A 
Revenues and expenses are separately identified:
• Insurance UW operations
• Investment operations
• Other operations
*** Insurance revenue consists of net WP
Insurance expenses consists of:
• Net claims and claims adj expenses
• Acquisition expenses
• General expenses
• Premium deficiency
27
Q

What is shown is the statement of retained earnings ?

A

Retained earning at endRP = Retained earning at begRP + NI earned - dividends and changes in reserve required + any prior period adj

28
Q

When are premium deficiency adjustments required in the Income Statement ?

A

If Net Policy Liabs in connection with net UEPR > (Net UEPR + Unearned Commission Liabs - DPAE)

29
Q

Discuss the general expense item in the Income Statement. Give examples.

A

Expenses that does not relate directly to the acquisition of business:
• Salaries
• Management/Professional fees
• Occupancy/IT costs

30
Q

Discount rate formula

A

Discount rate = market yield - investment expenses

***Market yield weighted average using (market value * modified D)

31
Q

How is calculated the discount factor to determine the PV of liabs ?

A

= Market yield - internal expenses

32
Q

Discuss about Statement of comprehensive income and accumulated comprehensive income(CI) in the Canadian Annual Statement

A

Total CI for the reporting period = NI + OCI

OCI:
• Changes in unrealized gains(losses) on A-F-S assets such as loans, bonds and debentures and equities
• Derivatives designated as CF hedges
• Foreign currency translation
• Share of OCI of subsidiaries, ass. and joint ventures
• Items that are reclassified to earnings of gains(losses) are also included in OCI

AOCI is the cumul value of OCI or total of unrealized gains on the items that is included in the equity on the BS

33
Q

Discuss about Statement of Cash Flows in the Canadian Annual Statement

A 
CF related to Operating activities: 
• NI generated during the year
• Changes in receivables
• Changes in UEPR and unpaid claims liabs
• Recognized gains/losses in investments

CF related to Investing activities:
• Net CF from purchase of new/sale investments

CF related to Financing activities:
• Net CF from increasing/repayment of borrowing + increase/redemption of shares - dividends to shareholders

34
Q

What is the purpose of MCT/BAAT ?
What is the minimum capital ratio (MCT) ?
What is the supervisory capital ratio (OSFI) ?

A
  • To let the supt assess if insurer maintains adequate capital
  • Minimum capital ratio of 100%
  • Supervisory capital ratio of 150%
35
Q

What is the purpose of the Test of Adequacy of Premium Liabilities ?

A

To compare
1 - Estimate of ultimate costs associated with unexpired portion of policies
2 - Premium liabs recorded by the company

36
Q

What is a premium deficiency reserve ?

A

Additional liab to ensure that all future costs are provided for

37
Q

Provide 5 items that must be considered when setting the company’s internal target capital ratio ?

A

1 - Nature: stock company can raise capital and will hold >= 150% but not much more since it wants to generate ROE. Mutual cannot raise capital, so will operate at a higher ratio
2 - Size of company: small is more volatile, so need more capital
3 - Re: reduced needs of capital since volatility is reduced
4 - Investment strategy
5 - Competition: with lower capital to support business, company has a pricing advantage

38
Q

Who must use the MCT and BAAT ?

A
  • MCT: Federally regulated insurers

* BAAT: Foreign branches operating in Canada

39
Q

What does the MCT compares ?

A

Capital available against Capital required

Capital available = Total equity - OACI
Capital required = BS asset

40
Q

Contrast the Minimum capital requirement (MCR) and the minimum capital test (MCT)

A
  • MCR is the smallest level of capital at which a company would be permitted to operate in Canada by OSFI
  • MCT is the guideline, published by OSFI, that provides a framework within which the Supt assesses whether the company maintains adequate capital
41
Q

Define and briefly describe DCAT

A

Process of analyzing and projecting trends of company’s financial condition given the financial circumstances, its recent past and its intended business plan, under a variety of future scenarios. It allows the actuary to inform company management of the likely implications of the business plan on capital and to provide guidance on the significant risk to which the company is exposed

42
Q

What is the principal goal of DCAT ?

A

Help measure capital adequacy, understanding events that may deplete capital, and find corrective actions such as monitoring systems

43
Q

What are the steps of the DCAT process ?

A

1 - Develop Base scenario
2 - Examine risk categories to determine those that are relevant to the company
3 - Stress test of the risk category for each relevant categories
4 - Select scenarios requiring further analysis
5 - Report on the results

44
Q

What is ComFrame ?

A

Common Framework for the supervision of Active insurance Groups developed by IAIS. The idea is to have a common valuation approach to measuring assets and liabs of insurers. Currently, the proposed valuation approach is IFRS

45
Q

What challenges ComFrame represents to the US ?

A

As IASB diverges from FASB, ComFrame could place US PC insurers with an international presence in the position of having to create another set of FS to conform to ComFrame

46
Q

What powers do the Federal Insurance Office (FIO) have ?

A

FIO was create by the Dodd-Franck Wall Street reform to act like a federal regulator to negotiate the content of ComFrame

47
Q

What are SIFI ?

Who determines who is SIFI ?

A

SIFI: Systematically Important FI (that are too big to fail)

It is determined by the Financial Stability Oversight Council (FSOC)

48
Q

What happens if MCT reaches the 150% of supervisory target ratio ?

A

It triggers early intervention and provide time for a company to take action to improve its MCT ratio

Examen 6 Partie C/D (31 decks)

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