Notes to Financial Statements

Question 1

purpose of notes

Answer 1

provide additional qualitative or quantitative info that may provide a more complete picture of the insurer’s financial condition

Question 2

Notes requiring direct involvement by actuaries

Answer 2

Reinsurance

Change in Incd Loss & LAE

Premium Deficiency Reserves

Discounting of Liab for Unpaid Loss & LAE

Asbestos/Environmental Reserves

Question 3

important to elaborate on reinsurance transactions because

Answer 3

have material impact on financial statements

Liab and income are net of reinsurance

Surplus is impacted by reinsurance

disclosures necessary bc reins generates credit risk so note can be used to assess level of credit risk as it provides details about unsecured recoverables, disputed balances, uncollectible recoverables

Question 4

unsecured reinsurance recoverables (A)

Answer 4

need to disclose info about reinsurers that don’t provide collateral if recoverables from reinsurer exceed 3% of ceding company’s surplus; show potential credit risk of recoverables

Question 5

reinsurance recoverables in dispute (B)

Answer 5

formal written letter is required to classify a recoverable as being in dispute; note can be used to identify credit risk and insurers that try to over recover

Question 6

reinsurance assumed & ceded (C)

Answer 6

info about ceding commissions related to ceded UEPR, necessary to disclose this as commissions are treated as revenue and therefore increase surplus; help identify situations where insurer is engaging in reinsurance contracts with commission designed to manipulate surplus and derive impact to surplus if policies are cancelled

Question 7

uncollectable reinsurance (D)

Answer 7

describes recoverables that were written off during yr because considered uncollectible, written off as expense; could refer to this when determining whether prov for reins is sufficient

To show how much reinsurance was deemed uncollectible historically, to
compare to the provision for reinsurance

Question 8

commutation of ceded reins (E)

Answer 8

commutation is settlement btw insurer and reinsurer to discharge all remaining obligations; note discloses commutation that took place during yr; commutations distort financial statements

consideration received will increase assets

loss reserve is increased bc reserves assumed back

Sched P will be affected by increase of reserves for curr year

Question 9

retroactive reinsurance (F)

Answer 9

covers liab that occurred prior to effective date of policy

ceded reserves are recorded as write-in contra liab

consideration paid reduces assets in BS

any gain (diff btw ceded reserves and prem paid) is recorded as other income in IS and special surplus in BS

info can be used to verify insurer is approp accting for retroactive reins and better understand its impact

*****Loss reserves unaffected by transaction so Sched P unaffected

Question 10

reins accounted for as deposit (G):

Answer 10

if accounted for deposit or liab, will not impact UW income; statement should include schedule that shows hist change to deposit/liab balance since inception of contract

Question 11

disclosures for transfer of P&C run-off agreements (H)

Answer 11

transfer to 3rd party of risk from line that is no longer actively marketed by insurer; accounted for differently to traditional retro reins contract:

consideration paid is recorded as paid loss (decrease assets)

reserves transferred recorded as contra liab

Sched P affected by change in net incurred loss

Question 12

Change in Incd Loss & LAE & importance

Answer 12

discloses changes in estimates for loss and LAE from prior AY

• lists amount of change, segments that lead to change, and reason for change
• important bc changes can distort curr yr UW income and recurring material changes may indicate that there are issues with reserving process and user need to refer to SchedP or 5-yr historical data exhibit

-Can help users identify whether there are significant adverse development. If
adverse development consistently occurs, may question under-reserving
-What caused this development? This will help assess whether material adverse risk
still remains, and also help determine whether reserves are reasonable

Question 13

Premium Deficiency Reserves

Answer 13

premium deficiency reserve is established if the unearned premium of in-force
business is not sufficient to cover the losses, LAE and maintenance expenses that
will arise as that premium is earned

insurer has option about whether to give credit for investment income when calc deficiency

• 2 ways to account for deficiency: establish write-in liab or reflect as part of UEPR
• if 2nd used, only way to know it exists is by referring to Notes
• need to disclose size of deficiency and whether investment income was considered

it may indicate that the insurer is issuing
unprofitable business
-Can identify lines that have rate adequacy issues

Question 14

Discounting of Liab for Unpaid Loss & LAE

tabular vs non-tabular

Answer 14

tabular and non-tabular discounting

• tabular are based on interest rate and mortality assumptions from life tables; apply to annuity claims that pay pension benefits; typically applied to specific claims; note discloses whether tabular used and if so basis and assumptions
• non-tabular mainly used when insurer receives permission from state regulator; often applied to aggregate reserves and are based on projected payment pattern and assumed discount rate; note discloses whether non-tabular used and if so the basis for discount
• note requires disclosure if there has been change since prior yr of key assumptions used to calc discount

-Different companies discount differently so this helps make Financial statements
more comparable

Question 15

reasons for familiarity with note for Discounting of Liab for Unpaid Loss & LAE

Answer 15

diff companies use diff discounting practices, use of non-tabular discounts is sign that regulator possibly may have solvency concerns, and discounting is disclosed and described in SAO

Question 16

Asbestos/Environmental Reserves

Answer 16

need to disclose potential exposure bc reserves from these exposures have developed adversely over past few decades and lot of uncertainty assoc with reserves

• policies designed to cover exposure do not need to be disclosed
• disclose LOB affected, nature of exposures, and reserving methods
• table provided containing beginning&ending reserves, loss incd, and paid during CY separately for asbestos and environmental and separately for direct, assumed and net for past 5 CY years

Question 17

Asbestos/Environmental Reserves note valuable

Answer 17

because discloses presence of exposure to asbestos and environ loss, magnitude of exposure, and recent devel of exposure

Question 18

Notes that may be relevant

Answer 18

Summary of Sign Accounting Policies

Events Subsequent

Intercompany Pooling

Structured Settlements

High Deductibles

Question 19

Summary of Sign Accounting Policies

Answer 19

describes source of accounting rules used to construct AS, any exceptions that were made to rules and basis for, and additional detail on significant accountingpolicies

Question 20

Events Subsequent

Answer 20

includes events that occur btw accting date of statement and date statement issued;

recognized=conditions that existed @ accting date

non-recognized=events that did not exist @ accting date

-recognized disclosure only needed if it would prevent the statements from being misleading and non-recognized described only if they may have material effect on financial condition of company

Question 21

Events Subsequent important for SAO

Answer 21

bc need to decide whether events are material to loss reserve estimates

Question 22

Intercompany Pooling

Answer 22

regulators want to understand arrangement so can assess solvency of aggregate group

arrangement can impact AS – UW & Investment Exhibit, Schedule F, Schedule P

Question 23

Structured Settlements

Answer 23

records amnt paid as paid loss and closes claim but if life insurer making payment becomes insolvent insurer could still be held liable so note is necessary to disclose potential credit risk which is not reflected in BS

-needs to mention total amnt of nominal structure settlement payments and if remaining payments > 1% of surplus, name of life insurer and associated remaining payments

disclose the total amount of structured settlement payments for which an insurer could be held liable.

note effectively addresses a potential credit risk that is not reflected on the balance sheet

Question 24

High Deductibles

Answer 24

loss reserves are held net of portion within deductible so important to disclose this arrangement in notes as credit risk exists;

must disclose reserve credit recognized for unpaid claims and amount billed but not yet collected for paid claims

The Note to Financial Statements on high deductible addresses another potential credit risk that is not reflected on the balance sheet.

It is effective in assessing the credit risk of LDD policies because it
helps the users understand the potential impact of this credit risk relative to the
total unpaid claims and to the company’s surplus.

Question 25

2 notes useful for WC that uses reinsurance

Answer 25

reinsuranceie unsecured reins recoverables because subject to credit risk and discounting because lifetime pension cases may be discounted using tabular methods

Question 26

issue of uncollectible reinsurance is addressed in

Answer 26

Schedule F (prov for reins=prosp measure) SAO (prospective measure of uncollectible reins in actuary’s opinion and extent uncollectible amnts are acted for in reserves estimates) notes (retrospective measure of amnt of uncollectable reins written off during CY)

Question 27

regulators concerned with reinsurance amounts in dispute

Answer 27

credit risk, insurers may be trying to artificially increase their surplus by overstating reins recoverable, ceding company may avoid having reinsurer listed as slow-paying by considering some of recoverables to be in dispute

Question 28

retroactive reinsurance differs from prospective reinsurance reason a company might enter into a retroactive reinsurance agreement

Answer 28

Retroactive reinsurance transfers loss liabilities that already occurred; and generates a surplus increase. Prospective reinsurance reinsures losses that have yet to occur. To provide surplus relief, recognized immediately under SAP – the difference between the carried reserves and the consideration paid (which would be based on the present value)

Question 30

questions that appointed actuary may ask about Unsecured Reinsurance Recoverable & why

Answer 30

-Was there a catastrophe that led to a large amount of recoverable? Motivation: Want to see whether the large amount of recoverable is temporary/permanent or usual/unusual issue. -Why wasn’t security provided? Concern that Y may not be able to pay the recoverable. -Are there concerns of the financial health of these reinsurers? Concern that Y has a low AM Best rating/ Concern that X has been late in its payments. -Do the reinsurers have high capital to premium ratio? Higher capital would have less chance to default. -Has X been current in its recovery payments? It may create cash flow issues when Reinsurer X doesn’t pay claims right away. -Are X and Y affiliated (with each other)? May be increased credit risk if these two reinsurers are affiliated. -Have any of these reinsurers recently experienced ratings downgrades? Might be indicative of financial trouble? -Why are you doing business with low‐rated and/or slow‐to‐pay reinsurers? To gain a better understanding of why the insurer is comfortable with what would ordinarily be increased credit risk. -What is the materiality standard used for notes B or D? Amounts not material to the insurer’s management may be material to the actuary. -Has there been a history of disputes or payment delays? Or, more generally, what has the past working relationship between the insurer and reinsurers been like Past experience may be predictive of future recoverability problems. -Has there been a history of disputes or payment delays? Or, more generally, what has the past working relationship between the insurer and reinsurers been like? Past experience may be predictive of future recoverability problems. -Is any of this reinsurance through an involuntary pool or association? Especially with respect to X, pools or associations might pay late due to reimbursement schedules although collectability risk is negligible. -Is the company relying too much on reinsurance? What are the ceding commissions involved with these contracts? Concern that the company is using these reinsurers for surplus relief, artificially inflating surplus at the cost of assuming additional credit risk. -What is management’s opinion of future uncollectibility? Management’s insight in this area is important. Note 23 is retrospective, while management’s insight is prospective.

Question 31

additional questions the Appointed Actuary might raise to the primary insurer relating to the reinsurance for this catastrophe

Answer 31

-Is there information that can tell to what degree Reinsurer Y is exposed to the cat? Want to know whether Reinsurer Y is exposed to it through multiple channels (i.e does it reinsurer other insurers that were impacted by this catastrophe). To what extent was the catastrophe reflected in the financial statement? Would like to know the total recoverables, including the catastrophe’s impact on surplus. What are the terms of the contracts with these reinsurers? Limits, layers, reinstatement premiums, coverage triggers, facultative/treaty and soon all have a bearing on how much liability the insurer will ultimately bear for the catastrophe.

Question 32

elements shown in either the statutory Balance Sheet or Statement of Income that would help a regulator assess the credit risk

Answer 32

Provision for reinsurance: Takes into account whether a reinsurer is authorized, unauthorized, or slow paying, so it arbitrarily varies the provision based on reinsurer characteristics. It also takes into account whether the reinsurer has posted collateral. However; the provision is strictly formulaic. It also doesn’t take into account reinsurer strength. Overall, it does an adequate job at assessing credit risk. Reinsurance recoverable on paid loss: Effective to give a general idea of the extent of amount insurer relies on reinsurance; however, it doesn’t show reinsurer strength so it’s difficult to assess how likely the insurer is to recover it’s recoverable. Investment income due and accrued: This is investment income owed to the company that has not yet been paid by a third party. This is part of the RBC charge for credit risk and will allow a regulator to effectively assess how much money the insurer could lose if the third party goes insolvent Recoverable from parent, subsidiaries and affiliates: Funds held by or deposited with reinsured companies: Funds held by companies under reinsurance treaties: Agents’ balances written off: Uncollectible reinsurance written off: Bonds (capital allocation): Deferred premiums, agents balances and installments booked but deferred and not yet due: Uncollected premiums and agents’ balances in the course of collection:

Question 33

Notes to Financial Statements that would help a regulator assess the credit risk

Answer 33

- Notes to Financial Statements, Reinsurance, Sections A, B and D - Notes to Financial Statements, Structured settlements - Notes to Financial Statements, High Deductible - Notes to Financial Statements, Subsequent Events

Question 34

Notes to Financial Statements on reinsurance provides

Answer 34

information on specific liabilities for which the credit risk may be heightened. It allows the users to assess the impact of individual entities that could pose significant credit risk to the insurance company. It does not, however, address reinsurance credit risks other than those related to unsecured recoverables, recoverables in dispute and recoverables that have been deemed uncollectible, which are partially quantified in provision for reinsurance.