B3. Odomirok 21

Question 1

List 2 reasons measurement tools are very useful

Answer 1

1. The results of a tool may indicate the need for further investigation (either via evaluation of other tools, or inquiry of management)
2. When multiple tools are used together over a period of several years, they can provide an early warning of “high risk” insurers

Question 2

The statutory financial statements provides what 2 views of financial health of the insurer:

Answer 2

• Balance sheet strength: ensure that the insurer can pay its claims
• Earnings potential

Question 3

How can the accident year loss and LAE ratios help regulators assess the adequacy of unearned premium reserves.

Answer 3

If ratios exceed 100%, it is possible that the unearned premium is insufficient to cover future losses that will emerge.

Question 4

List some financial statements that can be used to assess loss reserve adequacy

Answer 4

• Five year historical data exhibit: shows how losses have developed over time
• Notes to the financial statements: includes management’s discussion about changes in the incurred losses.
• Schedule P, Parts 2-4: provides data to perform tests of reserve adequacy
• Schedule F, Part 3 (and Notes): loss reserves are net of reinsurance, so the reinsurance collectability does have an impact on reserve adequacy.

Question 5

What may large growth in written premium during a soft market (underwriting cycle), as indicated by the Five-Year Historical Data exhibit suggest:

Answer 5

The insurer may be making concessions on rate or commission.

Question 6

What factors should the regulators consider regarding the investable assets when considering the balance sheet strength:

Answer 6

• 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

Question 7

Where can a user of the financial statements see increased exposure to catastrophic/ large events:

Answer 7

Writings by state in Schedule T; or by line of business in the Underwriting and 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

Question 8

Where can a user of the financial statements see deteriorating loss ratios:

Answer 8

Five-Year Historical Data exhibit (calendar year) or Schedule P (accident year).

Question 9

Provide some examples of poor decision making that have lead to insolvencies:

Answer 9

• little or no reinsurance
• insufficient reinsurance for the amount of risk
• very rapid premium growth
• significant adverse development
• inadequate pricing
• serious data problems