C - CIA Premium Liabilities Flashcards Preview

Exam 6C (Fall 2018) > C - CIA Premium Liabilities > Flashcards

Flashcards in C - CIA Premium Liabilities Deck (17):
1

PREMIUM LIABILITIES

Contrast
Claim Liabilities
vs
Premium Liabilities

-claim liabilities-
Liability for claims incurred on or before the balance sheet date

-premium liabilities-
E(costs) from unexpired portion of in-force contracts (ie. incurred after valuation date)
and
other liabilities related to premium development (retro-rating, CONTINGENT PROFIT COMMISSION)

-future claims and adj. exp
- E(reinsurance costs) on contracts not yet underwritten
-maintenance costs

2

PREMIUM LIABILITIES

Define
Unearned Premium Reserve

Portion of WP associated with exposure remaining on unexpired portion of conract

3

PREMIUM LIABILITIES

3 responsibilities of AA in terms of the Premium Liabilities.

1) value gross and net premium liabilities
2) assess need for a premium deficiency reserve
3) assess maximum DPAE

4

PREMIUM LIABILITIES

Define
Deferred Policy Acquisition Expense (DPAE)

asset recognizing prepaid acquisition expense for unexpired portion of policy

paid upfront when policy is issued but not expensed until premium is earned in the income statement.

Asset on balance sheet

includes:
--broker commissions
--premium taxes
--renewal costs
--advertising

5

PREMIUM LIABILITIES

Define
Unearned (Reinsurance) Commission.

arise from commission revenue on reinsurance ceded premium.

Reinsurance commission from the unexpired portion of the policy.

Is carried as a liability.

6

PREMIUM LIABILITIES

Contrast
Equity in the gross Unearned Premium
vs
Equity in the net Unearned Premium

--equity in the gross Unearned Premium--
amount by which GROSS UPR exceeds GROSS PREMIUM LIABILITIES
or
GROSS UPR - GROSS PREMIUM LIABILITIES

--equity in the Net Unearned Premium--
(AKA : Net Max DPAE)
=
Net UPR
+ unearned (reinsurance) commission
+ Premium Deficiency
- Net Premium Liabilities

Usually calculated on an "All Lines Combined" basis, unless significant change in mix of business.

7

PREMIUM LIABILITIES

Define
Premium Deficiency

Provision determined by AA when EQUITY IN NET UPR is negative

Amount which, when added to NET UPR and UNEARNED (REINSURANCE) COMMISSIONS, makes an appropriate provision for future costs arising from the unexpired portion of in-force policies.

OR

Premium deficiency exists when NET premium liabilities exceeds the sum of NET UPR + Unearned (Reinsurance) Commission

8

PREMIUM LIABILITIES
(1)
What happens if carried DPAE >= Equity in UPR (Max allowable DPAE) ?

(2)
What happens if the Equity in UPR (Max allowable DPAE) is negative ?

(1)
DPAE is reduced to Max DPAE

(2)
DPAE is reduced to 0
Premium Deficiency is required

9

PREMIUM LIABILITIES

Types of adjustments to historical experience that AA must account for when assessing projected LRs for premium liabilities

1) Loss Trends
2) expected legislative changes
3) recent court decisions
4) Change in mix of business
5) Rate changes
6) CAT and large losse loadings
7) Seasonality
8) Policy term

10

PREMIUM LIABILITIES

Define
Maximum Deferrable Policy Acquisition Expenses (Max DPAE)

(AKA Equity in Net UPR)
Amount by which NET UPR + Unearned (reinsurance) commission exceeds NET POLICY LIABILITIES in connection with unearned premium.

11

PREMIUM LIABILITIES

Discuss the treatment of LAE by the AA in their estimation of losses

AA may include ALAE (ULAE) in the estimation.

If they don't, an estimate of future ALAE (ULAE) would be derived by applying an approach similar to the expected loss approach

12

PREMIUM LIABILITIES

1) What are Maintenance Expenses?

2) Discuss the inclusion of Maintenance Expenses to reflect the future cost of servicing the policies in-force.

1) expenses associated with :
-endorsements,
-mid-term cancellations,
-change in reinsurance contracts

expressed as a ratio of UPR
evaluated as a ratio of general expenses.

They vary by LoB. To determine at what extent, consider:
a) availability of expense info by LoB
b) distribution model of insurer
c) characteristics of portfolio (2yr contracts)

13

PREMIUM LIABILITIES

Elements upon which the MfAD should vary by

Selected MfaD should vary :
--between premium liabilities and claim liabilities
--among LoBs
--among AccYrs, PolYrs, UWYrs

14

PREMIUM LIABILITIES

2 examples of premium development to be evaluated as part of the premium liabilities.

1) premium development on retro-rated reinsurance ceded

2) Audit Premiums where final prem is unknown until coverage expire.

3) Premium development on reinsurance assumed

15

PREMIUM LIABILITIES

Components in the calculation of premium liabilities

Expected losses and LAE in relation to Unearned Premium
Maintenance Costs
Contingent Commission
Premium Deficiency
DPAE
Unearned Premium Reserve
Expected Reinsurance Costs
Premium Adjustments for Swing Rated policies

16

PREMIUM LIABILITIES

Describe whether the cie's provision for policy liabilities shown in Annual Return can be different from AA's estimated policy liabilities

YES they could be different

But cie's provision must be greater than AA's estimate.

AA will also need to provide explanation on material differences.

17

PREMIUM LIABILITIES

Define
General Expenses

overhead and servicing expenses, not including acquisition expenses