Flashcards in A12. NAIC SSAP Deck (63):
Define "loss contingency"/ "asset impairment"
An existing condition involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur
3 components of liabilities
1. present responsibility to transfer/ use assets at a specified/determinable date based on the occurrence of a specified event/ on demand
2. The entity has little/ no discretion to avoid the responsibility
3. The transaction/ event that obligates the entity has already occurred
How should management book the reserve if there is a range
-if a particular amount within the range appears to be a better estimate, that amount should be booked
-if no amount in the range appears to be better than the
others, the midpoint should be booked
2 necessary criteria to charge a loss contingency/ asset impairment to operations
1. Information prior to the issuance of the financial statements indicates that the assets has been impaired/ liability incurred at the date of the financial statements
2. The amount of the loss can be reasonably estimated
Criteria to make a disclosure about loss contingency/ asset impairment
- a contingency/ asset impairment is not recorded because only one of the two conditions is met
-there is an exposure to loss higher than the amount accrued
How should management book the reserve if there is no range
the best estimate should be booked
2 disclosures that need to be made regarding loss contingency/ asset impairment
1. nature of the contingency
2. estimate of the possible loss/ range of loss; or a statement that such an estimate can not be made
Disclosures that the insurer needs to make if the contingency involves a guarantee
- nature and amount of the guarantee
- how the guarantee arose
-the events that would require the guarantor to perform under
-the current status
Disclosures that need to be made for each joint and several liability arrangement
-Nature of the agreement
-Total outstanding amount under the arrangement
-Carrying amount of the insurers liability, and carrying
amount of the receivable recognized
-Nature of any recourse provisions that would enable recovery from other entities of the amounts paid, including any limitations on the amounts that may be recovered
-In the period where the liability was initially recognized and measured, or the period in which the measurement changes significantly: the corresponding entry/ where the entry was recorded in the financials
2 categories of subsequent events
Type 1; "Recognized Subsequent Events": provide "additional evidence with respect to conditions that existed at the date of the balance sheet"
Type 2; "Nonrecognized Subsequent Events": provide "evidence with respect to conditions that did not exist at the date of the balance sheet"
Define "subsequent events"
Events that occur subsequent to the balance sheet date, but before the issuance of the statutory financial statements
Disclosures about Type 2 events in the financial statements
-Nature of the event
-Estimate of its financial impact, or a statement that the estimate can not be made
Which events should already be reflected in the financial statements
When are the additional premium for endorsements and changes in coverage recorded?
Effective date of change
When is Written Premium recorded for most contracts; and what is the exception to this rule?
-exception of WC, which can be recorded on an installment basis
Accounting treatment of flat fees
Included in "other income"
2 methods to uniformly earn premium throughout the year
1. daily pro rata: compares the number of days which have elapsed to the number remaining.
2. monthly pro rata: assumes 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
Rule to determine non admitted EBUB
10% of the EBUB in excess of the collateral held is non-admitted. If any EBUB over this level is not anticipated to be collected, it should also be written off.
How is EBUB recorded, both before and after the exposure is audited.
-Prior to the audit, companies should estimate EBUB. Premium is modified by the level of this estimate.
-Once the audit is completed, EBUB shall be adjusted to reflect the actual exposures. This adjustment is recognized as revenue immediately.
Accounting treatment of advance premiums
-recorded as liability
-not considered income until due
Necessary disclosure if the premium written through MGAs or TPAs exceed 5% of surplus.
-name and address
-federal employer identification number
-whether the party holds an exclusive contract
-type of business written
-type of authority granted
-total premium written
5 benefits of reinsurance
1. expands capacity
2. shares large risks
3. spreads the risk of catastrophes/ stabilizes underwriting results
4. aids in withdrawing from line
5. reduces net liability to amounts appropriate to the insurers financial resources
2 classes of reinsurance contracts
1. treaty: transfers the entire class
2. facultative: transfers individual risks
Contract provisions included in most reinsurance contracts
-Reporting responsibility of the ceding entity: contains the time schedules to report losses.
-Payment terms: contains time schedules to make payments, currencies that the payments must be made in, and the rights of parties to withhold funds.
-Payment of premium taxes: indicates which party needs to pay the premium taxes
-Termination: This can either be on a cut-off or run-off basis:
-Insolvency clause: claims that the reinsurers obligations
will be maintained (without any reduction) in the event of
insolvency of the ceding company.
4 criteria the 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 profit for either party
4. the agreement must provide for reporting of premiums and losses at least quarterly, unless there is no activity.
4 additional criteria that retroactive reinsurance require for risk transfer
1. the premium paid must be a specific, fixed 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 profit)
4. the contract shall not be cancelled or rescinded without approval of the commissioner of the domiciliary state of the ceding company.
2 important components of insurance risk
1. the ultimate amount of net cash flows (underwriting risk)
2. the timing of those cash flows (timing risk)
Briefly describe the accounting treatment of prospective reinsurance
-Amounts paid for prospective reinsurance shall be reported as a reduction to written and earned premiums.
-Changes in the estimated reinsurance recoverables are recognized as changes in losses incurred in the income statement.
-Reinsurance recoverable on loss payments is an admitted asset.
-Reinsurance recoverable on unpaid losses is recognized by reducing the respective reserves
Procedure to test that it is reasonably possible for the reinsurer to realize a significant loss
Compare the present value of the cash flows between the ceding and assuming enterprise
Describe the accounting treatment of novations
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.
Briefly describe the ceding companys accounting treatment of retroactive reinsurance:
-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 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
Accounting treatment if the assuming insurer receives the premium prior to the effective date
-Record it as a liability, and can not consider it as income
until the effective date.
-If premium is received after the effective date but prior to the due date, it is recorded as a reduction to the deferred but not yet due asset.
Criteria for funds held or deposited with reinsured companies to be admitted assets
-they do not exceed the liabilities that they secure
-the reinsured is solvent
Criteria for reinsurance premiums over 90 days overdue to be admitted
-the reinsurer maintains UEPR and loss reserves due to the ceding entity
-the ceding entity is licensed and in good standing.
If there is no specific contract with a due date for reinsurance premiums, when are they considered due:
-date at which notice of premium is provided to the ceding entity.
-date at which the assuming entity books the premium
Accounting treatment of uncollectible reinsurance
Uncollectible balances need to be written off from the schedules in which they were originally recorded
Accounting treatment if Ceding commission >Anticipated Acquisition Costs
The ceding company needs to establish a liability equal to the difference between the two. This liability is amortized prorata over the effective period of the reinsurance agreement.
Reinsurers accounting treatment of commutations
The reinsurer will eliminate the reserves, and record the
payment made to the ceding. It also recognizes the gain/ loss as underwriting income. The commuted balances are written off the exhibits in which they were initially recorded.
Ceding companys accounting treatment of commutations
The ceding company eliminates the reinsurance recoverable, and records the cash received as a negative paid loss. Any gain/ loss is treated as underwriting income.
How should the reinsurance agreement be treated if it does not transfer both components of insurance risk
Briefly describe deposit accounting for the ceding company
-The ceding entity records the amount paid as a deposit.
-The deposit is an admitted asset if the assuming entity is licensed, or there are funds held by the ceding company.
-The ceding company can not reduce the reserves
-At each reporting date, the amount of the deposit is adjusted to reflect both the payments made to date, and expected future payments. If the total losses are valued upwards, the ceding company will increase the deposit/ increase the outstanding loss liability/ increase the interest income/-increase the incurred losses
Describe a run-off agreement
Reinsurance or retrocession agreements intended to transfer almost all the risk of a line of business that is no longer actively marketed by the (re)insurer.
Briefly describe deposit accounting for the assuming company
The assuming entity records it as a liability.
-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
Briefly describe transferring entitys accounting treatment of commutations
-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
Conditions needed to receive run-off agreement accounting treatment
-Assuming entity is properly licensed
-The agreement should contain the same limits and coverages as the original contract
-The agreement should not contain any adjustable features, prot sharing or retrospective rating
-The agreement must meet the requirements of risk transfer
-The assuming reinsurer must receive financial strength ratings from at least two different agencies that is at least equal to that of the transferring insurer
-The assuming reinsurer is responsible for all assessments on the business being assumed -The agreement must only cover liabilities of lines that are no longer actively marketed by the transferring entity
-Neither party can cancel the agreement for any reason
When is a disclosure for reinsurance recoverables in dispute required
Reinsurance recoverable in dispute shall be identified 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.
When is a disclosure for unsecured aggregate recoverables required & what must be disclosed.
If the entity has unsecured aggregate recoverables with any individual reinsurers for reserves and UEPR over 3% of the ceding companys surplus, it must list each reinsurer and the unsecured aggregate recoverable pertaining to that reinsurer.
What needs to be disclosed when there is a commutation:
-name of reinsurer
What needs to be disclosed about uncollectible reinsurance was written off during the year
-name of reinsurer
What needs to be disclosed in the "Reinsurance Assumed and Ceded" section of the Notes to the financial statements:
-the maximum return commission due to the reinsurers if all reinsurance cancelled
-the accrual of additional or return commission based on the loss experience
How are premium/ liabilities recorded under Tail Coverage contracts with a fixed 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 indefinite period:
-the premium should be fully earned at inception
-the liabilities for unreported claims should be recognized at inception
Items that the insurer needs to disclose if there is a change in the key discount assumptions:
-amount of the discounted reserves at the current rates and assumptions (excluding the current AY)
-amount of the discounted reserves at the prior rates and assumptions (excluding the current AY)
-change in discounted liability due to change in interest rates and/ or assumptions
-amount of the non tabular discount, by line of business and reserve category
Accounting action required of insurer if it provides tail coverage at no additional charge
Establish a policy reserve to ensure that premiums are no earned prematurely
Accounting treatment of structured settlements in which the claimant is the payee
-loss reserves can be reduced
-the cost of the annuity is recorded as a paid loss
Accounting treatment of structured settlements in which the insurer is the owner and payee
-no reduction to loss reserves
-the annuity is recorded as an "other than invested asset" at its present value
-the income from the annuity is recorded as miscellaneous income
Disclosures necessary when entering into a structured settlement
-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 (for which the insurer has not received a release of liability) from a given life insurer exceed 1% of the surplus, it must disclose the name, location of the insurer and aggregate value of annuities.
Difference between SAP and GAAP treatment of structured settlements when the claimant is the owner and payee, but has not released the insurer
-GAAP: the gain from the purchase of the annuity needs to be deferred
-SAP: recognizes gain immediately
3 tests necessary to establish UEPR for a Long Term contract
1. Management's best estimate of the amounts refundable to the contract holders
2. Gross premium * (projected future gross losses & expenses from the unexpired term/ projected total gross losses & expenses).
3. Projected future gross losses and expenses to be incurred during the unexpired term, minus the present value of future guaranteed gross premiums.
2 requirements to qualify a contract as a "Long Term contract"
-policy term greater or equal to 13 months
-reporting entity can not cancel contract not increase premium
Rules to determine nonadmitted balances of recoverables from high deductible policies
-If the insurer does not hold collateral, deductible recoveries that are over 90 days overdue are nonadmitted.
-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 nonadmitted as well.
Are loss reserves for high deductible policies net or gross of the deductible?
Net (unless the deductible is deemed to be uncollectible)