CIA Premium Liabilities

Question 1

List items to consider when analyzing the premium liabilities

Answer 1

• UEPR reserve
• Policy liabilities in connection with UEPR
• Unearned (Re) commission
• Premium deficiency
• DPAE
• Ceded deferred premium tax
• Anticipated broker/agent commission
• Expected adj to swing-rated policies
• Expected changes to premiums as a result of audits, late reporting or endorsements
• Expected commission adj on policies with variable commissions

Question 2

List 2 major categories of “Other net liabilities”

Answer 2

1 - Relate to commission adjustments

2 - Relate to premium adjustments

Question 3

Define claim liabs and premium liabs

Answer 3

Claim liabs are the portion of ICL in respect of claims incurred on or before the BS date

Premium liabs are the portions of ICL that are not claim liabs

Question 4

Define UEPR Reserve

Answer 4

The portion of the WP associated with the exposure remaining under a contract of insurance

Question 5

Define Policy liabilities in connection with UEPR

Answer 5

Liabilities for future events consisting of the APV on the unexpired portion of the policies inforce at the valuation date. This can be divided in 3 items:
• APV of Future claims and adj expenses
• APV of Expected Re costs (on a net basis only)
• APV of Maintenance costs

Question 6

Define The deferred policy acquisition expense (DPAE)

Answer 6

Asset which recognizes the prepaid expenses over the policy period provided that such costs are recoverable from the equity in the net UEPR

Question 7

Define Unearned (Re) Commissions

Answer 7

Arise from commission revenue on Re ceded relating to the unexpired portion of a policy is carried as a liability

Question 8

Define Equity in the gross UEPR Reserve

Answer 8

Amount by which the gross UEPR exceeds the gross policy liabilities in connection with UEPR

Question 9

Define Equity in the net UEPR Reserve

Answer 9

Amount by which the net UEPR + unearned (Re) commissions exceeds the net policy liabilities in connection with UEPR

Question 10

Define Premium Deficiency

Answer 10

Provision that is determined by the AA when the equity in net UEPR is negative. Amount which makes an appropriate provision for future costs arising from the unexpired portion of in-force policies

Question 11

Discuss the expected losses within the “Policy Liabilities in connection with UEPR”

Answer 11

Evaluation of future expected LR in connection with the unexpired portion of in-force policies is a critical aspect of determining the future expected losses. Items to consider :
• Loss Trend
• Impact of expected legislative changes
• MOB
• Rate Changes
• CAT

Question 12

Discuss the LAE within the “Policy Liabilities in connection with UEPR”

Answer 12

LAE may be included in the estimation of the losses

If ALAE not include, should be derived by applying an approach similar to the expected loss approach

If ULAE not include, would be derived on a suitable basis consistent with AA’s valuation of claim liabilities

Question 13

Discuss the maintenance expenses within the “Policy Liabilities in connection with UEPR”

Answer 13

Need to be included to reflect the future cost of servicing the policies in force (as %UEPR)
Considerations:
• Availability of expense info by LOB
• Distribution model of the insurer
• Charact. of the insurer’s portfolio(2 yrs pol)

Question 14

When does a premium deficiency exist ?

Answer 14

When the net policy liabilities in connection with UEPR exceed the sum of net UEPR and unearned (Re) commissions

Question 15

How is defined the max deferrable policy acquisition expenses (max DPAE) ?
(AKA Equity in UEPR)

Answer 15

= Net UEPR + Premium deficiency + Unearned (Re) commissions - Net policy liabilities in connection with UEPR

Question 16

Define Contingent commissions (Other net liabilities)

Answer 16

Commissions that insurers pay their agents/brokers based on the profitability and the volume of business of individual producers

Question 17

Define Swing-rated contracts (Other net liabilities)

Answer 17

Contracts generate premium adjustments between insurers and Re based on a pre-determined “target” LR and the actual LR of the book of business Re

Question 18

Define Provision for retro-rated policies (Other net liabilities)

Answer 18

Provision when insurers issue policies for which premium is adjusted yearly based on the actual xp on the policy

Question 19

List the sources of dev on Re assumed or ceded to be considered

Answer 19

• Changes in subject matter premium which is usually unknown until the end of the contract period
• Swing-rated excess of loss treaties
• Reinstatement premium for catastrophic or other layer

Question 20

What happens if carried DPAE >= Equity in UEPR (Max DPAE) ?

Answer 20

DPAE is reduced to Max DPAE

Question 21

What happens if the Equity in UEPR (Max DPAE) is negative ?

Answer 21

DPAE is reduced to 0

Premium Deficiency is required

Question 22

Define Subsequent Event

Answer 22

Event of which an actuary first becomes aware after a calculation date but before the report date