Overall Flashcards
(142 cards)
1
Q
Define a qualified actuary
A
- Meets basic education, experience, continuing education requirements of the SQS for SAO as set for in the QS for actuaries issuing opinion in the U.S. promulgated by the AAA.
- Maintain an Accepted Actuarial Designation
- A member of a professional actuarial association that:
- requires adherence to the AAA code of conduct
- requires adherence to the U.S. QS
- participates in ABCD for members practicing in the U.S.
2
Q
Language for opinion section of the SAO
A
In my opinion, the amounts carried in Exhibit A on amount of items identifies:
A. Meet the requirements of the insurance laws in the state X.
B. are computed in accordance with accepted actuarial standards and principles.
C. Make a reasonable provision for all unpaid loss and LAE obligations for the company under the terms of its contracts and agreements.
D. (Make a reasonable provision for the unearned premium reserves for long duration contracts)
3
Q
Why is the IRIS 4 important?
A
- the existence of significant amount of surplus aid may be an indication that policyholder’s surplus is inadequate
- Surplus aid could improve results on other ratios enough to conceal important areas of concern
4
Q
IRIS 5 formula
A
two years loss ratio + two years expense ratio - two years investment income ratio
5
Q
IRIS 6 formula
A
2*net investment income earned / (two years cash and investment assets + two years investment income due & accrued - two years borrowed money - current year’s net investment income earned)
6
Q
Usual range for IRIS 7
A
greater than -10% & less than 50%
Insurers often have increase in surplus before insolvency
7
Q
IRIS 8 formula & usual range
A
(Current year surplus - change in surplus note - capital paid in or transferred - surplus paid in or transferred - surplus from prior year) / surplus from prior year
Usual range: greater than -10% & less than 25%
8
Q
IRIS 9 formula
A
Total liability - liability equal to deferred agents’ balances / liquid assets
Note: liquid assets does not include real estate
9
Q
IRIS 10 formula & usual range
A
gross agents’ balances in the course of collection / surplus
Usual range: less than 40%
10
Q
Describe the functions of Schedule P & identify which parts provide that information
A
DT - RAPID
- Development of reserves over time attributable to specific year and line (2.3.4)
- Trends in frequency and severity (1.2.5)
-calculate RBC loss-sensitive discount (7)
- evaluate Adequacy of recorded reserves (2.5)
- determine Payment process for discounting (3)
- observe split between IBNR and case reserve (4.5)
- disclosure for the SAO (1)
11
Q
Net Hurricane/Earthquake risk charge formula
A
1* net 1-in-100 year loss + 0.048 * ceded 1-in-100 year loss
12
Q
R3 components
A
AIR-FARE
- Amounts receivable related to uninsured plans
- Investment income due and accrued (0.01)
- Recoverables (parent/subs/affiliates)
-guaranty Funds receivable or on deposit
- Aggregate write-ins for other than invested assets
-Reinsurance recoverable (0.1)
13
Q
R0 off-balance sheet items formula
A
0.01 x value of each off-balance sheet items
14
Q
R0 alien insurance affiliate formula
A
0.5 x carrying value of company’s interest in affiliate
15
Q
R0 preferred stock formula
A
MIN [ (affiliate RBC - total value of common stocks) x ownership% of preferred stock, value of preferred stock]
16
Q
R0 common stocks formula using market method
A
MIN [ affiliate RBC x ownership % of common stock, SAP surplus of affiliate x ownership % of common stock]
17
Q
R0 common stocks formula using equity method
A
MIN[ affiliate RBC x ownership % of common stock, value of common stock]
18
Q
What risk does operational risk consider
A
L-PIPE
- legal risk
- personnel risk
- inadequacy of failure of internal system
- procedural risk
- external risk
19
Q
What risk does RBC not cover?
A
- Business plans & strategy
- management
- internal control
-systems - reserve adequacy
-ability to access capital
20
Q
Describe the 3 components of the fair value of an insurance liability under GAAP purchase accounting and how to calculate each
A
- the nominal future cash flows of liability (use LDFs to determine cash flow payouts)
- a reduction to recognize the time value of money and an additional load to account for illiquid nature of liability (use risk-free rate)
- A risk margin component to compensate for risk associated with liability ( use cost of capital approach)
21
Q
How to calculate the risk margin for calculating the fair value of liability
A
- Get cumulative unpaid value for each year
- Get the capital required to support these liability by multiplying the cumulative unpaid value by a given %
- Apply the risk adjustment formula, (R - i ) x sum[ avg(Ct, Ct+1) / (1+i)^(t+1)]
R = pre-tax cost of capital (required return on capital by purchaser)
i = discount rate
C = capital required to support these liability
22
Q
9 types of investments that valued in SAP and their book value
A
- Bonds both long & short term, NAIC 1-2, amortized value
- bonds both long & short term, NAIC 3-6, min[amortized, fair value)
- common stocks , fair value
- redeemable preferred stocks, NAIC 1-2, cost or amortized cost
- redeemable preferred stocks, NAIC 3-6, min [cost, amortized, fair value]
-non redeemable preferred stocks, NAIC 1-2, fair value - non redeemable preferred stocks, NAIC 3-6. MIN [ cost, fair value]
- SVO-identified investments, NAIC 1-2, fair value or systemic value
- SVO- identified investments, NAIC 3-6, fair value
23
Q
SAP goodwill formula
A
min[ purchase price - statutory surplus of acquired company, 10% of statutory surplus of acquiring company)
- Goodwill value is amortized over time to unrealized capital gains up to a maximum of 10 years
24
Q
GAAP goodwill formula
A
Purchase price - (Fair value of assets - fair value of liabilities)
- Do not amortize under GAAP
- If goodwill >0, then establish an asset equal to the goodwill amount
- If goodwill <0, then recognize immediately as operating income gain
- but test regularly for impairment (decline in assets values after purchase)
25
SAP treatment for retroactive reinsurance
-Consideration paid reduces cash asset
- ceded reinsurance reserves are recorded as negative write-in liability (or contra-liability)
- Gain (= negative write-in liability - cost of reinsurance) is recorded as write-in gain
- Gain goes into other income
- gain goes into special surplus
26
GAAP treatment of retroactive reinsurance
-ceded reinsurance reserves recorded as an asset
- gain is deferred so no immediate impact on surplus or income
- total liability increase (must establish a labiality to offset the deferred gain in income)
27
Describe how the structured settlements differs between SAP and GAAP
When a full release is signed by the claimant upon agreement to settle for the future annuity payment, SAP & GAAP have the same treatment: the purchase price of the annuity is recorded as a paid loss and the claim is closed.
If not provided:
SAP: still recorded as paid loss, but disclose the amount of these contingent liability in the Notes to financial statement.
GAAP: treats the structured settlement like a reinsurance contract, retaining the loss reserve and establish an equivalent reinsurance recoverables
28
Total investable assets formula
Two years average
loss reserves + LAE + UEP + ceded reinsurance premium payable + surplus - agent's balance
29
Funds attributable to insurance transaction formula
two years average
loss reserves + LAE + UEP + ceded reinsurance premium payable - agents' balance - Current year prepaid expenses in the UEP
30
Prepaid expense in UEP formula
pre-paid expense ratio x two years average UEP
pre-paid expense ratio = net acquisition expense / NWP
31
Structure of schedule F
Part 1 - Assumed reinsurance (premium, losses, commissions, collateral)
Part 2 - Premium portfolio reinsurance
Part 3 - Ceded Reinsurance - reinsurance provisions
Part 4 - issuing or confirming banks for letter of credit from part 3 (list of confirming banks)
Part 5 - Interrogatories for part 3. (commission rates, loss recoverables)
Part 6 - restatement of balance sheet ( to identify net credit for reinsurance)
32
Identify reasons that schedule F is an important tool in monitoring solvency for users of the annual statement
1. identifies gross assumed losses
2. identifies slow-paying reinsurers
3. measures significance of reinsurance against surplus
4. provides financial strength information of reinsured & reinsurers
33
how can schedule F be used to monitor the solvency of an insurer
-Schedule F tracks reinsurance transactions, calculates reinsurance provisions, and show the effect on the insurer's balance sheet of canceling all reinsurance contracts
-quality of reinsurance impacts risk of collectability from reinsurers which impacts solvency of the insurer
34
Slow-paying ratio formula
recoverable on paid loss & LAE > 90 days past due NOT in dispute / [ recoverable on paid loss & LAE NOT in dispute + amounts received in last 90 days]
35
Reinsurance provision formula
total recoverable - total collateral + 20% x [ recoverable on paid > 90 days NOT in dispute + total reinsurance recoverable in dispute]
36
Reinsurance provision formula for RP 64 (CD)
Reinsurance provision for collateral deficiency
A14(Recov) - Cr 63 (Recov)
A14(recov) = net amount recoverable from reinsurer
Cr 63 (recov) = credit allows for net recoverables
37
Cr 63 (recov) formula
Col 57 + Col 58 x COl 61
Col 57 = catastrophe recoverables qualifying for collateral deferral (assume is 0 if not given)
Col 58 = net recoverables subject to collateral requirement for full credit (if Col 57 = 0 , then COl 58 = A19(recov)
Col 61 = percent credit allowed on net recoverables subject to collateral requirements (this is the ratio between collateral provided & collateral required)
38
Reinsurance provision formula for RP 69 (OR)
MIN [ 20% x MAX( Pn90 + Pd90, F) , Cr 63(recov)]
Pn 90 = recoverable on paid loss & LAE > 90 days past due not in dispute (col 62)
Pd90 = in dispute (col 65)
F = net unsecured recoverable for slow payers for which credit is permitted (col 68)
This is the estimate of uncollectible overdue amounts from certified reinsurers
39
Describe the 2 tables in schedule F part 5
Table 1: identifies 5 largest reinsurer commission rates (where ceded premium >$50K)
The purpose is to identify companies using reinsurance to conceal high operating leverage
Table 2: identifies 5 largest loss recoverables from (col 15) and whether the reinsurer is affiliated with the reporting entity
The purpose is to assess concentration of reinsurance risk
40
Identify 9 functions of reinsurance
1. Fronting arrangements
2. Catastrophe protection
3. Surplus relief & capital efficiency
4. Withdrawal from market
5. Internal reinsurance transactions
6. Pools (mandatory & voluntary)
7. large line capacity
8. Enter market and/or underwriting guidance
9. stabilize results
41
Define reinsurance commutation
An agreement between a ceding insurer and the reinsurer that provides for the valuation, payment, and complete discharge of all obligations between the parties under a particular reinsurance contract
42
Policyholder's surplus after commutation
Current year surplus + change in ceded ultimate losses
43
1 year loss development after commutation
Current 1 year loss development - change in ceded ultimate loss
44
Identify 2 conditions for a contract to receive reinsurance accounting treatment
1. requires that significant insurance risk is assumed by reinsurer
2. requires that a significant risk to the reinsurance is reasonably possible
45
4 risk transfer test
1. Is transfer of risk self-evident
2. 'substantially all' exception
3. ERD (expected reinsurer deficit)
4. 10-10 rule
46
Identify the pitfalls in a risk transfer test
PRICE-P
Profit commission
Reinsurance expenses
Interest rates
Commutation timing
Evaluation date
Premium
47
Identify the practical considerations in a risk transfer test
Parameter selection (interest rates, payment patterns, loss distributions)
Parameter risk
Pricing assumptions
Commutation clause
48
Describe the implicit & explicit methods for accounting for parameter risk in a risk transfer test
implicit: higher expected loss selection & volatility
Explicit: give parameters a probability distribution & incorporate this into simulation
49
Advantage & disadvantage of using pricing assumptions in a risk transfer test
Advantage:
A properly priced reinsurance agreement is based on appropriate expected loss, risk load, payment pattern.
may work well for small or immature books of business
Disadvantage:
Reinsurance pricing assumptions are market-driven, may not reflect the true expected loss.
Pricing assumptions are derived for a different purpose
50
Describe 5 reasons for government participation in insurance
1. Filling needs unmet by private insurers (ex: TRIA)
2. When insurance is compulsory (Ex: WC)
3. Convenience (ex: NFIP, government may already have necessary structure in place)
4. Efficiency (ex: Auto, no agency commissions so lower cost and better price)
5. Social purposes (ex: Medicare, private market is motivated by profit. may be at expense of social purpose)
51
What are the criteria for evaluating government insurance programs
1. Is the program one of welfare or insurance
2. does it achieve social purposes
3. is it efficient
4. is it accepted by the public
5. is it necessary
52
What's the role of RMA (risk management agency) in federal crop insurance
- set rates
- act as reinsurer
-determine which crops can be insured in different parts of the country
- help monitor and control risks
- offer subsidies to farmers
53
What's the role of the federal government in federal crop insurance
- compensates the private insurers for their losses and expenses
- regulate crop program
- act as reinsurer and subsidizes premiums
54
How does RMA reduce the risk of adverse selection in multi-peril crop insurance
- limits amount that can be collected & names specific crops that are covered
- requires purchase prior to planning
-set rates to be actuarially sound using aggregate data
- helps set underwriting guidelines that recognize & reduce adverse selection
55
3 federal WC programs
FECA (federal employee compensation act)
Longshore & harbor WC act of 1927
BLBA (black Lung benefit act of 1969)
56
Describe 3 mechanisms that states can use to operate a residual market
1. Assigns applicants to carriers based on market share
2. Use a reinsurance pool
3. Authorize JUA
57
Describe MSA (Medicare set-aside allowance)
- A portion of the WC settlement set aside from future medical costs due to the injury
- all parties to a settlement must agree and fund the MSA
- MSA relieve pressure on MEdicare
-Relevant when WC services begin prior to Medicare eligibility but continue after Medicare eligibility
-WC is primary over Medicare so MSA must be enough to offer primary coverage
58
Describe CMS (center for Medicare & Medicaid Services
-administer Medicare
-establish guidelines for review & approval of MSA
59
What are the CMS requirements on an injured worker receiving MSA funds
-Claimant must pay medical bills with an interest-bearing account
- Claimant must properly report payments
60
Describe MMSEA (Medicare & Medicaid SCHIP extension act of 2007)
- Addressed the problem of CMS being unaware of primary payer responsibilities
- primary payers were trying to shift costs to Medicare
- Act requires RREs (responsible reporting entities) to report claims data to CMS so that Medicare don't pay when it shouldn't
61
What are the policy goals of NFIP
1. Access (provide access to primary insurance, transfer some financial risks to the federal government)
2. Mitigate & reduce (mitigate & reduce flood risk through flood plain management standards)
62
What are the objectives of NFIP
- risk-based premium
- affordability
- sustainability (premiums should cover claim costs & expense)
- high participation rate
63
identify ways that NFIP is different from traditional private insurance
Social goal:
- provide coverage to high- risk customers who would not able to obtain affordable coverage in private market
Non-insurance goal:
- distribute flood map to assist with flood risk management
- require land use and building standard for participation in NFIP
-reduce the need for other post-flood disaster aid
- fund rebuilding after a flood, makes it easier for people to recover
- protect lenders against mortgage, defaults due to uninsured loss
64
Describe flood insurance pricing & subsidies through NFIP
- Rates should be risk based but congress has authorized FEMA to admit certain exceptions :
- pre-FIRM (property built or improved before 12/31/1974, or before the first FIRM for their community)
- Newly mapped: properties mapped to a SFHA on/after 4/1/2015
- grandfathered: properties originally built in compliance with FIRM
65
Describe the NFIP risk management tools of private reinsurance and capital market
Private reinsurance:
- purchase from a varied group of reinsurer with each bearing part of the risk
Capital market:
- catastrophe bond reinsurance is facilitated by a single company
-risk is then transferred to capital market investors who purchase the bond
- Investors pay a certain percentage of the loos from a single large scale event
66
Identify issues & barriers to private flood insurance
1. Coverage must be 'at least as broad' as NFIP coverage (might be hard to determine since policy forms can be written differently)
2. Continuous coverage requirement (coverage must be continuous to retain NFIP premium subsidies, and a customer switching to private market may have lapse)
3. NFIP subsidies rates (private insurers cannot compete with taxpayers subsidized rates)
4. Regulatory uncertainty (private coverage increase state involvement which increase compliance costs)
5. Accurate assessment of flood risk (Private insurers don't have credible data, due to the 1974 privacy act. FEMA cannot release NFIP data)
6. Participation rates(necessary to manage & diversify portfolio)
67
Identify and describe potential effect of increased private sector involvement in flood insurance
1. More choice (higher limits, expanded coverage, shorter wait period)
2. Lower price (non-subsidized NFIP customers may get lower rates)
3. Variable protection (customer protections for private policies are enforced at state level, may vary state by state)
4. adverse selection ( private insurers may cherry-pick policies and leaving NFIP with underpriced high risk policies)
5. Impaired flood mapping & flood plain management (lower policies with NFIP, lower policy fees, short on money on improving)
68
Describe the IRS's revenue offset procedure as it applies to tax-basis income
In SAP, acquisition costs are not deferred so the insurer would incur a loss.
The insurer would then be entitled to a future tax refund on this loss.
But IRS wants to simplify the process.
So instead of a refund, reduces UEP liability by 20% (assuming acquisition cost ratio is 20% for all lines and for all insurers)
69
Tax-basis incurred loss formula
Paid loss during the year + change in loss reserves after discounting
OR incurred loss during the year - discount amount
discount amount = difference between undiscounted and discounted losses
70
What does proration mean
Increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income
71
Purpose of BEAT (base Erosion and Anti-Abuse Tax)
BEAT limits the ability of multinational corporations to shift profit from the US.
(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)
72
How does BEAT work
1. The corporate calculates its regular tax (21% of taxable income)
2. The corporation calculates its alternative tax (10% of gross income)
the alternative modified taxable income = regular taxable income + base erosion payments (which is 75% of income that escaped regular taxation)
3. If alternative tax > regular tax then the corporation must pay the difference.
the difference = BEAT
73
The conditions must be satisfied for a corporation to be potentially subject to BEAT
1. Insurer is part of a U.S. group of companies with average gross receipts in the past 3 years >$500M
2. Insurer makes base erosion payment >3% of the total deduction taken by the U.S. group on its current tax return
3. A U.S. insurance company that makes a tax-deductible payment to a related foreign company
74
Describe the purpose of 2 adjustments to SAP income to obtain taxable income
1. Revenue offset
to prevent insurers from claiming a loss due to acquisition expense by increasing taxable income
2. Loss reserve discounting
to prevent tax refund on a loss that's temporary until investment income is accrued
75
Examples of issues that fall under state insurance regulations
1. Financial regulation (capital requirements, investment)
2. Market conduct (sales, underwriting, claim handling)
3. Licensing (both insurers and producers)
76
Describe the Clayton Antitrust Act of 1914
- More specific than Sherman Antitrust Act and prohibits activities that encourage monopoly power specifically:
1. price discrimination (price differently between similar risks)
2. exclusive dealing (sale of insurance conditional on buyer not doing other business with competitors)
3. Mergers and acquisition that lessen competitions
4. 1 person cannot be a director of 2 competing corporations
77
NAIC Responses to the U.S. SEUA
The NAIC pressured congress to return authority of insurance regulation to states (under Commerce Clause of Constitution)
and permit cooperate rate-setting as was done in the compacts (amendments to Sherman Act and Clayton Act)
78
Motivation of NAIC Model Bills passed after McCarron-Ferguson
- Permitted cooperative rate-setting to ensure fair prices
- ensured rates were not inadequate, not excessive, not unfairly discriminatory
- limit federal regulation of insurance
- allow states to regulate rates
- prohibit certain anti-competitive behaviors
79
Describe the McCarron-Ferguson Act
In the 1945, congress passed McCarron- Ferguson Act to response to the U.S. v. SEUA
It preserves the authority of states to regulate insurnace
But federal laws applying exclusively to insurance supersede state laws
Exempts insurance from most federal regulation including anti-trust regulation (not exempt from Sherman Act)
But does not exempt boycott, coercion, intimidation regardless of state regulation
80
Describe Gramm-Leach Bliley Act of 1999
A federal law that removed barriers between banking, securities and insurance companies
Requires financial institutions to explain how they share and protect customer's private information
requires disclosure of information-sharing practices between banks and insurer affiliates
81
Gramm-Leach Bliley Act Provisions
1. requires disclosure of information-sharing practices between banks and insurer affiliates
2. prohibit formation of insurance-selling subsidiaries by national banks
3. prohibit paying claims with bank funds
4. prohibit preventing banks from selling insurance
5. facilitate selling insurance in more than 1 state by a single producer (prompted a response by the NAIC - producer model act)
82
Describe ways that the surplus lines market is regulated
- product must be unavailable in traditional insurance market
- producers must be licensed to sell surplus lines insurance
- producers must place business with insurers that meet managerial & financial requirements
83
Objectives of regulations
1. Protecting policyholders
- quality of customer services, reduction in probability of insolvency, compensation in the event of an insurer insolvency
2. Protecting investors
- ensure regular and accurate financial reporting
3. Protecting economy in general
- ensure a healthy & competitive market. promote availability & affordability. benefits of regulation should be greater than cost
4. Protecting depositors
84
Identify checks & balances in the U.S. insurance regulatory system for limiting regulatory failures
1. duplication
2. diversity of perspective
3. peer review
4. peer pressure
5. market discipline
85
Describe peer review in limiting regulatory failures
NAIC coordinates peer review groups FAD & FAWG
- FAD (financial analysis division)
analyze national significant insurers and refers unusual findings to FAWG
- FAWG (financial analysis working group)
- consists of 16 highly experienced financial regulators
86
Identify areas that regulators have targeted for improvement to the U.S. insurance regulatory system
1. rating agencies
Review reliance on rating agencies in the RBC system
2. securities lending
new reporting requirements for securities lending
3. unregulated affiliates
impact on insurers
87
Describe reasons for insurance solvency regulations
1. protects policyholder by making sure surplus is adequate
2. promote market stability
3. promotes strong risk management by insurers
88
Motivation for the introduction of terrorism insurance in the U.S
- fill unmet need (private insurers and reinsurers withdrew coverage)
- convenience (government can set up a program quickly and can work with the Treasury department regarding compensation)
- Social purposes (reduce economic disruption from lack of terrorism insurance availability)
89
3 specific goals of TRIA legislation
1. Stabilize private market by providing temporary terrorism insurance
2. Protect consumers by ensuring A&A
3. Preserve state regulation of insurance
90
Describe the surcharge of TRIA
Secretary of treasury must establish surcharges to recoup 140% of federal outlay when aggregate losses are <$37.5 B
For aggregate losses >37.5B, the SOT may establish surcharge but not mandatory
91
Describe terrorism insurance programs in Spain, U.K, Germany, Canada
Spain: government-owned reinsurer that has provided coverage for catastrophe since 1854.
U.K: privately owned mutual insurance company with government backing
Germany: private insurer with government backing
Canada: considered, but rejected, creating a government program following 911
92
Identify 4 elements of an insurable risk
1. credible (need a large number of customers and events to make loss predictable)
2. measurable (losses must be definite & measurable)
3. Accidental (losses must be fortuitous and accidental)
4. Catastrophic (losses must not be catastrophic)
93
Describe 2 ways of estimating retrospective premium adjustment
1. Apply the historical ratio of (retrospective rated development / earned standard premium) to the premium for the policy being rated
2. For each risk, compare known to anticipated loss development (including IBNR) to estimate return & additional premium earned at that point in time
94
Describe the primary goal of the NAIC analyst team
- identify insurers that appear to require immediate regulatory actions
- to access the solvency of insurers
95
Purpose of SMI (solvency modernization initiative)
- to evaluate and improve the regulatory framework of insurer
- started by state insurance regulators in 2008
96
Key components of SMI
- capital requirements
- governance and risk management
- group supervision
- statutory accounting
-financial reporting
- reinsurance
97
3 stages of the U.S. financial regulatory process
1. mitigate foreseeable risk
2. correct (take corrective action if hazardous financial conditions are detected)
3. Provide a backstop if financial protection if an insolvency does eventually occur
98
Factor to consider when judging regulatory effectiveness
RIICH
- were rehabilitation actions effective
- Did regulation help identify & correct problems before policyholders were harmed
- how frequent were insolvencies and how effective were the guaranty funds in reimbursing policyholders
- is there a positive cost-benefit analysis of the regulation
-Is the insurance market healthy
99
Priorities in SMI
- create a document explaining the U.S. insurance regulatory system
- examine international developments
- comply with Insurance Core Principles promulgated by the International Association of Insurance Superivors
- Learn from the global financial crisis
100
Identify 7 core principles of U.S. insurance financial solvency
1. Reporting (including disclosure and transparency of public financial statements)
2. off-site exams (regulators maintain an insurer profile using NAIC tools like FAST (Financial Analysis Solvency Tools))
3. On-Site exams (risk-focused exams covering governance, management, financial strength)
4. Capital adequacy
5. Regulatory control of risky transactions (require regulatory approval for transactions that could affect insurer's ability to fulfill policyholder obligation)
6. Prevention & correction (timely actions to address potential risks)
7. exiting market ( framework for orderly exit)
101
Reasons for the development of RRMF (reinsurance regulatory modernization framework)
- promote competition in the reinsurance market
- reflect globalization of insurance by recognizing foreign insurers and streamlining regulations
- reduce penalties for unauthorized reinsurers that are strongly capitalized
102
Describe NRRA
- nonadmitted & reinsurance reform act of 2010
- applied to nonadmitted insurance which includes surplus lines insurers and reinsurers
- NRRA gives the customer's home state exclusive authority to regulate the placement of nonadmitted insurance
103
Provision of NRRA
- A state cannot deny credit for reinsurance if certain conditions are met:
1. if domiciliary states has already granted credit
2. If domiciliary state is an NIAC-accredited state
- A state may proceed with reinsurance collateral reforms on an individual basis ( if the state is NAIC-accredited)
- A state is given sole responsibility to regulate solvency for an reinsurer
104
Describe the Governance Pillar of Solvency II
- Supervisory activities
- require adequate governance for
1. Internal audit (should report failure to follow company policies and deficiencies in internal control)
2. Actuarial (ensure reasonability of data, assumption, method when calculating technical provisisions)
3. Risk management (perform ORSA(Own risk and solvency assessment) to identify unique risks of companies)
4. Compliance with law (report failure to comply with regulators to board of directors)
105
Identify conditions that governance pillar of Solvency II must be addressed
- fitness & propriety
- outsourcing
-internal control
106
3 requirements for the company's internal model to be approved for use in calculating Solvency II quantitative capital requirements
- Used (model is used in running the business)
- Validated (model has been validated by an independent 3rd party)
- Documented (model is documented)
107
Describe the ORSA(own risk solvency assessment) under Solvency II
Pertains to all short term & long term risks
1. Identify, assess, monitor, manage, and report these risk including capital requirements
2. Includes all risks considered in Solvency II + unique company risks
3. Should explain any inconsistencies with MCR or SCR
4. Helps management understand how risks relate to capital and to make good business decisions
108
2 entities created by Dodd-Frank Act
1. FIO (Federal Insurance Office)
Monitors insurance industry, identifies gaps in the state-based regulatory system
2. FSOC (Financial stability oversight council)
- monitors all financial service market including insurance
- identifies risks to financial stability
109
Requirements that Dodd-Frank imposes on insurers
1. Undergo stress testing (to assess whether an insurer can absorb the financial impact of adverse events)
2. meet liquidity requirement (for short term obligations)
3. Adhere to capital requirement (for all obligations)
4. Develop a living will (a resolution plan in the event of insolvency)
110
Describe the specific areas of responsibility of FIO (Federal insurance office)
CRITI
1. Collect data on the insurance industry
2. report annually to congress on the state of the insurance industry
3. improvements (suggests improvements to insurance regulations in conjunction with state insurance departments)
4. TRIA (help administer TRIA)
5. International (Help with negotiation of international agreements)
111
Identify 2 main steps of state DOI regulation intervention for a financial troubled insurer
1. Fact-finding
- examine insurer using resources such as financial statements, RBC, IRIS
- regulator must also use expert judgment since there may have qualitative warning signs
2. Select appropriate regulation action
3 levels (mandatory corrective action, administrative supervision, receivership)
112
Define receivership
a process in which a legally appointed receiver acts as custodian of an insurer's assets and operations
113
Define rehabilitation
-Reorganization of an insurer's finances so that debt obligations can at least partially be met with future earnings
-may require external capital investments to stabilize finances
-liquidation usually follows
114
define liquidation
closure and distribution of assets to creditors in priority order
115
Describe 5 steps of the interactive rating process
1. Research ( by rating analysis, Insurer submits proprietary information)
2. Meeting ( between rating analysis & insurer's senior management for presentation)
3. Proposal ( the rating analyst leader proposes a rating. Insurer may submit further information)
4. Decision ( by rating comittee)
5. Publication ( to public & fee-paying subscribers)
116
Quantitative capital model for A.M. Best
-Expected policyholder deficit
-EPD = pure premium for treaty / market value of reserves
-Selection: choose required capital so that EPD = 1%
117
Cost of double taxation formula
Tax on indirect investment - tax on direct investment
OR Investment yield x corporate tax x (1- personal tax)
118
The margin on premium formula that the policyholders must pay to offset double-taxation for the investors
(Capital / premium) x Cost of double taxation prior to tax x (1+ yield )^-0.5
119
Cost of double taxation prior to tax formula
Cost of double taxation / [ (1-corporate) x (1-personal tax)]
OR
Investment yield x corporate tax / (1-corporate tax)
120
Cost of capital formula
Investment yield for insurer x corporate tax + investment restrictions
121
Margin required on policyholder premium formula to offset both double- taxation and the penalty regarding restriction on investment
cost of capital / (1-corporate tax) x (1+investment yield)^-0.5
122
invested capital formula
surplus + pre-paid acquisition cost % x UEP + (1- discount %) x undiscounted loss reserves - DTA
123
PV(future income ) formula
pre-tax income x (1-tax%) / cost of capital
124
Shareholders decision on liquidation or continued operation of the company
If invested capital - cost of liquidation > PV(future income) then liquidate.
else continue operation
125
What's the purpose of NRRA (nonadmitted & reinsurance reform act of 2010)
Create a better surplus lines tax payment and regulatory system
126
Describe how NRRA accomplishes its purpose
1. limits regulatory authority of surplus lines to customer's home state
2. Establishes federal standards for surplus lines regarding:
-Premium taxes
-Insurer eligibility
-Commercial purchase exemptions
127
Identify key provisions of NRRA
1. 1-state compliance (only an insured's home state can regulate the placement of surplus lines)
2. uniform eligibility standards (for an insurer selling surplus line coverage)
3. Exempt commercial purchase (a diligent search is not required for sophisticated commercial purchaser)
4. National producer database (producers must be in a database to collect licensing fees from a surplus lines insurers)
128
Describe the Uniform eligibility standards of NRRA
- States are empowered to create uniform eligibility standards for surplus lines insurers but all are currently using the NRRA default standards
- For U.S. domiciled insurers (AKA foreign insurers)
1. Must have >$15M in capital & surplus
2. Must be authorized to write in its domiciliary jurisdiction
-For non U.S. domiciled insurers (AKA alien insurers)
If insurer is listed in quarterly listing of alien insurers, state may not prohibit placing insurance with them
129
Definition of ECP (exempt commercial purchaser)
Any person purchasing commercial insurance that
1. employs a NRRA-qualified risk manager
2. Has paid aggregate commercial premium >$100K in past 12 months
3. The person's company is large (high net worth >20M or high revenue or lots of employees)
130
Describe the ECP provision of NRRA
State cannot force a broker to do a diligent search if the purchase is an ECP and
1. The broker has disclosed to the purchaser that coverage may be available in the admitted market
2. The purchaser has then instructed the broker to place insurance in the nonadmitted market
131
Describe the national producer database of NRRA
This database is for the licensure & renewal of surplus line brokers
-The specific NRRA requirement is that if a state does not participate in such as database, then they cannot collect licensing fees
132
Notes to financial statements about reinsurance
- Reinsurance assumed & ceded need disclosed ceded premium reserves and contingent commission
- Reserves are net of reinsurance on the B/S and I/S, (reinsurance can significantly lower balance sheet reserves and affect the surplus. Must understand the credit risk associated with reinsurance)
- If total reinsurance recoverable >3% of surplus, additional disclose need
- Recoverable is considered to be in dispute once a formal written refusal to pay is received from the reinsurer
- Uncollectible amounts is treated as expense
133
Describe the structure settlement in Notes
- Usually WC insurer buys annuity from life insurer for structured settlement payments
- Disclose total amount of structure settlement payments for which insurer might be liable
- If payments from single life insurer >1% surplus then disclose life insurer & amount
-Pertains to credit risk and is not shown in the balance sheet
134
Identify criteria a surplus lines insurer must generally satisfy to become a DSLI (domestic surplus lines insurance companies)
1. policyholder's surplus >$15M
2. Insurer is an eligible surplus lines insurer in a jurisdiction other than its state of domicile
3. The insurer's board of directors passes a resolution seeking to be domestic surplus lines insurers in the state of domicile
4. insurance commissioner approval and issuance of certificate of authority
135
Identify 4 surplus lines regulating requirements
1. surplus/capital requirements (vary by state)
2. Authorization/licensing requirements (insurer must be authorized in domiciliary jurisdiction)
3. Coverage must be declined by admitted market (except ECP)
4. Must meet managerial requirements ( ensures surplus lines carrier can meet customer's need)
136
Define RRG (Risk retention group)
- A liability insurance company owned by its members
-Members are a groups of similar business that have pooled their risks
-Medical malpractice is the most common line of business for RRG
137
How does RRG operate
- May write business directly in states where they are registered without obtaining a license
- Can be domiciled in 1 state but still do business in another state if a registration process is completed and the state commissioner is designated as agent for service of process
- Treated as multi-state insurers and subject to NAIC accreditation standards for RRGs
138
Describe how premiums are treated by ceding and assuming insurer in deposit accounting
- ceding company records premium paid as a deposit (asset)
- assuming company records premium received as a liability
139
Describe how losses are treated by the ceding and assuming insurer in deposit accounting
Ceding company
- Records are unpaid losses as non-reserve liability
- Records loss payments receive from the assuming company as reduction in the deposit asset
Assuming company
- records loss payments to ceding company as a reduction in their liability
140
Identify items a regulatory might consider before approving a reinsurance accounting treatment for a run-off agreement
- Reinsurance is properly licensed
- Contract must meet normal risk transfer requirement
- policy limits & coverage unchanged
- reinsurer must be rated at least as cedant by 2 different rating agency
141
What are some argument for the use of credit score
SMOR
1. Statistical significance in predicting expected loss cost
2. Manipulation (hard to manipulate because it's calculated by 3rd party)
3. Objective (its based on numerical data so it's objective)
4. Removal. (removal credit score won't change aggregate premium provided an off-balance is applied)
142
What are some arguments against the use of credit score?
FEED
- Frequency (credit score is only correlated with frequency not severity)
- Errors (50% of credit reports have errors, some are due to theft)
- Economic downturns (downturn in economy may have a disparate credit impact on vulnerable populations)
- Discriminatory (credit score may lead to rates that are unfairly discriminatory)
