CAS Financial Reporting (A/C) Flashcards by Bradley Schneider

Q

Liquidation

in contrast to ‘going-concern’

Odomirok.1-5 Intro

A

-runoff of assets/liabilities
-of interest to REGULATOR (for satisfying policy holder obligations)

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Q

Going-concern

in contrast to ‘liquidation’

Odomirok.1-5 Intro

A

-continued normal operations
-of interest to INVESTORS

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Q

Fair Value

in contrast to ‘historical cost’

Odomirok.1-5 Intro

A

-value in open market
-more accurate

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Q

Historical Cost

in contrast to ‘fair value’

Odomirok.1-5 Intro

A

-original cost MINUS depreciation
-easier to calculate & objectively verifiable

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Q

Principle-based accounting system

in comparison to ‘rule-based’

Odomirok.1-5 Intro

A

-accounting approach requiring interpretation to apply
-more flexible

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Q

Rule-based accounting system

in comparison to ‘principle-based’

Odomirok.1-5 Intro

A

-specific guidance
-easier to apply, but less flexible

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Q

Asset

Odomirok.6-7-BS

A

a property, right, or claim arising from past events that has future value

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Q

Liability

general definition

Odomirok.6-7-BS

A

an obligation that the company must fulfill, based on past events, which will require the use of the company’s resources

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Q

Surplus

general definition (sometimes called equity)

Odomirok.6-7-BS

A

difference between assets & liabilities

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Q

Cash & invested assets

balance sheet

Odomirok.6-7-BS

A

Top part of asset side of balance sheet. These are assets that could be readily sold in the near term to meet the insurer’s liabilities

bonds, preferred stocks, common stocks, real estate, cash & cash equivalents, other invested assets

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Q

Non-invested assets

balance sheet

Odomirok.6-7-BS

A

Top part of asset side of balance sheet. These are assets that are less liquid

uncollected premiums & agents balances, reinsurance recoveries, DTA (Deferred Tax Asset)

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Q

Liabilities

balance sheet

Odomirok.6-7-BS

A

Top part of the liabilities & surplus side of the balance sheet.

loss, UEP (Unearned Premium), LAE, reinsurance payables for losses and premiums, funds held, provision for reinsurance

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Q

Surplus

balance sheet

Odomirok.6-7-BS

A

Bottom part of the liabilities & surplus side of the balance sheet.

unassigned funds, gross paid in & contributed surplus, aggregate write-ins for special surplus funds, common capital stock

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Q

why is the balance sheet important to actuaries

Odomirok.6-7-BS

A

-Loss and LAE are the majority of the liabilities and actuaries have a significant role in their determination
-actuaries have a role in assessing the capital required to support an insurer’s risks

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Q

nonadmitted assets

with 3 examples

Odomirok.6-7-BS

A

SAP concept
refers to assets that have economic value but cannot easily be used to fulfill policyholder obligations
Ex[1] DTA (Deferred tax asset) - largest single source of nonadmitted assets
cannot be used to pay claims
likely never convertible to cash
Ex[2] furniture
not easily convertible to cash to pay policyholder obligations
Ex[3] agents’ balances more than 90 days overdue
may never be recovered
nonadmitted because SAP is focused on solvency and is conservative (vs GAAP)

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Q

Bonds

Odomirok.6-7-BS

A

a security (or investment product) that makes pre-determined interest payments (or coupon payments) according to a fixed schedule
generally 50-60% of an insurer’s assets

also called fixed-income security

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Q

Bond types under SAP

Odomirok.6-7-BS

A

NAIC 1 highest quality & lowest risk of default, NAIC 6 lowest quality & highest risk of default (SAP)
1-2 use amortized value
3-6 use min (amortized value, fair value)

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Q

Bond types under NAIC

Odomirok.6-7-BS

A

AFS (Available for sale): acquired with intent to hold for > 1 year BUT sell before maturity. Fair value
HTM (Held to maturity): acquired with intent to hold until maturity. Amortized cost
HFT (Held for trading): acquired with intent to hold only for hours or days. Fair value

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Q

Deferred Tax Asset (DTA)

Odomirok.6-7-BS

A

A DTA represents expected future tax benefits related to amounts previously recorded in the statutory financial statements not expected to be reflected in the tax return as of the reporting date

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Q

2 examples of DTAs that are relevant to the actuary

Odomirok.6-7-BS

A

1) difference in tax accounting & statutory accounting for loss reserves
- statutory loss reserves are discounted to find the reserves for tax reporting purposes
- in other words, the difference represents the time-value of money.

2) carryforward of net operating loss from previous years
- when losses in 1 year offset gains in future years

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Q

3 important differences between SAP and GAAP

Odomirok.8-9-IS

A

Asset recognition: SAP - asset is recognized when expense is incurred. GAAP - may defer recognition to achieve matching of revenue & expenses
Reinsurance in loss reserves: SAP - loss reserves are recorded NET of reinsurance. GAAP - loss reserves are recorded GROSS of reinsurance
Taxes: SAP - taxes (mostly) not deferred. GAAP - tax can be deferred

An example of GAAP asset recognition to achieve matching of revenue & expenses is for DAC (Deferred Acquisition Costs). Acquisition costs like advertising are not “counted” immediately. Rather they are earned over the term of the policy that was acquired by that particular advertising.

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Q

5 statements in a completed set of financial statements

Odomirok.8-9-IS

A

B/S or Balance Sheet (Statement of Financial Position – Chapter 7 in Odomirok)
I/S or Income Statement (Statement of Financial Performance – Chapter 8 in Odomirok)
Capital & Surplus (shows changes in surplus not recorded in the income statement)
Statement of Cash Flow (shows the inflow and outflow of cash & cash equivalents)
Notes to Financial Statement (quantitative & qualitative disclosures - Chapter 10 in Odomirok)

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Q

3 types of income

Odomirok.8-9-IS

A

U/W income
investment income
other income

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Q

Which section of income statement does the following belong to?
Premiums earned

Odomirok.8-9-IS

A

U/W income

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Which section of income statement does the following belong to? Losses incurred ## Footnote Odomirok.8-9-IS

U/W income

Which section of income statement does the following belong to? Loss adjustment expenses incurred ## Footnote Odomirok.8-9-IS

U/W income

Which section of income statement does the following belong to? Other underwriting expenses incurred ## Footnote Odomirok.8-9-IS

U/W income

Which section of income statement does the following belong to? Aggregate write-ins for underwriting deductions ## Footnote Odomirok.8-9-IS

U/W income

Which section of income statement does the following belong to? Net investment income earned ## Footnote Odomirok.8-9-IS

Investment income

Which section of income statement does the following belong to? Net realized capital gains (losses) less capital gains tax ## Footnote Odomirok.8-9-IS

Investment income

Which section of income statement does the following belong to? Net gain (loss) from agents' or premium balances charged off ## Footnote Odomirok.8-9-IS

Other income

Which section of income statement does the following belong to? Finance and service charges not included in premiums ## Footnote Odomirok.8-9-IS

Other income

Which section of income statement does the following belong to? Aggregate write-ins for miscellaneous income ## Footnote Odomirok.8-9-IS

Other income

Which section of income statement does the following belong to? Net income before dividends to policyholders and federal/foreign income tax ## Footnote Odomirok.8-9-IS

Net income

Which section of income statement does the following belong to? Dividends to policyholders ## Footnote Odomirok.8-9-IS

Net income

Which section of income statement does the following belong to? Federal and foreign income taxes incurred ## Footnote Odomirok.8-9-IS

Net income

Which section of the balance sheet does the following belong to? Bonds ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Preferred stocks ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Common stocks ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Real estate ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Cash, cash equivalents and short-term investment ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Other invested assets ## Footnote Odomirok.6-7-BS

* Assets * Cash and invested assets

Which section of the balance sheet does the following belong to? Uncollected premiums and agents balances ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Amounts recoverable from reinsurers ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Deferred premiums and agents balances ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Net deferred tax asset ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Receivables from parent, subsidiaries and affiliates ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Aggregate write-ins ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Other non-invested assets ## Footnote Odomirok.6-7-BS

* Assets * Non-invested assets

Which section of the balance sheet does the following belong to? Losses ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Reinsurance payable on paid loss and loss adjustment expenses ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Loss adjustment expenses ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Other expenses (excluding taxes, licenses and fees) ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Unearned premiums ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Ceded reinsurance premiums payable ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Funds held under reinsurance treaties ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Providion for reinsurance ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Aggregate write-in for liabilities ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Other liabilities ## Footnote Odomirok.6-7-BS

Liabilities

Which section of the balance sheet does the following belong to? Aggregate write-ins for special surplus funds ## Footnote Odomirok.6-7-BS

Surplus as regards policyholders

Which section of the balance sheet does the following belong to? Common capital stock ## Footnote Odomirok.6-7-BS

Surplus as regards policyholders

Which section of the balance sheet does the following belong to? Gross paid in and contributed surplus ## Footnote Odomirok.6-7-BS

Surplus as regards policyholders

Which section of the balance sheet does the following belong to? Unassigned funds ## Footnote Odomirok.6-7-BS

Surplus as regards policyholders

Which section of the balance sheet does the following belong to? Other surplus and capital ## Footnote Odomirok.6-7-BS

Surplus as regards policyholders

define 'balance sheet' ## Footnote Odomirok.6-7-BS

shows a company's assets, liabilities, surplus at a specific point in time

define 'income statement' ## Footnote Odomirok.8-9-IS

shows a company's revenue & expenses over a particular period

U/W income | formula ## Footnote Odomirok.8-9-IS

* = EP – (current AY loss) – (change in prior years' AY loss) – LAE – (other U/W expense) * = EP – (current AY loss & LAE) – (change in prior years' AY loss & LAE) – (other U/W expense)

Net investment income earned | formula ## Footnote Odomirok.8-9-IS

= (Interest and Dividends received on investment assets held over the course of the year) ## Footnote → This amount is net of investment expenses and other costs, but gross of federal income taxes, on the income statement.

Investment income | formula ## Footnote Odomirok.8-9-IS

= (net investment income earned) + (net realized capital gain (loss))

Investment gain | formula ## Footnote Odomirok.8-9-IS

= (net investment income earned) + (net realized capital gains(loss)) – (capital gains taxes)

Net investment income | formula ## Footnote Odomirok.8-9-IS

= (investment revenue) – (investment expenses) – (non-federal TLF)

other income | formula ## Footnote Odomirok.8-9-IS

= SUM(agents' balances charged off, service fees, aggregate write-ins)

TOTAL net income | formula ## Footnote Odomirok.8-9-IS

= (U/W income) + (net investment gain ) + (other income) – (dividends to policyholders) – (fed/foreign taxes incurred)

Surplus ## Footnote Odomirok.8-9-IS

Surplus(CY) = Surplus(CY-1) + NI(CY) + (direct charges to surplus)(CY)

direct charges used in surplus calculation ## Footnote Odomirok.8-9-IS

* changes in **un**realized capital gains * changes in **un**realized foreign exchange * changes in deferred income tax * **(-)** changes in nonadmitted assets * **(-)** changes in provision for reinsurance * cumulative effect of changes in accounting principles * additional capital contributions (includes change in surplus notes and change in gross paid-in & contributed surplus) * **(-)** stockholder dividends

Category 1: notes requiring direct involvement by actuaries ## Footnote Odomirok.10-Notes

* **C**hange (incurred loss & LAE) * **A**sbestos & environmental reserves * **R**einsurance * **D**iscounting (unpaid loss & LAE) * **PDR** (Premium Deficiency Reserves)

Category 2: notes that are relevant to actuaries ## Footnote Odomirok.10-Notes

* **S**ummary of significant accounting principles (This is Note #1. I just thought you should know. Totes important!) * **H**igh deductibles * **I**ntercompany pooling * **E**vents subsequent (usually known as 'subsequent events') * **S**tructured settlements

describe the Financial Statement NOTE: **C**hange in incurred loss & LAE ## Footnote Odomirok.10-Notes

shows prior AY changes * affects current CY U/W income * disclose change & reasons for change (segment, LOB,...)

describe the Financial Statement NOTE: **A**sbestos & environmental exposure ## Footnote Odomirok.10-Notes

* significant adverse development over several decades * must disclose detailed quantitative & qualitative disclosures regarding reserves

describe the Financial Statement NOTE: **R**einsurance ## Footnote Odomirok.10-Notes

reserves are net of reinsurance on the B/S & I/S * reinsurance can significantly lower the B/S reserves and affects the surplus * must understand credit risk associated with reinsurance * A: unsecured recoverables, B: disputed recoverables, D: uncollectible recoverables

describe the Financial Statement NOTE: **D**iscounting ## Footnote Odomirok.10-Notes

* disclose whether discounting is used for reserves * if so, then disclose type of discounting: tabular (for WC) or non-tabular

describe the Financial Statement NOTE: **PDR** (Premium Deficiency Reserve) ## Footnote Odomirok.10-Notes

* inclusion of investment income is optional * disclose amount and effective date of PDR * if PDR is recorded as part of UEP then this Note is the only way to know if PDR exists

describe the Financial Statement NOTE: **S**pecial accounting rules ## Footnote Odomirok.10-Notes

* disclose source of rules (usually NAIC APPM and the SSAPS) * disclose exceptions to rules

describe the Financial Statement NOTE: **H**igh deductible policies ## Footnote Odomirok.10-Notes

insurer pays the full claim and then seeks reimbursement from the insured for the deductible * creates credit risk that isn't shown on the B/S * disclose amount recorded & amount billed but not collected

describe the Financial Statement NOTE: **I**ntercompany pooling ## Footnote Odomirok.10-Notes

this is when companies in a group cede all business to lead company * each member of group then assumes back a specified percentage * note must disclose pooling arrangements * affects U&IE, Schedule F Parts 1&3, Schedule P

describe the Financial Statement NOTE: **E**vents subsequent ## Footnote Odomirok.10-Notes

must disclose Type 1 (recognized) & Type 2 (non-recognized) subsequent events (see NAIC.SSAP-9)

describe the Financial Statement NOTE: **S**tructured Settlements ## Footnote Odomirok.10-Notes

**Purpose** of General Interrogatories ## Footnote Odomirok.11-GenInt

COB provide further info on: * Controls * Operations * Business Practices

**Items** discussed in General Interrogatories ## Footnote Odomirok.11-GenInt

R-MESS * Regulatory exams * Merger activity * Exemptions from regulations * Sales commissions * Suspension of licenses

Information contained in Schedule T ## Footnote Odomirok.13

premium writings by state

annual statement that shows 'cash & cash equivalents' ## Footnote Odomirok.13

Schedule E

annual statement that shows 'stocks & bonds' ## Footnote Odomirok.13

Schedule D

annual statement that shows 'real estate' ## Footnote Odomirok.13

Schedule A

uses of Schedule P ## Footnote Odomirok.15-P

DT-RAPID * **D**evelopment of reserves over time attributable to specific years & lines * **T**rends in frequency & severity * calculate **R**BC loss-sensitive discount * evaluate **A**dequacy of recorded reserves * determine **P**ayment patterns for discounting * observe split between actuarial reserves (**I**BNR) and case reserves * **D**isclosures for the SAO (Statement of Actuarial Opinion)

how is Schedule P organized? ## Footnote Odomirok.15-P

* Part 1 - **tables** of **everything** by accident year (losses, expense, premiums, claim counts) * Parts 2, 3, 4 - **triangles** of **losses** (ultimates in Part 2, paids in Part 3, IBNR in Part 4) * Part 5 - **triangles** of **claim counts** * Part 6 - **triangles** of **earned premium** * Part 7 - **tables** & **triangles** for loss-sensitive contracts

what information does Schedule P provide (2 answers) ## Footnote Odomirok.15-P

* detail underlying loss & LAE reserves from balance sheet * includes 10 years of loss & DCC

what is a common reason for outside parties to use a company's Schedule P ## Footnote Odomirok.15-P

to evaluate company's reserve adequacy

how many 'Parts' comprise Schedule P ## Footnote Odomirok.15-P

7

how is Schedule P data segmented ## Footnote Odomirok.15-P

by line of business & accident year

cautions when using Schedule P to assess reserve adequacy ## Footnote Odomirok.15-P

* talk to people! Number's don't tell the whole story - need to talk to management to understand full picture (ex- Sch P is net of reins and does not reflect credit risk) * only 10 years of data - issue for long-tailed lines * pooling - internal pooling can distory data, participation in voluntary/involuntary pools can distory data, company's level of participation in the pool may have changed over time * commutations - can cause sudden increase in net reserves * DCC - Sch P parts 2,3,4 include DCC, that means you can't separate DCC trends from loss trends * preparation of schedule P - choice regarding allocations & presentations

purpose of the SAO | 3 items ## Footnote Odomirok.16-17-SAO

* **Opinion**: provide the appointed actuary's opinion on reserve amounts for items in SAO scope (whether the reserves are reasonable, inadequate, excessive...) * **Inform**: inform readers/regulators of significant risk factors regarding reserves * **Advise**: advise whether risk factors could lead to MAD in reserves (MAD = Material Adverse Deviation)

describe the organization of the SAO ## Footnote Odomirok.16-17-SAO

4 section, 2 exhibits: ISOR + (A,B) 1. Identification 2. Scope 3. Opinion 4. Relevant comments * Exhibit A: recorded amounts for items in scope (loss reserves, reinsurance...) * Exhibit B: disclosure items regarding NET reserves in scope ## Footnote (To me, ISOR sounds like eyesore, which may happen to you from time to time while studying because there is a lot of reading.)

how might an insurer get an exemption from filing the SAO ## Footnote Odomirok.16-17-SAO

* Size: the insurer is small (less than $1m annual GWP) & (less than $1m gross reserves @ year-end) * LOB: certain lines of business are exempt (u: doesn't stand for anything, but I needed a vowel to make the memory trick SLuSH into a word) * Supervision: exempt if insurer is under supervision * Hardship: if insurer is under financial hardship (cost of SAO is a burden)

identify intended users of the SAO | 5 ## Footnote Odomirok.16-17-SAO

* regulators * Board of Directors * management * investors * general public

contents of **identification** section of SAO ## Footnote Odomirok.16-17-SAO

* actuary's name/title + WARD -Who made appointment -Affirmation of qualifications -Relationship to company -Date of appointment * intended purpose/users (ASOP.36, section 3.2) | WARD

contents of **scope** section of SAO ## Footnote Odomirok.16-17-SAO

must identify: - reserve items in opinion - accounting basis for reserves - intercompany pooling - review date (also defined in ASOP 36) - data source

contents of **opinion** section of SAO ## Footnote Odomirok.16-17-SAO

* [A] LAWS: reserves meet insurance laws in domiciliary state * [B] STANDARDS: reserves computed in accordance with actuarial standards * [C] TYPE OF OPINION: R, I, E, Q, or N (reasonable, inadequate, excessive, qualified, none) * [D] MISCELLANEOUS: other loss reserve items, work of others,..

contents of **relevant comments** section of SAO ## Footnote Odomirok.16-17-SAO

- comments & disclosures to aid reader's understanding - items 1&2 (of 8): MAD (Material Adverse Deviation) -materiality standard regarding MAD -risks that may result in MAD - items 3-8: various

contents of **Exhibit A** section of SAO ## Footnote Odomirok.16-17-SAO

recorded amounts for items mentioned in the scope

contents of **Exhibit B** section of SAO ## Footnote Odomirok.16-17-SAO

disclosure items regarding NET reserves in the scope

reserve items (3) and disclosure items (6) in the **scope** section of the SAO ## Footnote Odomirok.16-17-SAO

reserve items: * loss & LAE reserves * retroactive reinsurance assumed reserves * unearned premium reserves for long-duration contracts Should disclose: * whether reserves are discounted or undiscounted * basis for risk margin (or state there is no risk margin) * gross or net of recoverables (reinsurance, salvage & subrogation) * whether uncollectible recoverables were considered * types of expenses included in LAE (DCC, A&O, ...)

**review date** for the SAO ## Footnote Odomirok.16-17-SAO

the date subsequent to the valuation date through which material information known to the actuary is included in forming the reserve opinion * it's NOT the same as the signing date * the signing date comes on/after the review date * info arising between review date & signing date is NOT relied on by the actuary

describe the **data reconciliation statement** in the SAO ## Footnote Odomirok.16-17-SAO

it states: the actuary either **performed** OR **reviewed** reconciliation to Schedule P

define **reasonable** actuarial opinion ## Footnote Odomirok.16-17-SAO

recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities

define **inadequate/deficient** actuarial opinion ## Footnote Odomirok.16-17-SAO

recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities

define **excessive/redundant** actuarial opinion ## Footnote Odomirok.16-17-SAO

recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities

define **qualified** actuarial opinion ## Footnote Odomirok.16-17-SAO

actuary is UNABLE TO ISSUE an opinion on certain material items (reserves could still be within actuary's range)

define **no opinion** actuarial opinion ## Footnote Odomirok.16-17-SAO

actuary is UNABLE TO CONCLUDE that reserves are reasonable

if the opinion is reasonable, what is the appropriate wording in the SAO ## Footnote Odomirok.16-17-SAO

amounts carried in Exhibit A.. make reasonable provision for unpaid loss & LAE obligations, both gross & net.. under terms of company's contracts & agreements

if the opinion is inadequate (or excessive), what is the appropriate wording in the SAO ## Footnote Odomirok.16-17-SAO

actuary must further disclose their own minimum (or maximum) reasonable reserve level

is this document public OR confidential and how does that align with its purpose: **SAO** ## Footnote Odomirok.16-17-SAO

PUBLIC: * investors want to know if reserves are adequate and to understand the company's risks

is this document public OR confidential and how does that align with its purpose: **AOS** ## Footnote Odomirok.16-17-SAO

CONFIDENTIAL: * regulator needs access to proprietary & sensitive information to assess solvency risks

is this document public OR confidential and how does that align with its purpose: **Actuarial Report** ## Footnote Odomirok.16-17-SAO

CONFIDENTIAL: * users (eg: management) would see significant proprietary information that the public (eg: competitors) shouldn't see | ASOP.41

describe the RELEVANT COMMENTS section of the SAO, & how many required items? ## Footnote Odomirok.16-17-SAO

* comments & disclosures to aid the reader's understanding (of reserves) * there are 8 required items

identify the 8 items required in the RELEVANT COMMENTS section of the SAO ## Footnote Odomirok.16-17-SAO

1 & 2: MAD (Material Adverse Deviation) * MATERIALITY STANDARD regarding risk of MAD * RISKS that may result in MAD (comment must be added if no such risks could result in MAD) 3: Exhibit B significance of Exhibit B disclosure items including: * anticipates salvage & subrogation * discounting (tabular & non-tabular) * insurer's share of reserves for (pools & associations) 4 & 5: Reinsurance * retroactive reinsurance * uncollectible reinsurance 6: IRIS * ratios 11, 12, 13 7: Changes * material changes in reserving assumptions/methods since prior opinion 8: UEP (Unearned premium) * UEP for long-duration contracts

identify common types of materiality standards (5) ## Footnote Odomirok.16-17-SAO

percentage-based standards: * % of reserves (loss & LAE) [10% is typical] * % of surplus [10-20% is typical] * % of net income regulatory ratio based standards: * RBC: reduction in surplus that would trigger the next RBC action level * IRIS: amount that would trigger an unusual IRIS ratio

identify example of major risk factors (for SAO) ## Footnote Odomirok.16-17-SAO

many, here are some.. * mass tort claims * catastrophic weather events * asbestos claims * website hack by Martian bots

what is the very last thing the actuary must do regarding the SAO ## Footnote Odomirok.16-17-SAO

sign the darn thing!! (submit with Annual Statement by March 1, and keep all supporting docs for 7 years)

identify the intended audience for the AOS ## Footnote Odomirok.16-17-SAO

* regulators in the domiciliary state (do NOT file with NAIC) * Board of Directors the AOS is NOT a public document (contains proprietary company information)

how is the AOS organized (Actuarial Opinion Summary) ## Footnote Odomirok.16-17-SAO

Comparison section (4 items): * A: range of actuary's reserves (**if** the actuary calculated a range) * B: point estimate by actuary (**no requirement** for **both** range and point estimate) * C: carried reserves by company * D: difference (company - actuary) Adverse Development section (1 item): * E: has there been (1-year adverse development GREATER than 5% in 3 of the last 5 calendar years)

where in the Annual Statement is the adverse development of reserves disclosed ## Footnote Odomirok.16-17-SAO

Five-Year Historical Data, line 74 (raw data is in Schedule P, Part 2 - Summary)

if there HAS NOT been adverse development more than 5% in 3 of the last 5 years, describe item E of the AOS ## Footnote Odomirok.16-17-SAO

best practice is to state this fact (although no comment is specifically required)

if there HAS been adverse development more than 5% in 3 of the last 5 years, describe item E of the AOS ## Footnote Odomirok.16-17-SAO

provide sufficient detail so regulator can determine if additional review is required. Detail depends on specific situation a possible way to structure the item E statement: * STATE there has been adverse development & for which years * SUMMARIZE the reason for the adverse development * EXPLAIN the reason in more detail * MITIGATE the effects of the adverse development (explain how that might be done)