C - CIA Premium Liabilities

Question 1

PREMIUM LIABILITIES

Contrast Claim Liabilities vs Premium Liabilities

Answer 1

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

Question 2

PREMIUM LIABILITIES

Define Unearned Premium Reserve

Answer 2

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

Question 3

PREMIUM LIABILITIES

3 responsibilities of AA in terms of the Premium Liabilities.

Answer 3

1. Value gross and net premium liabilities
2. Assess need for a premium deficiency reserve
3. Assess maximum DPAE

Question 4

PREMIUM LIABILITIES

Define Deferred Policy Acquisition Expense (DPAE)

Answer 4

• 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

Question 5

PREMIUM LIABILITIES

Define Unearned (Reinsurance) Commission.

Answer 5

• Arise from commission revenue on reinsurance ceded premium.
• Reinsurance commission from the unexpired portion of the policy.
• Is carried as a liability.

Question 6

PREMIUM LIABILITIES

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

Answer 6

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.

Question 7

PREMIUM LIABILITIES

Define Premium Deficiency

Answer 7

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

Question 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 ?

Answer 8

1. DPAE is reduced to Max DPAE
2. DPAE is reduced to 0 Premium Deficiency is required

Question 9

PREMIUM LIABILITIES

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

Answer 9

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

Question 10

PREMIUM LIABILITIES

Define Maximum Deferrable Policy Acquisition Expenses (Max DPAE)

Answer 10

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

Question 11

PREMIUM LIABILITIES

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

Answer 11

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

Question 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.

Answer 12

1. Expenses associated with :

• Endorsements
• Mid-term cancellations
• Change in reinsurance contracts

Generally expressed as a ratio of Gross UPR. Evaluated as a ratio of general expenses.

2. They vary by LoB. To determine at what extent, consider:

• Availability of expense info by LoB
• Distribution model of insurer
• Characteristics of portfolio (2yr contracts)

Question 13

PREMIUM LIABILITIES

Elements upon which the MfAD should vary by

Answer 13

Selected MfaD should vary:

1. Between premium liabilities and claim liabilities
2. Among LoBs
3. Among AccYrs, PolYrs, UWYrs

Question 14

PREMIUM LIABILITIES

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

Answer 14

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

Question 15

PREMIUM LIABILITIES

Components in the calculation of premium liabilities

Answer 15

1. Expected losses and LAE in relation to Unearned Premium
2. Maintenance Costs
3. Expected Reinsurance Costs
4. Contingent Commission
5. Premium Deficiency
6. DPAE
7. Unearned Premium Reserve
8. Unearned Ceded Commission
9. Premium Adjustments for Swing Rated policies

Question 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

Answer 16

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.

Question 17

PREMIUM LIABILITIES

Define General Expenses

Answer 17

Overhead and servicing expenses, not including acquisition expenses