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31 Cards in this Set

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  • Back
According to Gorvett, List 3 AM Best publications:
1) Aggregates and Averages
2) Bests' Insurance Reports
3) Bests' Key rating guide

Best's Insureance reports provides company detail with ratings and the BCAR while the final report Best Key rating guide is a higher level summary of companies.
According to Gorvett, what is AM Best's most important quantitative measure and describe it.
The BCAR (Best's Capital Adequacy Ratio) is like Best's proprietary Risk-Based Capital formula enhanced to allow some additional risk measures and some subjectivity like quality of reinsurers)
According to Feldblum, List 7 entries on th ebalance sheet that do not run through the income statement (rather they are a direct charge to surplus)
1 Change in Non-admitted assetts
2 Change in Unrealized capital Gains
3 Change in net unrealized foreign Exchange gains
4 Chane in Net Deferred Income Tax
5 Change in Net Provision for Reinsurance
6 Change in Surplus Notes
7 Cumulative effect of Change in accounting procedures
According to Feldblum, Feldblum asserts that the capital invested in an insurance companyis a function of several factors. Satte 4 of these factors
1 - undiscounted Loss reserves
2 equity in UEPR
3 RBC requirements
4 any other need determined by "ruin criteria"
According to Feldblum, Feldblum argues for a profitability measure using a capital base other than GAAP equity or statutory surplus. identify 2 components of capital used in this measure
1 - capital embedded in indiscounted loss reserves
2 - full unearned premium reserves (no DAC)
According to IASA Assetts, the NAIC designates 6 qualities of bonds, list the six and descibe how that bond is valued:
1 Highest Quality (NAIC 1)carried at amoritized cost
2 High Quality (NAIC 2)carried at amoritized cost
3 Medium Quality (NAIC 3)carried at minimum of amoritized cost and fair market value
4 Medium Quality (NAIC 4)carried at minimum of amoritized cost and fair market value
5 Lower Quality (NAIC 5)carried at minimum of amoritized cost and fair market value
6 Bonds in or near default(NAIC 6)carried at minimum of amoritized cost and fair market value
According to IASA Assetts, the NAIC designates 6 qualities of preferred stocks, list the 6 and descibe how that preferred-stock is valued:
RP1-RP2 (redeemable preferred) valued at book value
RP3-RP6 (redeemable preferred) valued at lower of book value (cost) or fair value
P1-P2 (perpetual preferred) valued at fair value
P3-P6 (perpetual preferred) valued at lower of book value (cost) or fair value
According to IASA Assetts, Only 2 admissible fixed assets may be capatilized in SAP, list them
1 Real Estate
2 EDP (electronic dataprocessing equipment)
According to IASA Assetts, list the 3 things included in Agent's balances or uncollected premiums
1 Balances due from the insurer's agents or brokers for premium on policies written
2 Uncollected Premium Balances from transactions conducted directly with the insured
3 -Assumed premiums receiveable, net of commissions payable
According to IASA Assetts, Describe the Net Deferred Tax Assett
An insurer must recognize the net deferred tax assett (DTA) for future tax effects of temporary differences between book and tax income. The gross DTA admissibility test must be applied to determine the admitted amount of DTA
According to IASA Assetts, Why are Real Estate and EDP the only 2 fixed assetts that statutory accounting allows to be admitted and capatilized, list 3 reasons.
1 rare purchase
2 large expenditure
3 less fluctuation in surplus
According to IASA Investment Income, Describe Repurchase Agreements.
Under repurchase agreements, entities buy securities and simultaneously agree to resell the same securities on a specified date within 12 months of the purchase.
According to IASA Investment Income, List 2 reasons why money market funds are popular for insurers:
1 Their ease of investing smaller and widely fluctuating cash balances
2 They are diversified, highly liquid arrangements
According to IASA Investment Income, Treasury bonds and treasury notes are both backed by the US GOv't. What is the difference between them?
Treasury bonds have amaturity date from 1-7 years from date of issue.

Treasury notes have a maturitty date greater than 5 years.
According to IASA Investment Income, List the 2 types of Municipal Bonds and describe.
1 General Obligation Bonds - backed by the full faith and credit of the issueing body
2 Revenue Bonds - backed by the revenues from a specific project
According to IASA Investment Income, List 3 reasons for using surplus notes
1 providing an alternative source of capital for stock companies
2 A source of capital for mutual and other non-stock companies
3 A vehicle to provide regulators with flexibility in dealing with problem entities whose surplus levels are deemed inadequate to support their operations

-Surplus notes are subordinate to any other debt
According to IASA Investment Income, Define a cap.
A cap is a derivitive instrument where the owner receives a cash settlement if an indicator rises above a certain threshold. I ie you have 4% bond yield and the interest rate rises above 6%, this will lower the market value of these bonds, perhaps a cap could mitigate these effects.
According to IASA Investment Income, Expain why a insurance company would purchase a floor.
A Floor is aderivitive instrument where the owner receives a cash settlement if an indicator falls below a certain threshold. If the insurer will need euros to pay a claim in 2 years but currently holds dollars, they may want afloor to make sure the exchange rate does not fall below a certain point.
According to IASA Investment Income, define a swap
A swap is an arrangement between 2 or more parties to exchange payments based on the performance of underlying interests. Ex: a company may want to swap the fixed interest payments it is receiving for variable interest rate payments that another company is receiving.
According to IASA Investment Income, Define a forward
A forward is an agreement (other than a future) to exchange, at a specified future date and price, underlying interests. Most common is foreign currency forward.
According to IASA Investment Income, Define a Future
A futures contract is an agreement tarded on an exchange to buy, sell, or effect a cash settlement babased on the performance of an underlying assett. Puts and calls are the 2 most common types of options.
According to IASA Investment Income, the model NAIC Model Ivestment Law gives the insurance company 2 alternative methods of analyzing their investment holdings. State and describe these 2 methods.
1 - Defined Limits Method - predescribed schedule which requires an insurer to hold investmens that are diverse enough not to exceed the defined schedule
2 - Prudent Person Method - company is allowed to analyze holdings to ensure that investment guidelins are met and policyholder surplus is enhanced (it may be based on a duration matching analysis and or analyzing rates of return from each investment class)
According to IASA Investment Income, State 3 advantages of Repurchase Agreements
1 low transaction costs
2 flexible terms
3 no supply constraints
According to IASA, Other Liabilities, Capital & Surplus: How do you decide wether contingent commissions should be part of Line 4 or Line 5?
When contingent commissions are computed as a percentage of premium they are considered a part of commission and brokerage expense and they should be included in the liability for contingent commissions (
line 4)
When based on something other than percentage of premium, then should be booked as "other Expense" (line 5.)
According to IASA, Other Liabilities, Capital & Surplus: List 3 types of reinsurance agreements that provide for contingent commissions
1 straight profit
2 sliding scale
3 guaranteed profit
According to IASA, Other Liabilities, Capital & Surplus: Describe line 13: Funds held by companies under Reinsurance Treaties
Cash held or any other form of legal assett with high liquidity. In most cases funds are held for unauthorized reinsurers. The ceding company can take credit as an assett for any amounts that may be due by an unauthorized reinsurer to the extent that such amounts are adequately secured.
According to IASA, Other Liabilities, Capital & Surplus: How are dividends on tresury stock treated?
Not treated as a liability. Do not represent an actual distribution of earnings. Instead, treasury stock dividends are merely a capitalization of a portion of unnassigned surplus.
According to IASA, Other Liabilities, Capital & Surplus: Describe line 14 "Amounts withheld or retained by company for account of others"
a company may withhold or acquire funds that are payable to governments or other institutions. They can generally be separated into these 2 categories:
1- Deductions from employees for their portion of payroll taxes, group insurance premium, pensions, savings bonds, etc..
2- Policyholder or claimant funds held by the company, such as uncashed or unclaimed checks
According to IASA, Other Liabilities, Capital & Surplus: Define a reciprocal Exchange
a reciprocal Exchange is a voluntary unincorporated business created to writwe insurance for its subscribers ( agroup of business/individuals agree to insure eachother)A attorney-in-fact manages the exchange.
According to IASA, Other Liabilities, Capital & Surplus: Desdcribe line 27 - Aggregate write-ins for speacial surplus funds.
A segregated portion of surplus designated for special purposes.
-these funds restrict the amount of funds available for both policyholder and stockholder dividends. One of the most commo n special surplus funds is accounts established to offsett downward fluctuations that may occur in the value of invested assetts.
According to IASA, Other Income & Direct Charges & Capital and Surplus: Describe Line 14 "Aggregate Write ins for Miscellaneous Income" and give 6 common examples of these items
Line 14 is for additional items affecting net income but are not includable in U/W or investment income.
1 Premiums for Life insurance on employees
2 Checks cancelled because they were never cashed
3 Gain or loss from sale of equipment
4 retroactive reinsurance
5 gains or losses from foriegn exhange realized
6 Fines and penalties by regulatory authorities