Part 15 (Odomirok 21) (***) Flashcards
*** Strengths and limitations of the tools for solvency of insurers (38 cards)
T/F We are able to rely on an individual tool to exclusively make a conclusion about the financial health of the insurer
False, each tool only provides one piece of evidence
T/F We can NOT replace an audit by instead using the Measurement Tools
True
T/F Measurement tools do not guarantee the input data is accurate/complete
True
T/F These tools indicate if management has implemented good internal management, systems, and controls
False
T/F These tools will uncover fraud
False
What are the two views of financial health the statutory financial statement provides of the insurer
- Balance sheet strength
- Earning Potential
Why is Balance sheet Strength one of the views of financial health
Regulators want to ensure that the insurer can pay its claims
What are the two areas that can impair solvency in the Balance Sheet
- Loss & LAE reserve adequacy
- Unearned Premium Reserve Adequacy
What can regulators refer to for Loss & LAE reserve adequacy
- Five Year Historical data exhibit
- Notes to the financial statement
- Schedule P, Parts 2-4
- Schedule F, Part 3
What does the Five Year historical data exhibit show about Loss & LAE reserve adequacy
How losses have developed over time
What does the Notes to Financial Statements include that refer to Loss & LAE reserve adequacy
Includes management’s discussions about changes in the incurred losses
What does Schedule P, Parts 2-4 provide that relates to Loss & LAE reserve adequacy
Provides data to perform tests of reserve adequacy
What does Schedule F, Part 3 show that relates to Loss & LAE reserve adequacy
Lists reinsurers, so regulators can examine the reinsurers used, strength
What 2 things would cause regulators to want to assess the adequacy of unearned premium reserves
- Accident year loss & LAE ratios (From Schedule P, Part 1) > 100%
- Deficiencies in the loss Reserves
When examining the balance sheet strength, what will regulators also look to (other than Reserve adequacy)
Investable Assest
What is looked for/monitored in Investable assets
- Changes in investable asset values and yields on invested assets
- If insurer generally invests in riskier assets than industry average, look at effectiveness of insurer’s hedging
What can be looked at to generate early warnings of future problems in earning
Trends in Financial Ratios
What trends are they looking for in financial ratios to generate early warnings of future problems in earning
- Large growth in written premium during a soft market
- Increases in underwriting or other expense ratios
- Deteriorating loss ratios
- Increased exposure to CAT/large events
- Losses on investments, Change in Mix of Invested assets, Declining yield on investment assets
- Increase in the provision for reinsurance
What does Large growth in written premium during a soft market indicate
Insurer may be paying more commission
What does Increases in underwriting or other expense ratios indicate
Insurer may be paying more commission, and less of premium is available to pay for losses
What does Deteriorating loss ratios indicate
Price increases are not sufficient enough to keep up with the increase in losses
What does Losses on investments, Change in Mix of Invested assets, Declining yield on investment assets indicate
Insurer has changed its investment strategy, or lacks controls of the investment strategy
What does Increase in the provision for reinsurance indicate
Increase credit risk
What do IRIS ratios focus on and what is the
Disadvantage with IRIS ratios
IRIS focuses on balance sheet strength and earnings quality
There is not direct link between the results of the ratios and regulatory intervention
