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According to Mallor, Define a tort
A tort is any civil wrong inflicted upon a person other than by a breach of contract.
According to Mallor,list the 4 types of wrongfulness and describe
1 Intent - desire to cause certainconsequences
2 Recklessness - A concious indifference to a known high risk of harm
3 Negligence - Conduct that falls below the level necessary to protect others against harm
4 Strict Liability - Liability irrespective of fault
According to Mallor,whatare the differences in the burden of proof in a civil vs. criminal case?
Civil - Proponderence of Evidence (less stringfent than
Criminal - Beyond a reasonable doubt
According to Mallor, List the 2 major types of damages recoverable under cases and give examples
1 Compensatory Damages (tangible and intangible: like medical expenses vs. damage to reputation)
2 Puntiitve Damages - for flagrant wrongness is becoming greater part
According to Mallor, List the 3 elements of a negligence case that a plaintiff must prove to recover:
1 a breach of duty by the defendant
2 actual injury suffered by the plaintiff
3 actual and proximate causation between the breach and the injury
According to Mallor, List the 2 traditional defenses in a negligence case and the 2 newer defenses
Traditional 1 - contributory negligence
Traditional 2 - assumption of risk
Newer 1 - compareitive negligence
Newer 2 - Comparitive fault
According to Mallor, List the 3 classifications of people who enter your land and you owe a duty to:
1 Invitees - business people and public people who are lawfully on your land
2 Licensees - the privelege to enter land dependent on landowner (social guests/family/soliciters)
3 Trespassers
According to Mallor, Define "Negligence Per Se"
There must be a violation of a law by defendant, in addition the palintiff must be the type of person protected by said law and suffer a harm the law or statute was intended to protect against. Baldwin vs. GTE South (phone booth case were there waqs a law on locations of phone booths)
According to Mallor, Describe the principle of Res Ipso Loquitur"
"Thing speaks for itself"
applies when:
1 - The defendant has exclusive control of the instrumentality of harm
2 - the harm that occurred would not normally occur in the absence of negligence
3 the plaintiff was in no way responsible for his own injury
According to Mallor, Describe Contibutory Negligence
Th plaintiff's failure to excersize reasonable care for her own safety. This can be a complete defense unless the the plaintiff can show the defendant had the "last clear chance" to avoid the injury
According to Mallor, Describe Comparitive Negligence
The courts determine the relative negligence of the parties and award damages in proportion to the degree of negligence determined. Also there is the pure system where percentages always apply or the "mixed system" where the dedfendant must be at least 50% at harm to pay any damages
According to Mallor, Describe Assumption of risk:
The palintiffs VOLUNTARY consent to a KNOWN danger
According to Mallor, Describe Strict Liability
Liability without fault or irrespective of fault
-no intent to harm
2 most common (abnormally dangerous activities and sale of defective dangerous products)
According to Mallor, List the two things that a tort reform legislation can do and give some examples
1 - Limits plaintiff's ability to get a judgement and
2 - Limits the damages a plaintiff can recover once they get a judgement
EX1 - Restricitng the liability of social hosts or businesses for the damages caused by intoxicating people to whom they serve alchohol
EX2 statutory limits on punitive damages
EX3 Med-Mal has seem some statutory caps on claims and also forcing mediation before trial
According to Mallor, Define Recklessness
willful disregard for another's safety
According to Mallor, Define Negligence
A person or group causing injury failed to excersize reasonable care in their action or inaction
According to Mallor, list 4 reasons for the 20th century's adaptation of "Pro-Consumer" Rules
1- There is less of a percieved need to protect manufacturers of defective goods in a viable industrial economy
2- Long distributioin chains means that consumers no longer deal directly with the parties responsible for the defects
3 - Large corporations dominate the economy and people have less bargaining power.
4 - Complexity of goods have made buyer inspections more difficult
According to Mallor, How has the switch from "caveot emtor" to "caveot venditor" led ot socializtion of risk?
Caveot Emptor - "let buyer beware"
Caveot Venditor "let seller beware"
A belief that sdellers/manufacturers and their insurers are best able to to bear the economic costs associated with product defects and can pass these costs on through higher prices.. hence this risk ahas become socialized.
According to Mallor, Describe "Contractual Theories" and "Tort-based theories" of product liability
Contractual theories involve a product warranty
tort-based theories - plaintiffs argue that the defendant was negligent or that strict liability should apply.
According to Mallor, According to UCC section 2-313, states that an Express Warranty is created in any of 3 ways:
1 - Any affirmation of fact or promise regarding the goods (written or oral)
2 - Any descriptions of the good - staetements/blueprints/adjectives describing goods
3 - A sample or model of goods to be sold
According to Mallor, Desribe "Implied Warranty of Merchantability"
Implied warranty is created by law rather than the seller's statements. UCC says goods must be merchantable (be fit for ordinary purposes for which goods are used)
According to Mallor, Desribe "Implied Warranty of Fitness"
a) The seller has a reason to know a particular purpose for wich the buyer requires the goods
b) the seller knows that the buyer is relying on the knowelege of the seller to select a suitable good.
c) the buyer actually relies on sellers expertise to select good.

EX: Fast guy asks if hammock weill support his weight
According to Mallor, Describe Section 402A's requirements in a strict liability case
A seller is liable for physical harm or property damage suffered by the ultimate user of the product if the product "was in a defective condition unreasonably dangerous to the user or consumer or to his property" Sectoin 402A requires that 2 tests are met:
1 The seller must be engaged in the business of selling the product that harmed the plaintiff
2 The product must be in a defective condition when sold, and also must be unreasonably dangerous because of that condiditon
3- the buyer did not substantially alter the product from its original form
According to Mallor, Describe the federal Magnuson-Moss Warranty Act
Applies to sales of consumer goods that cost more than $10
If a written warranty is written, it must be full or limited
-a full warrant promises to a) remedy any defects in the product and b) replace the product or refund the purchase price
A seller who gives a limited warranty is bound to the promises it actually makes
According to Mallor, Section 402B lests a consumer recover from injury resulting from misrepresentations about goodds they purchased if the following 4 criteria arte met:
1-made by a party engaged in the business of selling the same type of goods
2-made to the public by advertising, labels, or similar means
3-a fact material to the goods purchased
4-actually and justifiably relied on by the the consumer
According to Mallor, List the 3 major kinds of damages awarded in Products liability and describe.
1- Basis of Bargain Damages - (direct economic loss of buying defective product)
2-Consequential DFamages - Personal Injury, property damage, and indirect economic loss, non-economic loss (pain and suffering)
3- Punitive Damages - to punish defendants who have acted in a outrageous fashion
According to Mallor, Define a "Product Liability Disclaimer"
a "Product Liability Disclaimer" is a clause wherby the seller tries to eliminate its liability under 1 or more theories of recovery
According to Mallor, Define a "Remedy Limitation"
A Remedy Limitation is a clause attempting to block recovery of certain damages (prevents recovery of certain types of damages but doesn'attack the palintiff's theory of recovery)
According to Mallor, How can a seller exclude the implied waranty of merchantibility
A seller must:
1- use the word merchantibility
2- make the disclaimer conspicuous if written
According to Mallor, How can a seller exclude the implied waranty of fitness?
A seller must
1-use a writing
2- make the disclaimer conspicuous
According to Mallor, List 3 traditional products liability defenses that involve the plaintiff's behavior
1- abnormal use
2- Assumption of Risk
3- Contibutory Negligence
According to Miceli, what are the 2 primary social functions of tort law?
1- To Compensate victims for their injuries
2 -to deter "unreasonably" risky behavior
According to Miceli, what is the primary goal to an economic approach to tort law?
primary goal to an economic approach to tort law is optimal detterence. For all those engaged in risky activities to take all cost-justified steps to minimize overall accident costs
According to Miceli, Describe the unilateral care model
Only the injurer can invest in in costly precaution, or care, to reduce the likelihood and severity of damages to a victim
According to Miceli, Describe the bilateral care model
Both injurer and victim can invest in precaution
According to Miceli, list 3 simplifications to Miceli's model
1 - Administrative costs of resolving tort claims are initially ignored
2- Assumes injurers themselves suffer no damages
3- The question of wether it is beneficial for the injurer and the victim to be engaged in the risky activity and at what level is ignored
According to Miceli, At what point does x* occur under the MArginal Hand rule?
Optimale Care occurs where the slopes of x and pD are equal. This is referred to aS THE MARGINAL HAND RULE
According to Miceli, List a complication in applying marginal analysis to actual accident cases
Care ussually comes in discrete bundles and does not vary continuously.
According to Miceli, How does Equilibrium change between a "Simple Negligence" defense and "Negligence with contributory negligence" defense?
In NAsh equilibrium both parties choose efficient care. Adding a defense of contributory negligence
1- does not distort incentives
2- does not affect the allocation of liability in equilibrium (victim bears liability)
According to Miceli, Since negligence with contributory negligence does not affect equilibrium or liability what isd its 1 disadvantage
It is likely costlier to administer because it requires courts to evaluate compliance with 2 2 standards of care rather than 1.
According to Miceli, When asctivity levels matter in a unilateral model, what is preferred negligence or strict liability?
Strict liability because the injurer will not choose the efficient activity level under negligence
According to Miceli, What are 2 problems with liability insurance for tort law?
1) Insurance reduces the ability of tort law to create incentives for care
2) Insurance will cause injurer to take too little care from a social perpective
According to Miceli, list 2 methods insurers use to mitigate moral hazards
1 - Providing premium discounts/surcharges to those who adopt/fail to adopt risk-reducing behavior
2- Offering partial coverage like high dedcutibles for lower premium
According to Miceli,
In the model with Litigation Costs, strict liability gives inadequate incentives for injurer care for 2 reasons:
1 - litigation costs will deter some victims from filing suit
2- the injurer will ignore the litigation costa incurred by the victims who do file suit.
According to Miceli, Define Privity Limitation
privity limitation means that a consumer only had the right to sue the person he had a contractual relationship with. Ex. Driver could only sue dealership, not the manufacturer of the car
According to Miceli, What was overturned in the 1916 MacPherson vs. Buick case?
The privity limitation was overturned
According to Miceli, Define the Coase Thereom
the Coase Thereom says that when parties to a legal dispute can bargain at a low cost, they will allocate recources efficiently regardfless of the assignment of liability
According to Miceli, How do individuals tend to misperceive risks
In a systematic way.
They tend to overestimate the low probability risks and underestimate the high probability risks
According top Miceli, How do misperceptions affect output.
As long as consumers expect to bear some of the losses, misperceptions will affect output.
1- If consumers overestimate risks (alpha greater than 1) output is too low (consumers demand too little of product)
2- If consumers underestimate risks (alpha less than 1) output is too high (consumers demand too much of product)
According to Miceli, why do mispercetions by the consumer support strict liability?
The party who more accurately perceives the risk should bear the liability in equilibrium.
The historical trend toward strict liability is supported in conjunction with the increasing complexity of most consumer products
According to Hamilton and Ferguson, Describe a modified No-Fault plan
-most common form of no-fault legislation
-partially restricts the right to sue but does not eliminate it
-offers a comprehensive personal injury protection package to injured auto accident victims
-in most states places a ceiling on the max personal injury benefits
According to Hamilton and Ferguson, Define a threshold in a modified no-fault plan
-is a boundary that must be crossed before an injured person can make a tort liability claim
-can be verbal ort monitary
-a threshold is unique element of a modified plan
-distinguishes it from a pure plan and an add-on plan
According to Hamilton and Ferguson, Describe an Add-On no-fault plan
-expanded version of medical payments and disability coverages
-provides benefits similar to PIP benifits in a modified plan
-NO RESTRICTION on the right to sue
-contains off-sett provision that entitle a no-fault insurer to reimbursement for no-fault benefits paid to the injured person.
According to Hamilton and Ferguson, Describe Choice No-Fault plans
Insured has option at the time the policy is purchased, of choosing to be covered under no-fault insurance
- Predium reductions offered to those who select no-fault coverage
-insured gets to choose appropriate amounts of coverage for himself
According to Hamilton and Ferguson, describe what is meant by a coordination of benefits provision, in a no-fault plan
To Reduce the cost of Auto insurance a coordination of benefits provision is used.
-these provisions make either the health or the auto insurance primary and require that the premium for the excess insurance source be reduced accordingly.
-ussually benefits from federal or state insurance plans are (WC, disability, social security) are deducted from no-fault payments
-then health insurance plans are not reduced, but, they can recover against the no-fault plan
According to Hamilton and Ferguson, does the primary PIP follow the auto or the insured?
It varies can be either way, but iof both apply then pasyments are pro-rated.
According to Hamilton and Ferguson, Described the assigned claims plan in no-fault insurance
When no insurance is available from any source (both parties uninsured) then "assigned claims plan" kicks in.
-funded by insurance companies
-claims assigned based on volume of insurance a carrier writes in that state.
-gives insurer the right of subrogation against uninsured driver.
According to Hamilton and Ferguson, Has no-fault insurance plans succeeded in reducing auto insurance premiums?
The reduction in premiums has not been attained, as there is a wide gap between the no-fault plans that have been introduced and the concept of a pure no-fault insurance.
-Further change and innovation are inevitable.
According to AAA "Current Issues in Asbestos Litigation", Since a victim 's disease is often attributed to multiple exposures over decades of use, How does a typical claimant file suit?
-A single claimant typically files suit against 60 or more defendants
-The majority of claims are filed in state courts
-the mix of claims by state has varied dramatically over time
According to AAA "Current Issues in Asbestos Litigation", Describe the RAND corporation's may 2005 report
- one of the most comprensive asbestos studies of all time
- it shows that at least 730,000 claimants had filed suit through 2002 against more than 8,400 defendants
--showed that the annual number of claims increased sharply beginning in the mid to late nineties, and the nonmalignant unimpaired claimants account for most of the growth.
-there is concern due to the increase in claims because of a depletion in funds to pay future claims
-there was at least $70 billiuon paid claims due to nonmalignant claimants
RAND study does not include information past 2002.
According to AAA "Current Issues in Asbestos Litigation", list 5 notable changes since 2002 (RAND study)
1 - more recources to direct recources to the sickest claimants (changes to the MAnville Trust Distribution Process and state reforms imposing medical criteria to bring a claim)
2 - a decrease in claims filing in 2004-05 of less severe medical conditions
3 - additional bankruptcies, but at a lower annual rate
4 - continued federal and state reforms
5 - heightened scrutiny of potentially fraudulent claims
According to AAA "Current Issues in Asbestos Litigation", The Manville Corporation was the largest asbestos manufacturer, they have claims experience available through 2005 describe some of the conclusions from their data
1- more than 100,00 claims filed in '03
2- Mesothelioma claims have steadily increased due to (a - change in TDP effective that year, b- greater medical awareness and diagnossis of mesothelioma, and c - increases in claimants propensity to sue, rather than increase in disease incedence)
-nonmalignant claims have varied much more over time
-Predicts that 1.2-2.1 million claims will ultimately be filed
According to AAA "Current Issues in Asbestos Litigation", why could dedfense costs increase in the future?
- more defendants are now involved in litigation and defense is no longer routinely handled on a joint basis
-many defendants have abandoned settlement strategies
-newer defendants are incurring significant discovery costs as they work to understand their exposure and potential defenses
- overage disputes between the denfendants and insures, as well as between insurers and their reinsurers might increase
According to AAA "Current Issues in Asbestos Litigation", there have been various proposals for asbestos reform, but the economic costs are uncertain, list 2 reasons for the uncertainty:
1 - sources of information regarding asbestos claims are limited
- the time horizon for the projections span 50 years
According ot AM Best's, "Business as never before" List 4 court decusions in 2004 that are changing the way insurers work.
1 - Plaintiff's sought rulings on coverage disputes, payment caps, and punitive damage awards
2 - World Trade Center insurance litigation has made insurers aware of the need to document complex insurance transactions carefully
3 - Health insurers can operate knowing that the Employee Retirement Income Security Act pre-empts any state lawclaims regarding employee benefit plans
4 - Premium disclosure policies are more closely examined by life insurers as numerous lawsuits regarding modal premiums make their way through the courts
According ot AM Best's, "Business as never before" health insurers (Cigna and Aetna) had moved their cases from state to federal court on the grounds that ERISA pre-empts any claims regarding employee benefit plans. Describe 2 benefits of ERISA
1- Under ERISA, patients can sue an HMO or other health plan for reimbursement of denied benefits but not for damages caused by the denial.
2 - The US supreme court ruled that under ERISA, if an HMO concludes that a particular treatment isn't covered under the terms of the plan, its "denial of coverage would not be a proximate cause of any injuries arising from the denial"
-a s a result - ERISA-based plans are removed from the state statutes, which minimize risk to the insurers.
According ot AM Best's, "Business as never before" Desribe Dimunition of value, and give facts about how different states treat it.
Diminished value is when the market value of a car is diminished after it has been in an accident and then repaired.
-Georgia requires that the insurer refund the difference ot insureds
-43 states allow insurers to exclude dimunition in value in policy language
-18 states do not have any case law on the subject
According ot AM Best's, "Business as never before" Was the World Trade Center 1 claim or 2 claims and why i sit important?
A formal insurance contract was not in place at the time of the terrorist attack. Therefore the decision came down to whatever was in the different insurers binder forms.
-one jury found it to be a single loss for a a group of insurers while a second jury found it to be two occurrences for another group of insurers.
According ot AM Best's, "Business as never before" Describe the Wallace and Gale asbestos court case by MAryland and upheld by US district court of appeals and why this case was significant.
The courts ruled that the insurers are only liabl;e for the aggregate limits on the policy and not an unlimited amount.
Thsi si significant because policyholders have sought to shift the asbestos liability onto insurers, sometimes without regard to policy limits like policy limits on completed operations.
Wallace and Gale demonstrates that "'operations' claims can also be 'completed operations' which, in fact have an aggregate limti"
According ot AM Best's, "Business as never before" Define Modal Premiums
Modal premiums allow premiums to be paid more frequently than annually (monthly) - plaintiffs argue that insurers should disclose APR's and finance charges if they apply.
According ot AM Best's, "Business as never before" why are life insurers concerned about disclosing APRs and fees associated with modal premiums?
An Indiana professor has recommended to Insurance regulators that the information be disclosed to judge the desirability of paying monthly, and wide variations in APR's exist
-In 2003 Distrrict of Columbia's Commissioner of Insurance and Securities regulation told a seminar that failure to disclose was a an unfair trade practice.
-Insurers are taking a wait and see approach, but the risk of being sued will eventually lead to more explicit disclosures.
According ot AM Best's, "Business as never before" What is going on with punitive damages amounts?
A Utah case allowed an award of 145 million against state farm.
US supreme court overuled and set a single digit limit (9 million)
-Cozen O'conner Law firm study shows that punitive damages awards are rarely higher than a 4 to 1 ratio, and has made arguments to suggest this ratio should not be surpassed unless there is an agregious offense.
-although not every verdict winds up in an appeal, so insurers are still in an important fight to control punitive damage expenses.
According ot AM Best's, "Business as never before" According ot AM Best's, "Business as never before" list the complaints of the Spitzer case vs. MArsh.
1 - brokers and insurers fix prices and rigged bids (illegal)
2 - insurers inappropriately offered brokers contingent commissions based on the quality or volume of business they produce without proper disclosure to their clients.
- these contingent commissions were rerwards the business that MArsh steered and allocated to the insurance companies
- Lawssuit named the biggest companies (AIG, Ace Ltd., Hartford, and Munich Re.)
-Several Insurance company employees have pleaded guilty to criminal charges
According ot AM Best's, "Business as never before" What did Bob Zeman, SVP for Property/Casualy Insurers of America say regarding the Spitzer attack on contingent commissions?
1 - We need to differentiate between contingent commissions and bid rigging
2- Contingent commissions are not illegal if done legally, but bid rigging is illegal.
According ot AM Best's, "Business as never before" What IS ONE of the effects of the Spitzer case already?
1 - Most of World's largest brokers have already stopped accepting contingent commissions
According to Musulin, Describe the 4 steps of the Excess wind procedure.
1 - STATEWIDE loss data is accumulated by year and separated into wind and non-wind components
2 - a ratio of wind to non-wind losses is calculated by years over a long period of time (20-30 yrs). If any years ratio is in excess of 2 standard deviations of the mean then the excess losses are removed and averaged over a longer period.
3- An "excess wind factor" is then calculated. ?Normal losses = Non-Wind + Wind losses below the threshhold.
4 - The Statewide excess winf factor is then weighted with a regional excess wind factor and applied to normal losses to estimate total expected losses in an average year
According to Musulin, List 4 assumptions about the 20-30 yr period used.
1- Catastrophic activity is "normal" during this period
2- Population demographics are stable
3- Insured losses by peril are stable
4- Changes in coverage or construction practices do not affect the ratio of wind to non-wind losses.
According to Musulin, List 2 defenses of the Excess Wind Procedure
1 - It can be used effectively in situations where the basic assumptions are not violated.
2 - It uses actual insurer loss data and simple mathematical calculations that can be easily verified
According to Musulin, List 3 disadvantages of using a computer model:
1 - Difficulty in verifying data (amount of exposure is used which cannot be seen in annual statement)
2 - Use of Black-Box model (modeler's programs are propriety)
3 - Model Complexity (the seismic and nmeteorological simulations and damage functions are difficult ot follow)
According to Musulin, Who were the first users of modeling technology and why?
Reinsurers
-used to estimate Probable Maximum losses
-to price reinsurance products
According to Musulin, Who were the second major users of modeling technology?
Rating Orginizations like AM Best
According to Musulin, Despite the use of 'black boxes' and proprietary information, the insurer community accepted models with relatively little controversy, List 4 reasons why.
1 - Modeling technology was a clear technological improvemnt over the available alternatives
2 - Modeling process was not foreign to insurers
3 - Insurers benefitted from a competitive environment offering modeling services
4 - Insurers lacked a safety-net from government-sponsered windpools, leaving them little choice but to accept the modeling process used by their reinsurers and investors or face a loss of reinsurance and or capital
According to Musulin, Describe 2 consequences if the regulators do not accept modeling technology.
1 - A Contraction in coverage for high-risk insureds from private companies
2 - An Expansion of coverage offered by quasi-governmental entities financed through assesments or public debt.
According to Musulin, list 4 impacts of the regulatory acceptance of models.
1 - In short run, there will be disruptions as more focused pricing leads to insurance prices more alligned with risk
2 - not all consumers will be worse off (low risk consumers will benefit from price reductions and high risk consumers will be incented to mitigate risk)
3- In the long run aggrergate losses should be decline as risky behavior is discouraged
4 - If the impact on consumers is unnacceptable, public policy makers might decide that high risk consumers will be subsidized through residual markets and/or public sources of capital
According to Musulin, What is the most significant effect of modeling?
A greater rating resolution (more accurate pricing)
- Large amounts of daata required in traditional ratemaking are no longer required
-computer modeling allows for rating resolution at the zip code and construction class level
According to Musulin, List 5 potential benefits to consumers by having a better estimate of individual loss exposure.
1 - Comprehensibility of prices (consumers can better understand and control insurance costs once they understand the characteristics that give rise to a higher exposure to loss)
2 - Rational Behavior - Consumers will take costs into account and act accordingly
3 - Fair pricing - more accurate pricing will reduce subsidies and reward consumers who mitigate risk
4 - Reduced Information risk - Investors demand higher returns to compensate for uncertainty. improved information will reduce this uncertainty and create more capacity
5 - Stable pricing - models use long term seismic or weather data and all available information on the risk to determine loss estimates
According to Musulin, the modeleing issue has directed regulatory attention to 2 areas, list them.
1 - Ratemaking (where most focus has been)
2 - Solvency - The models offere regulators an improved tool to assess financial solidity of insurers (but if they use them for solvency it makes it difficult to deny their use in Ratemaking)
According to Musilin, some people that full disclosure of models isn't necessary. List 4 tests that could be used as a validation process without having to fully disclose:
1 p[redicted wind fields ina storm actually observed vs. those actually observed
2 statstics such as mean windspeed, or number of storms of certain categories for simulation vs. historical averages.
3 relative damage estimates by type of structure vs. what was actually observed in recent storms
4 predicted losses vs. actual losses
According to Musilin, Describe the Florida Commission on Hurricane loss projection Methodology.
-started in 1995
-commission consists of 12 people from various disciplines (meteorology, computer science, engineering, actuarial, consumer advocate, DOI)
- objective of commission is, "The legislature recognizes the need for expert evaluation of computer models and other recently developed techniques or improved actuarial methodologies for projecting hurricane losses in order to resolve conflicts amoung actuarial professionals, and in order to provide both immediate and continuing improvement in the sophistication of actuarial methods used to set rates charged to consumer"
According to Musilin, describe the results to date of the Florida Commission on Hurricane loss projection Methodology.
-test data submitted to modelers
- outside experts visited modelers and evaluated their techniques
- outside experts shared their findings with commission
- in '96 the commission adopted model standards and specifications
- modelers were offered the opportunuity to respond to those standards and specifications
- modelers will make presentation to commission to argue that their models are sufficient
- if approved insurers could use models in rate filings
According to Musilin, list 2 powerful disincentives for unscrupulous insurers to manipulate model results
1 - if rates are inflated, the insurer could loss business
2 - inflated loss estimates could: a) put downward pressure on financial ratings and increase the need for and cost of reinsurance and b)depress earnings and adversly affect stock price
According to Musilin, list 3 safeguards against manipulating model results
1 - Require a legal affidavit attesting that the user has not manipulated assumptions
2 - require a formal opinion from the modeler or the proper execution of the model when run by the insurer
3 - Have modelers provide regulators with rate ranges that reflect geographic, building structure, and deductible options
According to Musilin, List 2 issues for states with major CAT exposure
1 - Availability problems if you do not allow insurers to charge for high risk exposures
2 - national and regional market disruptions
According to Musilin, Regulators and insurers need to work together or we would see these 3 consequences:
1 - availability shortages
2 - continuing market disruptions
3 - degraded claims paying ability
According to Brady, define "Anti-Rebating Laws"
Laws that prohibit agents, brokers and insurers from returning portions of premiums as incentive to applicants to purchase insurance.
According to Brady, What were the 27 officers of the South-Eastern Underwriter Assoctiaons indicted for? (5 things)
1 - price fixing premiums and agents commissions
2 - coercion tactics to force non-SEUA members to abide with SEUA rules
3 - continuing agreement and concert of action to take control of 90% of the fired and allied lines market
4 - withdrawing rights of SEUA agents if they did business with non-SEUA companies
5 - threatening insurance consumers who did not purchase insurance from SEUA
According to Brady, The SEUA case was first dismissed in district court on what grounds?
Paul vs. Virginia was the defense (insurance not interstate commerce)
According to Brady, describe 'Paul vs. Virginia'
'Paul vs. Virginia' was a ruling that insurance was not interstate commerce, insurance should be regulated by the states, and insurance was not subject to federal regulation and anti-trust laws
According to Brady,what was the final ruling in the supreme court of the SEUA case?
SEUA Decision - Court ruled that insurance was interstate commerce, subject to federal regulation and Sherman Act and other anti-trust legislation. (Clayton Act, Robinson-Patman Act, Federal Trade Commission Act)
According to Brady, list 4 arguments to support federal regulation of insurance in the SEUA case?
1 - insurance is inter-related, interdendent, and integrated accross states
2 - only 18 of the 200 members of the SEUA were domiciled in one of the six SEUA states
3 - bothe before and after PAul vs. Virginia, intangible products such as electrical impulses of telegraph transmissions were subject to federal legislation
4 - other business make sales contracts in states where they are not headquartered and they are subject to federal regulation.
According to Brady, describe the Sherman act.
This act prohibits collusion in attemts to gain monopoly poower
According to Brady, describe the results of the McCarran Ferguson act:
Decision that it was in the public interest for states to regulate insurance and federal government regulates to the extent that states do not. Also, federal Sherman Act applies for boycott, coecion, intimidation.
According to Brady, in the McCarran Ferguson act congress could regain control if the following were not met.
1 - State legislation could not supercede federal legislation regarding boycott, coercion, and intimidation
2 - if congress passes a specific law regarding the insurance industry, federal law supercedes any state regulation in the areas addressed by the federal legislation.
According to Brady, after McCarran ferguson act, the NAIC wrote 2 model rate regulation bills, 1 applied to liability insurer the other for fire, marine, and inland marine. What were the 2 purposes?
1 - to ensure that rates were not excessive, unfairly discriminatory and adequate
2 - low cooperation in setting rates as long as it did not hinder competition
According to Brady, after McCarran ferguson act, the NAIC wrote 2 model rate regulation bills, 1 applied to liability insurer the other for fire, marine, and inland marine. What 4 things did the bill require?
1 - Required prior approval of rates
2 - explained how to file rates
3 - described the role of rate organizations
4 - recommended anti-rebating provisions in states that did not already have such laws.
According to Brady, with the purpose of preventing the Federal Trade Commision act, the NAIC adopted the "act relating to unfair methods of competition and unfair deceptive acts and practices in the business of insurance" List 8 prohibited activities:
1 - misrepresentation and false advertising of policies
2 - false information and false advertising in general
3 - defamation
4 - boycott, coercion, and intimidation
5 - false financial statements
6 - stock operation and advisory board contracts
7 - unfair discrimination
8 - rebating
According to Brady "State Insurance Departments", what branch of the state government is the insurance department a part of?
Executive Branch!
According to Brady "State Insurance Departments", List 4 arguments for an ELECTED insurance commissioner.
1 - appointed commissioner might not be aware of the publics concerns
2 - appointed commissioner might feel inclined to yield to the interests of whoever appointed him, wheras an elected commissioner is not obligated to a certain group.
3 - an elected official is elected for a full term, whereas an appointed commissioner is subject to dismissal
-an appointed commissioner is more likely not to make changes from prior commissioners.
According to Brady "State Insurance Departments", List 4 arguments for an appointed commissioner
- no need to campaign for funds
- would be experienced and knowelegable (some states require an expert)
- is less likely to be swayed by public opinion
- will not be perceived as a politician
According to Brady "State Insurance Departments", List 9 typical duties of the insurance commissioner
1 overseeing operation of the insurance department
2 promulgating orders, rules, and regulations to administer insurance laws
3 issuing licenses to insurances to insurance company's agents and brokers
4 reviewing pricing and coverage
5 performing financial and market conduct exams
6 holding hearings on insurance laws
7 taking actions against violations of law
8 issuing annual reports on the status of the status of the states's insurance department.
9 maintaining records of department activities.
According to Brady "State Insurance Departments", describe regulatory philosophy and regulatory style.
REgulatory philosophy is the attitude and regulatory style is the approach.
According to Brady "State Insurance Departments", why id important for an insurance department to have agood relationship with the state legislature.
Since insurance dfepartments compete with other state regulatory agencies for share of a limited budget, lobbying for the departments needs is important. A good relationship with the legislature can result in insurance issues being addressed on a regular basis and in a beneficial manner.
According to Brady "State Insurance Departments", Desribe the function of the liscensing department within the department:
All insurance departments deal with the liscensing of insurance companies and agents. Both insurance companies angents must meet certain requirements and pay fees that vary by state.
According to Brady "State Insurance Departments", other than the liscensing department, what is th eother major depoartment within the insurance department?
Coverage and Pricing Regulation
According to Brady "State Insurance Departments", List the 4 different types of filing lws for P&C lines.
1 Prior Approval
2 File and Use
3 Use and File
4 No File
According to Brady "State Insurance Departments", List the 5 most common reasons for disapproval of a filing
1 not in the public interest
2 illegal
3 unfairly discriminatory
4 excessive or inadequate
5 not meeting minimum standards
According to Brady "State Insurance Departments", Regulators can do financial and market conduct exams, descrtibe financial exams:
Financial Examinstions include:
1 - annual audits by CPA's
2 - Actuarial Opinions on Loss Reserves
3 - can include the use of the annual statement
3 - the NAIC publishes the "Financial Condition Examiners handbook" to detect a) early detection of financial trouble or unlawful activity, and b) develop information for timely, appropriate regulatory action
According to Brady "State Insurance Departments", Describe IRIS:
Insuance Regulatory Information System,
1 for regulators as a guide to help highlight insurers needing financial scrutiny
2 to asses a company's finacial situation by examining certain financial ratios
According to Brady "State Insurance Departments", Regulators can do financial and market conduct exams, descrtibe market conduct exams:
Review ways in which insurer does business including:
1 advertising
2 underwriting
3 pricing
4 claims handling
5 policy issuance
According to Brady "State Insurance Departments", List 2 main reasons why every state insurance department does NOT have a fraud bureau:
1 restraints on budgets
2 lack of insurance fraud laws
According to Brady "State Insurance Departments", Regulators are responsible for the functions of receivership, rehabilitation, and liquidation. List 3 grounds for rehabilitation.
1 liabilities exceed assets
2 insurer refuses to submit its books, records, etc. to commisssioner
3 Insurer willfully violates its charter or articles of incorporation or any state law.
According to Brady "State Insurance Departments", ins. departments are responsible for protection and education of consumers. list 5 of these types of activities:
1 help with claims
2 compalints
3 inquiries from general public
4 offer eductional programs (insurance and loss prevention)
5 Publish information about guides for purchase of insurance
According to Brady "State Insurance Departments", List 4 functions of the General Counsell of the insurance department
1 Give legal opinions on legislation
2 assist in drafting admisnistrative rules and regs
3 Represent the insurance regulators in non-criminal proceedings
4 offer legal advice on insurance issues
According to Brady "State Insurance Departments", Give 5 reasons why the position of legislative liason is important:
1 testimony needs to be given
2 misconceptions addressed
3 supporting data offered
4 questions answered
5 advice to assist legislature's dealings with insurance codes and related laws.
According to Brady "State Insurance Departments", List 4 sources for regulatory funding
1 Premium taxes
2 Fees and assesments
3 appropriation from the state treasury
4 Fines and penalties
According to Brady "State Insurance Departments", which 2 states have regulatory insurance commissions and describe their functions
Louisiana and Oklahoma
-purpose is to regulate insurance pricing
According to Brady "State legislatures and the NAIC", List 6 ways a legislature can influence the dept. of Ins.
1 enactment of laws
2 deliberations about laws
3 hearings
4 investigations
5 reports
6 control budget
According to Brady "State legislatures and the NAIC", list 3 forms of legislative investigations
1 requiring annual reports
2 completing performance reviews
3 conducting audits of state insurance departments
According to Brady "State legislatures and the NAIC", List 6 types on non-insurance laws that a legislature can influence the insurance environment.
1 Banking (some fed banks can sell insurance)
2 Contracts
3 Premiums (monthly premiums)
4 Fraud
5 Investments
6 Lobbying
According to Brady "State legislatures and the NAIC", What was one of the first steps to creating effective insurance regulation by the NAIC?
Uniform Financial reporting
According to Brady "State legislatures and the NAIC", What are 3 objectives of the NAIC?
1 Promote public interest through fair and equitable treatment
2 Solvency
3 Maintain and improve effective regulation
According to Brady "State legislatures and the NAIC", what is a NAIc model law?
The NAIC has reccommended insurance regulation in the form of hundreds of model laws. It occurs when the entire NAIC membership votes to adopt a committews recommendation
According to Brady "State legislatures and the NAIC", Model laws can be changed by legislatures, take years to be adopted or not be adopted at all. Give 4 reasons for this
1 Some may be viewed as unneccesary because other state laws are viewed as sufficient
2 decide to modify a model law to meet their particular state's needs or to better coalesce with other laws
3 legislature might not have a session every year or sessions might be too brief.
4 abundance of other items for legislature to look at.
According to Brady "State legislatures and the NAIC", in 1998 the NAIC introduced its Accredation Program to have basic standards so that regulators would have basic standards for solvency regulation. List the 3 criteria for accreditation
1 The laws and regulations of a state must meet certain basic standards of NAIC models
2 The regulatory methods of the state must be acceptable
3 Department practices must be adequate
According to Brady "State legislatures and the NAIC", The research division of the NAIC does a lot of work to support the regulators, list 6 main activities performed by the research division:
1 Giving information to the state insurance departments
2 Helping the staffs with technical and regulatory questions
3 giving information to federal and state agencies
4 Helping to develop the NAIC financial and statistical datatabases
5 providing pertinent statistical material and research studies
6 Giving other NAIC departments support through research
According to Brady "State legislatures and the NAIC", List 3 porimary areas of importance dealt with by the research department:
1 Statistics
2 Insurance Issues
3 Advice on pricing and coverage regulation
According to Brady "State legislatures and the NAIC", list 3 databases maintained by the NAIC to keep track of problem people and companies:
1 Regulatory Information Retrieval System (RIRS) names of people ort companies that have had regulatory or disciplinary action taken against them
2 Special Activities Database (SAD) - names of people/companies who have had charges brought against them or been investigated, might have been involved in fraud
3 Complaints Database System (CDS)
According to Brady "State legislatures and the NAIC", What does the Securities Valuation office do?
monitors the quality and the value of investments of insurance companies
According to Brady "The Role of Others in Insurance Regulation," list 4 other entities that play a role in insurance regulation:
1 the courts
2 the insurance industry
3 consumers
4 other interest groups
According to Brady "The Role of Others in Insurance Regulation," list 4 areas in which the courts have influenced insurance regulation
1 effect of court decisions on state insurance department activities
2 policy language
3 policy coverage
4 claims settlement
According to Brady "The Role of Others in Insurance Regulation," List 3 vehicles for the insurance industry to influence regulation
1 Trade Associations
2 Advisory Organization
3 Individual Insurance Companies
According to Brady "The Role of Others in Insurance Regulation," List 2 functions of insurance Trade Associations
1 Access to legislative developments and use association personnel as their lobbying forum
2 participate on committees in drafting new legislation or influencing changes to pending legislation
According to Brady "The Role of Others in Insurance Regulation," Describe Insurance Advisory Organizations
1 not as active as trade associations in shaping regulation
2 non-profits working on behalf of companies
3 primarily deal with the filing of rates or propspective loss costs
4 provide valueable services to memeber insurers.
According to Brady "The Role of Others in Insurance Regulation," list 6 valueable services provided to memeber insurers by Insurance Advisory organizations:
1 develop rating systems
2 collect and tabulate statistics
3 research topics important to memebers
4 Provide a forum for discussion on important topics
5 educate members, regulators and public on particular issues
6 Monitor regulatory issues of concern ot members
According to Brady "The Role of Others in Insurance Regulation," List 2 ways insurance companies influence regulation
1 Provide Expert testimony
2 providing NAIC with technical expertise
According to Brady "The Role of Others in Insurance Regulation," what is the most influential consumer group and what has it done?
PUBLIC CITIZEN

- automobile seatbelt/safety laws
- distrusts any action by insurance companies
- demonstartes influence by having its members testify before congressional committees
According to Brady "The Role of Others in Insurance Regulation," list 7 major concerns of consumer groups in the 1990's
1 auto rates can be lowered and service improved
2 insurance industry is inefficient
3 state regulators are too weak
4 ratemaking has perverse incentives regarding cost cutting and safety
5 structural reform is needed in regulation
6 competition must be increased
7 health insurance is the #1 crisis that needs to be addressed
According to Brady "The Role of Others in Insurance Regulation," How do Consumer groups influence the NAIC?
Consumer groups influence the NAIC by informing members of NAIC task forces, working groups, and comittees about perceived problems. The NAIC can use this information in developing model laws.
According to Wagner 'Rating Bureaus', list 3 goals of early rating bureaus in the 1800's.
1 establish and maintain adeqauate rates
2 control excessive commissions
3 standardize policy forms
According to Wagner 'Rating Bureaus', In 1866, insurers formed the national board of fire insurance underwriters (NBFIU) list its 2 goals
1 control rates and commissions
2 terminate agents who did not support and maintain board mandated rates.
According to Wagner 'Rating Bureaus', in late 1800's regional bureaus were formed, list 4 ways they differed from the NBFIU.
1 focused on insurer's conduct not agents
2 creating compacts with insurers to distance them from ratemaking and enforcement
3 force non-member insurers to become members by reducing rates
4 creating stampin offices to review rates and underwriting
According to Wagner 'Rating Bureaus', The merritt committee was formed in New York to investigate non-life insurance. list 4 of its findings:
1 fire rate problem was 2-fold (making of rate and maintenance of rate
2 insuirer's should be able to combine to eliminate rate wars caused by competition
3 having bureau rates would reduce expenses
4 more credible rates would result from insurers pooling their premium and loss data.
According to Wagner 'Rating Bureaus', The merritt committee also looked at what extent states should be able to regulate. List 4 results
1 life insurance commissions ands acquisition expenses limited (but not stock fire companies)
2 the bureau system prevented large increases in commissions
3 mutuals had advantage over stock companies, because they could declare dividends and have lower prices and commissions
4 NAIC adopted Inland MArine rules to limit what could be called IM. This closed a loophole for using non-regulated IM coverage.
According to Wagner 'Rating Bureaus', list 3 ways bureaus tried to forestall competition
1 sparking judicial/legislative activity to inhibit the use of non-bureau rates
2 bureaus preventing insurer's from being partial subscribers
3 bureaus challenging independent insurers rate filings or member's deviation filings
According to Wagner 'Rating Bureaus', List the 3 conclusions of the US SEnates antitrust and Monopoly Committee(O'Mahoney Committee)
1 competition should be the prime regulator of insurance
2 rate setting in concert represented the most serious threat to the competitive market
3 urged state regulators to use a 'file and use' system
According to Wagner 'Rating Bureaus', shortly after the O'Mahoney committe these 3 things happened
1 rate hearings and litigation were brought to a close
2 rate enforcement activities were stopped
3 insurers began to view the bureaus role as a "provider of services"
According to Wagner 'Rating Bureaus', In the 20th century, rating bureaus consolidated to save money list 2 noteworthy ones.
1 The Insurance Rating Bureau
2 ISO
According to Wagner 'Rating Bureaus', Rating bureaus gradually have become advisory organizations, list services provided in fire underwriting and in Work comp
Fire - town grading, and commercial fire scheduling rating
WC - experience rating
According to Wagner 'Rating Bureaus', bureaus also serve as statistical agents for their members, list 1 major function of this
gather, compile, submit to state regulators premium and loss data. This info tool for regulators to gauge U/W performanc eby line, class and territory
According to Wagner 'Rating Bureaus', in 1988 20 state attorney generals filed antitrust lawsuits against ISO relating to the standardized policy language for commercial GL. List 3 changers ISO made in response:
1 majority of the board will consist of public members
2 ISO prepared loss costs without input from industry committees
3 ISO staff become responsible for policy form development, with reliance on outside recources
3
According to Wagner 'Rating Bureaus', in 1997 ISO became a for profit organization, describe two changes which illustrate why the insurance industry no longer owns ISO
1 - insurer members only could elect 3 of 11 board members
2 - ISO employees and management have partial ownership and elect the remaining board members
According to Wagner 'Rating Bureaus', In the 1980's and 90's, advisory orgainizations assesments went down by 50% of premium, list 4 reasons for this reduction:
1 consolidations
2 insurers having option to become independent
3 availability of different levels of service ot purchase
4 savings that resulted from technology
According to Wagner 'Rating Bureaus', list 3 ways advisory organizations enhance competition in the marketplace
1 providing new companies with pricing assistance and policy language (easy entry)
2 assisting small carriers
3 focusing on the creation and maintenence of specialty products
According to Harrington "Rate regulation in the 20th century", Describe a timeline of these dates: 1945, 1940's-1950's, 60's - 70's, 80's-90's
1945 - McCarran/Ferguson - rate regulation reaches full bloom
40's-50's - prior approval, bureau rates
60's-70's - bureau rates break down, use of competitive rating in some states
80's-90's - large commercial rates largely deregulated
According to Harrington "Rate regulation in the 20th century", in 60's many states went to competitive rating from prior approval, list 4 reasons for this
1 movement away from bureau rates
2 increased administrative costs of multiple rate filings by insurers
3 solvency regulation became more important
4 hopes that price competition would stymie affordability problems
According to Harrington "Rate regulation in the 20th century", rapid growth in claims costs in the 70's and 80's caused states to respond in these 4 ways:
1 Prop 103 in California
2 in 80's WC rates were widely supressed
3 development of residual market mechanisms
4 rate of return regulation
According to Harrington "Rate regulation in the 20th century", Competition creates incentives to do these 4 things for insurers:
1 forecast costs accurately
2 price and underwrite as to avoid adverse selection
3 create refined system of rate classification
4 minimize claim costs and settlement expense
According to Harrington "Rate regulation in the 20th century", competitive rating and risk classification has these 3 additional impacts
1 promotes coverage availability
2 provides incentives for high risk buyers to control losses
3 smaller residual markets
According to Harrington "Rate regulation in the 20th century", List 5 consumer advocacy arguments for regulation
1 the insurance industry limited exemption form federal antirust laws facilitates collusion
2 consumers need protection from inadvertantly purchasing high priced coverage
3 when insurance is cumpolsory, regulation is needed
4 rate supression is good for affordability and will encourage people to buy
5 restrictions on classification will lead to fairness
According to Harrington "Rate regulation in the 20th century", list 5 possible adverse effects of prior approval witrh regulatory lag
1 administrative costs high
2 delays make it hard to keep up with trends
3 greater variation in coverage ability over time
4 greater variability in insurer profits
5 higher long-run prices
According to Harrington "Rate regulation in the 20th century", list 3 possible adverse effects of prior approval with binding rate floors
1 inefficient non-price competition (excessive service)
2 slower expansion of efficient firms
3 higher prices
According to Harrington "Rate regulation in the 20th century", list 6 possible adverse effects of prior approval with average rate suppression
1 larger residual market
2 reduced service
3 increased risk for insurers and increased solvency risk
4 adverse spillover on other states
5 reduced insurer investment infrastructure
6 reduced entry and increased exit
According to Harrington "Rate regulation in the 20th century", list possible adverse effects of restrictions on classification residual market ceilings
1 costs of enforcement of classification compliance
2 large residual markets
3 high prices for low risk insureds
4 low loss-control incentives for high risk insureds and vice-versa
According to Brady, "Governments role in regulation", federal government can declare state laws void for these 3 reasons:
1 state law Contradicts federal law
2 court determines there isw interference with federal law
3 stste law imposes improper burden on interstate commerce
According to Brady, "Governments role in regulation", after maccarran/ferguson act states were given primary regulatory control except in these 3 situations
1 situations of boycott, coercion and intimidation
2 when federal antitrust laws apply
3 specific federal laws aimed at regulation of insurance
According to Brady, "Governments role in regulation", list 3 us supreme court cases that helped define the term, the "business of insurance"
1944 - SE Underwriters case
1946 - Robertson vs. California (dealt with liscensing of companies/agents)
1958 - FTC vs. National Casualy Co. (advertising and selling policies)
According to Scedule F, List the 3 Purposes of Schedule F
1) Provide SUPPORTING DATA for assumed and ceded reinsurance accounting entries
2) Develop PROVISION FOR REINSURANCE
3) Restate the balance sheet from a Net to Gross basis
According to Schedule F, Fronting companies are identified in collumn 5 of Schd F part 3. List the 4 types of fronting contracts that are exempt from identification in this collumn
1) Affiliated Transactions
2) Pools
3) Small amounts (under 5% of PHs)
4) Captives
According to Schedule F, Provisions fro Reinsurance arise from the following 4 reinsurance recoverables
1) Unsecured Recoverables from Unauthorized reinsurers
2) Unsecured Recoverables form Slow Paying Reinsurers
3) Overdue Recoverables from authorized and unauthorized reinsurers
4) Recoverables in Dispute from unauthorized and slow paying reinsurers
According to Schedule F, List the 3 objectives for The Provision for Reinsurance
1) encourages insurers tio use authorized reinsurers
2) encourages ceding companies to seek collateral from unauthorized or slow paying reinsurers
3) encourages ceding companies to demand timely payment
According to Schedule F, list the 2 unintended consequences of the Provision for Reinsurance
1) since unauthorized reinsurers often provide cheaper coverage the higher expense gets passed on to the customer
2) Securing recoverables is expensive, leads to increased prices
According to Schedule F, what is the formula for a reinsurer who is not authorized
-Provision = Unsecured total recoverables + 20% (recoverables over 90 days
overdue) + 20%(amounts in dispute).
-Disputed balances are counted in the above equation, in order to prevent the
reinsurer from avoiding the penalty for overdue recoverables by classifying them as
‘in dispute’.
According to Schedule F, What is the formula for the Reinsurance Provision for an Authorized Slow-paying Reinsurer
-Provision= max[ 20% (unsecured total recoverables), 20% (recoverables over 90
days overdue) ]
According to Schedule F, What is the formula for the Reinsurance Provision for an Authorized NON-Slow-paying Reinsurer
-Provision = 20% (recoverables over 90 days overdue) + 20% (amounts in dispute).
According to Schedule F, What is the formula for calculating whether an reinsurer is slow-paying or not?
A reinsurer is classified as “slow paying” if the ratio of recoverables over 90 dues
overdue, to (all recoverables on paid losses & LAE + amounts received in the last 90
days) >= 20%.
According to Feldblum Satutory Surplus, List 7 entries on the balance sheet that do not go through the income statement, rather they are a direct charge to Surplus
1) Change in Non-Admitted Assetts
2) Net Unrealized Capital Gains
3) Change in Net unrealized Foreign Exchange Gains/Losses
4) Change in Net Deferred Income Tax
5) Change in Provision for Reinsurance
6) Change in Surplus Notes
7) Cumulative effect of change in accounting procedures
According to Feldblum Satutory Surplus, What is the formula for Invested capital for a P&C Insurer? or in other words what composes the amount of capital that is subject to the cost of capital
Invested Capital = PHS + capital embedded in gross UPR and full value of loss reserves - Deferred Tasx Asset
According to Feldblum Satutory Surplus, List 4 factors that determine the amount of capital invested in an insurance company
1) Undiscounted Loss Reserves
2) Equity in UEPR
3) RBC Requirements
4) any other need determined by "ruin criterion"
According to Feldblum Statutory Surplus, When an insurer looks at wether or not to stay in business based off of the amount of invested capital and value of its income, what two items are compared and how is the value of the income evaluated?
If the PV of the income perpetuity is greater than the amount of invested capital, then stay in business. The perpetuity formula = annual income after tax/interest rate from the equities market
According to SSAP 65, List the 3 things that shall be disclosed about tabular discounting:
1) Tables and Rates used
2) Amount of any discounted liability in the financial statement
3) Amount of tabular discounting by line and reserve (Case vs. IBNR)
According to SSAP 65, If there have been changes in rates or other key discount assumptions in discounting loss reserves from prior years, then the current annual statement shall disclose the following 4 things:
1) Amount of discount on ALL Prior years liabilities under current rates and assumptions
2) Amount of discount on ALL Prior years liabilities under previous rates and assumptions
3) Change in discounted liability due to the change in rates and assumptions
4) Amount of non-tabular discount by line and reserve category,
According to SSAP 65, How are changes in reserve discounting accounted for in the annual statement that are due to changes in rate sand assumptions?
Those changes hit the income statement and affect current calendar year earnings
According to SSAP 65, list 3 facts about High Deductible policies
1) Reserves are net of deductibles to the extent deductibles are collectible
2) Reimbursements are accrued when losses are paid
3) Recoverables represent credit risk and not underwriting risk. In absence of contractual due date, billing date is used for aging. Deductibles > 90 days overdue are non-admitted. However if the insurer holds security, a minimum of 10% of the recoverable in excess of the collateral amount is reported in lieu of applying the aging requirement
According to SSAP 65, an insurer must disclose the following 4 things about its A&E exposures:
1) Reserving methodology for both case and ibnr
2) Amount paid and reserves for loss and ALE, direct, assumed and net (after intercompany pooling)
3) Description of the lines where there might be exposure (including there nature)
4) The following data field for the most recent 5 calendar years: (beginning reserves, incurred loss and ale, CY paid loss and LAE, ending reserves)
According to SSAP 65, for long duration contracts (over 13 months), the amount of the UEPR shall be no less than the max of three tests.
1) mgmt’s best estimate of amounts refundable as of the date
2) GPW * (% of loss not yet incurred out of total expected loss)
3)
According to Notes on the Financial Sattements, if tabular discounting is used, the notes must diclose the following information
1) Identify table used
2) Rates used to discount
3) amoutn of discounted liabilites reported
4) Amount of tabular discount by LOB and split between case and IBNR
According to Notes on the Financial Sattements, list the 3 situations where the use of tabular discounting is permitted
1) Indemnity portions of WC pension claims and LTD claims on A&H policies
2) certain monoline med-mal writers to help privately organized doctor's mutuals write busines without havign to raise more capital
3) as permitted by a regulator to enable a domestic insurer to continue operations
According to Notes on the Financial Sattements, List the 4 things needed to be disclosed in the Notes if non-tabular discounting applies
1) Rate used and the basis used to discount liabilities
2) amoutn of discoutn by LOB split by Case vs IBNR and DCC vs AO
3) Total amoutn of non-tabular discoutnign in annual statement
4) If rates used have change from previous statement, then amount of discount at current and prior rates, change in discount, and by LOB
According to Notes on the Financial Sattements, list the 6 things an insurer should dislose abotu intercompany pooling:
1) Identify the lead company
2) Descriptions of LOB's subject to pooling
3) Unnafilliated cessions and wether they occur prior to pooling
4) Identification of pool members that contractual right of direct recovery from non-affiliates on reinsurance coverign business subject tot he pool
5) Explainations of any descrepancies between entities regarding pooled business
6) Description of the sharing of the Provision for Reinsurance
According to Notes on the Financial Sattements, List 3 similarities of HIGH DEDUCTIBLE policies to retrospective rating policies
1) Insurer is liable for all claims and is reimbursed by insureds
2) Insurer's liability to the claimant is not dependent on wether the insured reimbureses (there is credit risk)
3) In states that levy premium taxes and assessments, reimbursements are treated like premium
According to Notes on the Financial Sattements, List 5 similarities of HIGH DEDUCTIBLE policies to excess polies with a service contract to handle claims from a first dollar
1) statutory loss reserves are net of expected reimbursements
2) The RBC WP risk charge is levies on actual premium, not premium equivalents, the RBC reserving risk charge is levied on net reserves
3) In states which levy premium taxes only on premium and not on premium equivalents, taxes are just on premium and reimbursements are like TPA fees
4) The RBC non-admitted assett charge is levied only on unreimburesd paid losses (not on unpaid losses)
5) High deductible p[oliceis require heavy underwriitng for credit risk and periodic monitoring of insured's financials
According to Notes on the Financial Sattements, What is the survival ratio when talking about A&E exposure?
= current carried reserves/payments in recent 3 years - this measuree is used to gage the adequacy of A&E reserves
According to SSAP 65, List the 3 things that shall be disclosed about tabular discounting:
1) Tables and Rates used
2) Amount of any discounted liability in the financial statement
3) Amount of tabular discounting by line and reserve (Case vs. IBNR)
According to SSAP 65, If there have been changes in rates or other key discount assumptions in discounting loss reserves from prior years, then the current annual statement shall disclose the following 4 things:
1)Amount of discount on ALL Prior years liabilities under current rates and assumptions
2)Amount of discount on ALL Prior years liabilities under previous rates and assumptions
3)Change in discounted liability due to the change in rates and assumptions
4)Amount of non-tabular discount by line and reserve category,
According to SSAP 65, How are changes in reserve discounting accounted for in the annual statement that are due to changes in rate sand assumptions?
changes hit the income statement and affect current calendar year earnings
According to SSAP 65, list 3 facts about High Deductible policies
1) Reserves are net of deductibles to the extent deductibles are collectible
2) Reimbursements are accrued when losses are paid
3) Recoverables represent credit risk and not underwriting risk. In absence of contractual due date, billing date is used for aging. Deductibles > 90 days overdue are non-admitted. However if the insurer holds security, a minimum of 10% of the recoverable in excess of the collateral amount is reported in lieu of applying the aging requirement
According to SSAP 65, An insurer must disclose the following 4 things about it’s a&E exposures:
1) Reserving methodology for both case and ibnr
2) Amount paid and reserves for loss and ALE, direct, assumed and net (after intercompany pooling)
3) Description of the lines where there might be exposure (including there nature)
4) The following data field for the most recent 5 calendar years: (beginning reserves, incurred loss and ale, CY paid loss and LAE, ending reserves)
According to SSAP 65, for long duration contracts (over 13 months), the amount of the UEPR shall be no less than the max of three tests.
1) mgmt’s best estimate of amounts refundable as of the date
2) GPW * (% of loss not yet incurred out of total expected loss)
According to Feldblum Schedule P part 1, describe what is shown in the prior years column:
The prior years row shows payments in the current CY
only
According to Feldblum Schedule P part 1, Shedule P is a tool used by regulator to monitor the solvency of an insurer, list 8 funtions of Sched P:
1) Measures Loss and ALE adequacy
2) shows payments & reserves by line & AY. In this way, a company can identify segments of business with good or bad experience.
3) the effects of changes in loss reserve margins on Calendar Year results can beseen via the Accident Year figures.
4) it provides loss payment patterns needed to discount the reserves
5) provides data for reserving risk & written premium risk in the RBC formula.
6) shows the percentage of premium & losses associated with loss sensitive contracts, and the sensitivity of those.
7) separates the occurrence & claims made experience needed for the RBC offset.
8) supports the SAO (Statement Of Actuarial Opinion).
According to RBC, What is the RBC charge for cash or money market funds?
0.3%
According to RBC, What is the RBC charge for Equities?
15%
According to RBC, What is the RBC charge for Reinsuarnce Recoverables?
10%
According to RBC, What is the RBC charge for miscellaneous recoverables?
5%
According to RBC, What is are the ranges for the action levels: Company Action Level, Regulatory Action Level, Authorized Control Level, Mandatory Control Level
150%-200% - Company Action Level
100% to 150% Regulatory Action Level
70% to 100% Authorized Control Level
less than 70% Mandatory Control Level
According to RBC, what are the actions associated with Company Action Level, Regulatory Action Level, Authorized Control Level, Mandatory Control Level
Company Action Level - Cmpanyt submit a plan how additional capital will be obtained or reduce risk exposure
Regulatory Action Level - Company submit a plan and regulator has right to take action (restrict new business) at his discretion
Authorized Control Level- The commisioner isd authorized to take control
Mandatory Control Level - The commissioner is authorized to place the company under regulatory control (rehab or liquidization)
According to RBC, List 3 incebtives related to RBC forulas for companies to report inadequate reserves -"Triple Whammy"
1) Stat Surplus is increased when reserves are lowered
2) Reserving Risk Charge is lowered therefore lowereing required capital
3) Adverse development is lowered therefore reducing reserving risk charge
According to RBC, list 2 rebuttles to the argument of the tripple whammy on incentives to reduce reported reserves
1) NOT PURPOSE of RBC - it is not the purpose of RBC to ensure reserve adequacy - that is taks of actuaries and regulators
2) MANIFEST - any inadequate reserves will manifest themselves through adverse development and hence higher reserving risk
According to RBC, List one incentive for insurers not to undertate reserves
TAX - increased taxable income
According to RBC, What is the purpose of the Premium concentration factor in the written premium risk?
Diversification - If an insurer writes many LOB's, risk is reduced because the UW results of th evarious lines are not completely correlated with eachother. -More diversification leads to greater reduction in RBC charge
According to RBC, Which risk charge is outside the square root formula and why is that?
R0, investments in insurance affiliates, it is outside to avoid a reduction of overall capital requirements by simple layering of company's legal structure
According to RBC, what is the purpose of "adjustment for investment income" in the reserving risk calc?
Reserves are undiscounted, this is an implicit margin that should be remnoved to avoid double-counting of required capital
According to RBC, RBC charge for for investments in alien insurance subsidiaries is estim ated as 50% of reported value of enterprise. What is rationale?
Data indicates an average of RBC charge of 50% carrying value
According to RBC, Whay is the RBC charge different for US and alien subsidiaries?
Outside US have different annual filing requirements. It would be difficult to calculate their RBC charge
According to RBC, provide 2 arguments against the statement RBC is understated because the RBC doesn't use covariance adjustments in its square root calculation (it actually assumes independence)
1) The correlation is weak and the main correlation between reserving and reisnurance collectibles is taken care of by moving half of credit risk from R3 to R4
2) Teh squre root rule will overstte required capital for aq given expected policyholder deficit if the risk elements have a bormal or lognormal distirbution
According to RBC, list 3 actions taken by NAIC to ensure nationwide adoption of uniform RBC requiorements:
1) Annual statement - they made it part of the annual statment
2) The did not includse the formula in model law, so the states couldn't modify it
3) They made passing the model law a requirement for accredation
According to RBC, List 3 criticism of the reinsurance credit risk RBC charge
1) Disincentive - The high charge is a disincentive to reinsure and reduce risk
2) Does not differentiate between types of reinsurers (well capitalized vs. not)
3) Collaterlization - RBC does not consider the collateralization of reinsurance recoverables
According to RBC, List 3 arguments for the reinsurance credit risk RBC charge
1) Contibuted to insolvency - reinsurance collectibility has contributed to major insolvencies
2) "Sham reinsurance" - financially troubled insurers have used sham reinsurance to hide their financial problems
3) RBC does not contemplate additional reinsurance premiums paid on loss sensitive contracts
According to RBC, the NAIC retained its 10% chare for reinsurance recoverables for the following 3 reasons
1) Pooor Historical Data
2) continually changing marketplace
3) other factors affecting collectibility (quality of reinsurer)
According to RBC, what is the risk charge for credit risk on recoverables from Involuntary market pools?
No charge - this is designed to increase availability for hard to service risks
According to RBC, what is the risk charge for credit risk on recoverables from intercompany pooling (affiliated companies)?
No Charge
According to RBC, howe is the statutory provision for reinsurance treated with regards to to RBC charge for reinsurance credit risk?
Stat Provision is deducted from reinsurance recoverables subject to RBC charge to avoid double counting
According to RBC, the RBC formulabalances 3 major considerations: list them
1) Accuracy
2) Simplicity
3) Incentives
According to RBC, List 2 criticisms for the RBC "worst Case Year" approach to reservign and premium risk:
1- historical results may be a result of happenstance and not risk characteristics
2) Calibrating the required capital may not use observed adverse development in determining a good proxy for risk characteristics
According to RBC, list two arguments for why the RBC reserving risk charge should reflect the net effect of adverse development and the implicit interest discount
1) long duration implies high interest discount
2) volitility of adverse development of statutory WC reserve payments is low. any changes are likely slow and incremental
According to RBC, list 3 arguments for why the RBC reserving risk charge should NOT reflect the net effect of adverse development and the implicit interest discount
1) 1980's OBSERVED loss development does not reflect the riskiness of WC in 80's
2) Industry wide WC reserves are DEFICIENT and nto reflected in financial statements
3) Use of tabular discounts is already used
List 5 purposes of RBC standards and which two have been prohibited to use
1) Minimum Capital Requirements
2) Solvency monitoring
3) Legal authority of regulators tro take action
4) Ratemaking - prohibited
5) MArketing - prohibited
According to IASA Chpt 14, Describe 5 instances where SAP is more conservative than GAAP
1) Provision for Reinsuriance
2) Excess of statutory over Statement Reserves
3) Non-adnitted Assetts like agents balances over 90 days
4)DAC asset not recognized
5)Equipment, Furniture and supplies are non-admitted
According to IASA Chpt 14, Describe 4 instances where GAAP is more conservative than SAP
1) Tax Provision on Unrealized Capital Gains
2) Premium Deficiency
3) Undeclared PH Dividends
4) SAP allows all NAIC category 1 and 2 bonds to be carried at amoritized cost regardless of company’s ability to hold until maturity
According to IASA Chpt 14, Give an ezample of where SAP is contradictory to the liquidation basis of accounting:
-The use of amoritized values for bonds and other fixed income securities
According to IASA Chpt 14, Under GAAP, is it necessary for actuarial cerification of Loss and ALE reserves? How about UEPR?
NO, NO
According to IASA Chpt 14, What is the purpose of premium deficiency? And how is it reflected in GAAP?
Prem Deficiency is established in GAAP to account for shortfall between UEPR and expected Loss, ALE and Expense
This deficiency first reduces the DAC asset and then any excess is set up as liability Excess premium deficiency reserve
According to IASA Chpt 14, Under SAP how are bonds valued?
Category 1-2 – amortized value
Category 3-6 Lower of market value and amortized value
Market values are promulgated by NAIC SVO (securities valuation Office)
According to IASA Chpt 14, Under GAAP how are bonds valued?
“Held to maturity bonds” – amortized value
“trading securities” –market value (and unrealized gains included in income)
“other than maturity and trading” - market values with changes in market values recognized as unrealized gains net of deferred taxes that affect surplus
According to IASA Chpt 14, How does SAP and GAAP treat undeclared PH Dividends?
SAP – not recorded as liabilities until declared
GAAP – amount ot be accrued as liability on balance sheet with estimate of amount to be declared
According to IASA Chpt 14, Identify the principal user of GAAP and SAP
SAP – Regulators and Policyholders
GAAP - Investors
According to IASA Chpt 14, , Identify the main objectives of GAAP and SAP
SAP – Adequacy of surplus – ability to meet it sobligations to policyholders and a focus on liquidity
GAAP – Going Concern – matching of income earned with costs incurred
According to IASA Chpt 14, how do GAAP and SAP treat Federal Income Taxes?
GAAP- includes provision for taxes currently payable AND a provision for Defererred Taxes to future periods
SAP – Only includes provision for taxes currently payable
According to IASA Chpt 14, How is salvage and subrogation treated in SAP and GAAP?
SAP – anticipated Sal/Sub reduces liability for related upaid loss is allowed
GAAP – Reduces liability for unpaid loss is required
According to IASA Chpt 14, How do you record estimate for loss reserves based on management’s range in GAAP and SAP?
GAAP – the low end of range
SAP – the midpoint of range
According to IEE, list 2 differences between the investment gain ratio in IEE and the IRIS investment yield test?
1) The numerator in the IRIS test excludes all capital gains, not just realized gains
2) The denominator of the IRIS test is actual invested assets not just approximated
According to IEE, list 3 interested parties in the profitability by business segment
1) Rate regulators
2) Investors
3) Management
According to IEE, There is 1 major difference between IEE Part 1 and the UWE and Investment exhibit Part 4 in the annual statement:
The Other expense category is broken out into Acquisition expenses, general expenses and TLF
According to IEE, the allocation of investment income to LOBs in the IEE rests upon 3 basic principles: List and describe:
1) Investment income allocated in proportion to investible funds
2) Funds attributable to Insurance Transactions
3) funds attributable to capital and surplus
According to Schedule P, List 4 things to keep in mind that might not be reflected in Sched P triangles:
1) Changes in environment (economic/insurance)
2) State Compensation Systems
3) Deductibles
4) Policy Exclusions (environemnetal)
5) Growth of Company
According to Schedule P, List 3 reasons why Exposure Year Prem can be different from CY premium
1) Premium Audits
2) Retrospective Prem Adjustments
3) Lags - Accounting/booking lags
According to Schedule P, In part 7 (information on loss sensitive contracts) – describe how the info is presented
Presented on all lines basis and not for individual lobs
According to Schedule P, are claim counts on a per accident basis or a per claimant basis?
They can be either
Identify and describe where Schedule P accounts for:
• assumed proportional reinsurance.
• assumed non-proportional reinsurance
* ceded non-proportional reinsurance
a. Assumed Proportional Reinsurance – accounted for in the line of business (LOB) it
covers
Assumed Non-proportional Reinsurance – mapped to either Reinsurance A = Property, B
= Liability, C = Financial
e.g. workers comp – Reinsurance B
fire – Reinsurance A
b. Ceded Non-proportional Reinsurance would be accounted for in its original line of business
According to schedule F, List the 7 parts of Schedule F and its purpose
Part 1 – shows assumed premiums and losses by ceding company
Part 2 – shows premiums on portfolio reinsurance effected or cancelled during the year
Part 3 – shows ceded premiums and losses by reinsurer
Part 4 – aging schedule for recoverables by reinsurer
Part 5 – Unauthorized reinsurer penalty calculation
Part 6 – non-slow-paying reinsurance penalty
Part 7 – slow-paying reinsurance penalty
According to schedule F, List Feldblums 4 criticisms of the provision for reinsurers:
1) purely retrospective (does not consider reinsurer capital adequacy)
2) Arbitrary provision
3) Complex formulas may trick user to think that they are adequate formulas
4) No consideration of appropriateness of reinsurance covers for company exposures
According to schedule F, describe a Fronting company that is identified in Part3 3 collumn 5:
A Fronting company is not liscensed to do business in state and hence they reinsure a large percentage (over 75%) of the business written by a liscensed company
According to schedule F, list 4 types of fronting contracts that are exempt form identification in column 5 of sched F part 3.
1) affiliated comnpanies
2) pools
3) small amounts (less than 5% of PHS)
4) captives
According to schedule F, list 2 reasons why it is difficult to determine when reinsurance payments are due:
1) many contracts do not contain dates
2) ceding companies may wait until losses exceed a certain level before notifying reinsurer
According to Conger Fair Value, Define Fair Value
The amount between 2 unrelated parties that are under no obligation can sell an asset or settle a liability
According to Conger Fair Value, Describe the event that caused FASB to embark on a project to consider the move to fair value accounting:
Savings and loans crisis of the 80’s – companies had assets on books with market values < book values (overvalued due to book value accounting) – Led to huge taxpayer bailout
According to Conger Fair Value, describe how under SAP, gAAP and Fairvalue accounting bonds would be valued that are not held to maturity
SAP – amortized cost
GAAP – market value (for trading securities)
Fair Value – market value
According to Conger Fair Value, Describe how a switch from GAAP to fair value would impact the valuation of policy benefit liabilities.
Would have to explicitly value discount and risk margins (may increase or decrease liabilities). Gaap separates loss reserves and UEPR and recognizes revenue when it is earned. Fair value would only present a single policy benefit liability – premiums are recognized as revenues when written
According to Conger Fair Value, list the 3 level hierchy for valueing things in Fair Value:
1-Directly determined using market price of identical asset/liability
2-Determined via PROXIES –
3- Determined VIA Valuation methods – using analytical approach based on theoretical market pricing models
According to Conger Fair Value, does fair value approach include the time value of money and cash flow risk?
YES
According to Conger Fair Value,List 3 factors that prevent the formation of a secondary market for P&C liabilities
1) LEGAL impediments – liabilities are not transferable without consent of insureds
2) UNIQUENESS of insurance portfolios
3) INFORMATION ASSYMETRY and ANTI-SELECTION
According to Actuarial Statement of Opinion, List 3 sources the actuary should solicit information regarding REINSURANCE COllECTIBILITY
1) COMPANY MANAGEMENT (gather information about collectability problems)
2) RATINGS of reinsurers from rating agency
3) SCHEDULE F (focus on late paying reinsurers)
According to Actuarial Statement of Opinion, List 3 points that must be covered in the OPINION Paragraph
1) Reserves are computed in accordance with accepted loss reserving standards and principles
2) Reserves MEET the REQUIREMENTS of the INSURANCE LAWS of the domicile state
3) RESERVES MAKE A REASONABLE PROVISION for the unpaid loss and LAE obligations of the company
According to Ghezzi Redlining, List 6 parties interested in the redlining issue?
1) Insurers
2) Insurance Consumers
3) Regulators
4) Congress
5) Federal and State courts
6) Federal and state adgencies (HUD)
According to Ghezzi Redlining, Define Redlining
Redlining is generally used to refer to any insurance company activity that limits the availability or affordability of insurance in urban areas or minority groups
According to Ghezzi Redlining, What 2 groups have recently been activie in fighting redlining?
1) HUD – argued against using unfair underwriting criteria (race, religion, sex, family status or nationality (Courts have agreed)
2) NAIC – have concluded there is availability problems in urban areas
According to Ghezzi Redlining, The NAIC lists 3 things that cause availability shortaes in urban areas
1) risk conditions in urban areas
2) insurers lack of knowelege about urban risk factors
3) rate adequacy
According to Ghezzi Redlining, Ghezzi suggests that actuaries do 3 things to assess the redlining issues
1) Refine Pricing Analysis
2) Review UW guidelines
3) Review mix of business by geographic area
According to Ghezzi Redlining, Describer the insurer view on redlining:
Rating criteria and UW guidelines are NOT Unfairly discriminatory
Since insurance industry does not engage in disparate treatment, they should not be responsible if the effects of its procedure results in low availability or affordability for certain insureds
According to Ghezzi Redlining, Describer the federal view on redlining
Does not focus on fair treatment in UW process
Focuses on observable outcome of insurers’ UW practice
Examples of disparate outcome would be lack of urban insureds or minority insureds
The absence of these isnureds is a problem, regardless of appropriateness of insurers UW, rating and risk assessment practices
According to NAIC Model Rating Law, What are the 9 purposes of the Property Casualty model rating law?
1 -Prohibit Price fixing and anticompetitive behavior
2)Protect Policyholders against excessive, inadequate, unfairly discriminatory rates
3) Promote competition by being responsive
4) Provide regulatory procedures for maintaining appropriate data systems
5) Provide regulatory controls in the absence of competition
6) Improve availability and fairness of insurance
7) authorize essential cooperative action among insurers in ratemaking process
8) Encourage efficient and effective marketing practices
According to Harrington Politics and Economics of Auto insurance, at what level of costly classification will the market go to?
The market will classify as long as this results in a lower premium for low risk groups
According to Harrington Politics and Economics of Auto insurance, Will costly classification always result in positive net social benefit?
No, not always
According to Harrington Politics and Economics of Auto insurance, Will the benefits of COSTLESS classification to the low-risk group will always be equal to or greater than the benefits to the high risk group?
True
According to Harrington Politics and Economics of Auto insurance, List 2 examples of a state mandated the increased reliance on Driver Records:
1) Prop 103 in California – designed to increase reliance on driver’s record
2) South Carolina 1989 – designed to surcharge people who have had poor driving records to fund losses in reinsurance facility
According to Harrington Politics and Economics of Auto insurance, Describe the authors perspective on using individual driving records in the rating process:
It improves correlation, but is limited improvement due to low credibility of individual experience
According to Harrington Politics and Economics of Auto insurance, List 3 potential consequences of surcharging for accidents and traffic violations (in excess of market classification)
1) Reduced accident reporting
2) Risk of Excess premium charges
3) Inefficiently high level of deterrence
According to Harrington Politics and Economics of Auto insurance, The use of Reinsurance facility or JUA could increase costs over time for 2 reasons. List them:
1) In a reinsurance facility, costs to investigate claims is born by 1 insured while the cost savings are shared by the all of the participants- reduces incentives to engage in cost-saving claims investigation
2) JUA – Cost reduction incentives are reduced, because costs are reimbursed as a set amount per claim or percentage of premium
According to Harrington Politics and Economics of Auto insurance, List 3 main functions of Private Sector Provision for competitive markets
1) Consumers incented to minimize cost of risks due to competitive pricing and risk selection
2) Insurers handle their own claims and hence are incented to reduce costs
3) Competition keeps rates in line with costs and produces desirable diversity in service and coverage
According to Harrington Politics and Economics of Auto insurance, Identifies 4 elements whose existence increases the likelihood of that classification restrictions will be implemented under an economic theory of regulation:
1) Supported by Organized Group
2) Resulted increase in Premium is spread widely and delayed
3) People who are getting adversely affected are unaware
4) Small Impact on efficiency
5) Strong Government and public commitment to fairness
According to Harrington Politics and Economics of Auto insurance, Define Pareto Efficiency:
Pareto Efficency exists when no person can be made better of without making someone else worse off.
According to Harrington Politics and Economics of Auto insurance, Define “Kaldor-Hicks” POTENTIAL Pareto Efficiency:
POTENTIAL Pareto Efficiency, no person could be made better off by an amount sufficient to fully compensate those made worse off by a given action
According to Harrington Politics and Economics of Auto insurance, List 4 basic types of Rate Filing Laws:
1) Prior Approval – must get regulatory approval before rates can be used
2) File and Use – must file rates before use
3) Use and File – Can use rates first but must file ina short time frame (10 days)
4) No Filing- the regulator could still ask for rates
According To Weining Personal Insurance (life health retirement), What 2 elements of OASDHI ensure the social adequacy of the sytem?
1) Low income workers receive a higher portion of their pre-retirement income than high wage workers
2) Workers with dependents receive higher benefits than those without
According To Weining Personal Insurance (life health retirement), give 2 reasons why participation in OASDHI is cumpolsory.
1) To avoid Antiselection (low income unhealthy etc..)
2) Economies of scale, law of large numbers
According To Weining Personal Insurance (life health retirement), How do Medicare benefits vary by income?
They do not vary, all Medicare benefits are the same regardless of income
According To Weining Personal Insurance (life health retirement), Is medicare part B voluntary or compulsory?
Voluntary
According To Weining Personal Insurance (life health retirement), Compare Work Comp vs. Social Security Disability benefits with respect to COVERED INJURIES, Required Length of Employment, Benefits for Spouse and Children, Waiting period for benefits:
1) For SS benefits are only payable to covered workers who suffer injury that will keep them from working for 12 consecutive months
2) Worker must have worked a specified number of quarters out of thew last # of quarters
3) If you are eligible, so are spouse and children
4) Benefits are not paid unless you have been disabled for 5 full consecutive months
According To Weining Personal Insurance (life health retirement), list 2 actuarial advantages of the compulsory nature of SS.
1) Stable population, with no adverse selection
2) Actuary can use available statistics regarding fertility, production and mortality without making adjustments for characteristics of insured population
According To Weining Personal Insurance (life health retirement), List the eligibility requirement for a worker to be Fully insured status
40 credits or have worked full time for 10 years
A worker must be fully insured to receive retirement benefits.
According To Weining Personal Insurance (life health retirement), List the eligibility requirement for a worker to be Currently insured status
A worker with at least 6 credcits during the last 13 quarters ending with the quarter in which death disability or entitlement to retirement benefits occur.
According To Weining Personal Insurance (life health retirement), List the eligibility requirement for a worker to be disability insured status
Depends on Age:
31 and older must be fully insured and have at least 20 out of the last 40 credits
Special rules apply to younger people and blind people
According To Weining Personal Insurance (life health retirement), Define Intergenerational transfer:
The process of transferring income from one generation to another
OASDHI operates on a pay as you go basis, which means that current benefits are funded by by payroll taxes levied against employers and employees. When a workers earnings are reduced, they are paid by the current workers.
According To Weining Personal Insurance (life health retirement), What is the purpose of MediGap insurance?
Medigap insurance fills in the gaps that exist in Medicare, covering portions of Medicare deductibles or procedures and items not covered by medicare. Medigap coverage is sold by private insurers and regulated by the federal government.
According To Weining Personal Insurance (life health retirement), Describe How Medicare part A and Part B are funded.
Part A – funded through Payroll taxes
Part B – funded by premiums paid by participants and subsidized by the government
According To Weining Personal Insurance (life health retirement), The calculation of the unemployment insurance tax rate is based upon a wage base lower than actual wages and includes an experience rating adjustment based on actual unemployment experience. Explain how the use of a wage base lower than actual wages can accentuate the impact of the economic cycle on employers:
In tough times when the company is paying lower wages, the tax rate is actually higher as a percentage of total wages than when they are paying higher wages
According To Weining Personal Insurance (life health retirement), The calculation of the unemployment insurance tax rate is based upon a wage base lower than actual wages and includes an experience rating adjustment based on actual unemployment experience. Discuss 2 criticisms of the use of experience rating in determining an individual employers tax rate:
1) It assumes company has control over the decision to hire or layoff workers, when this is interdependent on the economy
2) Once a company is paying the maximum tax rate, they have no incentive for loss control
According To Weining Personal Insurance (life health retirement), Describe what is covered in Mecicare Part A
Hospital Expenses (inpatient expenses)
Skilled Nursing Home Care
Hospice Care
Blood Transfusions
Home Healthcare Services
According To Weining Personal Insurance (life health retirement), Describe what is covered in Mecicare Part B
Physician Fees
Medical Supplies and equipment
Clinical Laboratory Services
Outpatient services
According To Weining Personal Insurance (life health retirement), Describe what is Medicaid
Government program for low income groups (inpatient and outpatient services) must prove that income is low enough to qualify
According to Jenkins National Flood insurance Program, what is FEMA’s role in the NFIP?
Assisting state and local governments, private entities and individuals:
1-prepare for
2 -Mitigate
3 -Respond to
4 –Recover from natural disasters including flooding
According to Jenkins National Flood insurance Program, what are two things FEMA has done to mitigate flood losses?
1- Identifies and maps flood-prone communities and makes insurance available to property owners who agree to adopt and enforce building standards
2- Provides funding for mitigation planning and projects before and after floods occur through grant programs
According to Jenkins National Flood insurance Program, What 3 things did the federal government ask FEMA to investigate
1- Effect of Repetitive loss properties on NFIP
2- Recent actions taken to address repetitive loss properties
3- FEMA’s approach to mitigation
According to Jenkins National Flood insurance Program, List 3 recent federal actions to reduce claims from repetitive loss properties:
1 – FEMA’s targeting of the most frequent and costly repetitive loss properties for mitigation
2 – FEMA charging full actuarially baswed rates for repetitive loss property owners who refuse to accept FEMA’s offer to purchase or mitigate the affected buildings
3- congressional proposals to phase out coverage
According to Jenkins National Flood insurance Program, Flood maps provide the basis for 2 things, list them:
1 – establishing floodplain building standards for participating communities
2 – setting insurance rates and identifying those properties whose owners are required to purchase flood insurance
According to CAS study note on Government Insurers, List 5 major reasons for government participation in insurance:
1) Convenience
2) Social Purposes
3) Greater Efficiency
4) Compulsory purchase of insurance
5) Filing insurance needs unmet by private insurance
According to CAS study note on Government Insurers, List 2 types of insurance that are available and affordable because of federal government subsidies:
1) Crop insurance
2) Flood Insurance
According to CAS study note on Government Insurers, List 3 reasons for government to provide compulsory insurance
1 – without insurance, people may not have the means to pay damages from their negligent actions
2- Sometimes there is not a private market for insureds
3 – by operating as a not for profit entity, the cost of government insurance would be lower than if offered by a for profit insurer
According to CAS study note on Government Insurers, List 2 examples of government to provide compulsory insurance
1- Maryland State Auto plan
2- Work Comp State Funds
According to CAS study note on Government Insurers, List 1 argument for State Work Comp Funds as specialists in WC:
State Funds can be expected to offer more intensive levels of rehabilitation and other services
According to CAS study note on Government Insurers, List 1 argument AGAINST State Work Comp Funds as specialists in WC:
Some private insurers who specialize in WC, can offer the same level of service and expertise as state funds
According to CAS study note on Government Insurers, after 911 many insurers and reinsurers excluded the terrorism peril, list 3 potential consequences of this exclusion:
1-numerous construction projects would be cancelled or delayed
2-owners of airports and other large stuctures could have difficulty meeting legal or contractual requirements of being fully insured
3-investing activities would be affecting since many securities are backed by assets that would no longer be insured
According to CAS study note on Government Insurers, List 3 reasons why TRIA was passed:
1– Fulfills need unmet by private insurers
2 – serves a social purpose
3 - to avoid economic disruptions if terrorism coverage was not available or affordable
According to CAS study note on Government Insurers, List 4 concerns of insurers with regards to TRIA
1- timing of payment of claims and reimbursement could cause cash flow problems
2 – domestic terrorism events are not covered by TRIA (OK city)
3- Personal lines are not covered, nor nuclear, chemical or radiation
4 – the low % of commercial policyholders who opt for purchasing terrorism coverage may also imply a lack of public acceptance
According to Nyce Government Insurers, Government insurance programs can be lumped into 3 large categories, list them:
1- Property-casualty insurance plans
2 – social insurance plans
3 – financial security plans
According to Nyce Government Insurers, What are the primary objectives of private insurance:
Private insurance seeks to provide actuarial equity
According to Nyce Government Insurers, What are the primary objectives of PUBLIC insurance:
Public Insurance Programs typically seek to provide social equity
According to Nyce Government Insurers, List 3 levels of involvement at which the government can participate:
1 – Exclusive insurer
2 – Partner with private insurer
3 – competitor to private insurer
According to Nyce Government Insurers, Describe the purpose of a FAIR plan (fair access to insurance requirements)
Make property insurance available to property owners who are otherwise unable to obtain insurance because of their property’s location or other reason
According to Nyce Government Insurers, how do private insurers participate in FAIR plans?
Varies by state, but it is an insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties. It is a market of last resort.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, List 3 constraints of Michigans Essential Insurance Act:
1- Limited number of rating territories to 20
2- Limited the range of base rates between territories (lowest territory couldn’t be less than 45% of highest)
3- For adjacent territories rates couldn’t vary more than 10%
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, did Michigans Essential Insurance Act constraints subsidize Detroit rates and coverage availability?
Rates were subsidized
Did not enhance availability as residual market grew because insurers withdrew agents in Detroit or otherwise curtailed writing in Detroit.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, what were the 2 major purposes of Michigans Essential Insurance Act from the legislators point of view?
1 - Increase availability ion urban areas
2- improve affordability in urban areas
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, What is community rating done by Blue Cross?
Eliminates rating factors of age, sex, occupation, income or past claims experience and instead charges the same premium to all customers in a community.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, List 6 characteristics of most Blue Cross prepaid hospital expense plans
1 – sponsored by a hospital or group in the community
2 – Not for Profit with special tax exemptions
3 – offers community rating
4 – Limited choice of benefit options
5 – direct writer distribution
6 – Low administrative expenses due to size, distribution method and limited plan choice
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, List 2 justifications for socialization of insurance costs
1 – Fairness Sharing insurance costs is fairer than basing costs on individuals risk characteristics
2 – Affordability – Premiums should be affordable for everyone when the government compels everyone to by insurance
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, Describe how residual markets creat cross-subsidization:
If the rates charged in residual markets are less than the costs to cover losses and expenses, the loss is passed on to the insurer of the standard market who then build it into their costs and eventually pass it on to the standard market premiums and essentially pass on the subsidy.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, Describe 2 adverse consequences of the cross subsidies created by the residual market:
1- insurers may write less direct business to avoid funding larger portion of residual market
2- It creates a moral hazard since those in the residual market aren’t really paying a premium that reflects their risk level.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, Describe how governments can alleviate the adverse consequences of cross subsidization caused by residual market?
1 – they could allow for an actuarially sound pricing and better fund their costs so that the losses aren’t passed on to standard market.
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, Why has community rating plans like Blue Cross not held up in the voluntary market?
Low risk insureds migrate out of these plans to find cheaper insurance
According to Bartlett, Attempts to socialize Insurance costs in voluntary markets, List 4 exit barriers to an insurer trying to exit a competitive market when the government imposes cross subsidization.
1 – Regulators will require prior notice to policyholders if they plan to withdraw
2 – Companies will loose cross-sell opportunites
3 – companies will loose the sunk costs they have doing business in that state
4 – Regulators may make the company withdraw completely from state and not just that 1 product.
According to Ettlinger Solvency State Regulation, what are 4 factors that most frequently contribute to insolvencies?
1 Rapid Growth
2 Uncollectible Reinsurance
3 Inadequate Pricing and Reserving
4 Out of Line Expenses
According to Ettlinger Solvency State Regulation, Define Solvency, Insolvency and Technical Incsolvency according to an insurer:
Solvency – ability to meet financial obligations
Insolvency – Liabilities exceed assets
Technical Insolvency – insurer doesn’t hold minimum capital even if assets are greater than liabilities
According to Ettlinger Solvency State Regulation, List 3 types of risk unique to insurance industry:
1 – Price inadequacy (true costs are not know when policy is sold)
2 – Reserve error
3 – Underwriting risk
According to Ettlinger Solvency State Regulation, List 3 types of risk that are common in most industries
1 – Business Risk (maintain competitiveness and growth)
2 – Market Risk – related to macroeconomic factors
3 – Financial risk – firms ability to cover debt obligations
According to Ettlinger Solvency State Regulation, List 4 categories of regulatory activity directed toward maintaining insurer solvency
1 Maintaining UNIFORM systeme of FINANCIAL reporting
2 MONITORING insurer SOLVENCY
3 Monitoring CAPITAL ADEQUACY through RBC
4 Accreditation of State Insurance Departments
According to Ettlinger Solvency State Regulation, Describe FAST Ratios
These consist of several IRIS ratios designed to measure relationships not captured directly by IRIS ratios
Provide a total Score based on number of points assigned for each ratio
High score indicates high risk of insolvency
According to Ettlinger Solvency State Regulation, Describe the 2 types of NAIC financial exams that are currently performed
Full scope Exam usually required every 3-5 yrs
Limited Scope Exam – unusual scheduled in between full scope exams
According to Ettlinger Solvency State Regulation, List 4 causes that prompt a limited scope exam:
1 - Unusual values identified in IRIS ratios
2 – Internal Department analysis of Annual statements
3 – Request from another Insurance Department
4 – Unusual complaint volume
According to Ettlinger Solvency State Regulation, Describe how determining the solvency of an insurance company is different from determining bankruptcy for a non-insurance firm.
Non-Insurance company is bankrupt when liabilities exceed assets.
An insurance company is considered technically insolvent when its surplus falls below a minimum capital level, although its assets still exceed its liabilities
According to Ettlinger Solvency State Regulation, Describe the disposition of an insolvent insurer.
Regulator obtains court order to take over company
- Companies finances are stabilized through marshalling of assetts and run-off liabilities
- Assets are disposed of and company is liquidated
-Losses are paid by guaranty Association
According to Ettlinger Solvency State Regulation, what is the basic issue behind calls to reform the current way of dealing with insurer insolvencies?
COMPLEXITY OF MULTI-STATE liquidations (how to coordinate over 50 states)
According to Ettlinger Solvency State Regulation, List 2 ways to deal with COMPLEXITY OF MULTI-STATE liquidations.
1 – Interstate Compacts – binding agreements between states that subordinate states laws
2 – Federalization – establish a federally run receivership/guaranty fund for large multistate companies
According to Ettlinger Solvency State Regulation, Describe how a “large net worth deductible” applies in guaranty fund coverage
For large companies some states require that they meet a claim deductible of up to 10% of their net worth before they can collect from guaranty fund
According to Ettlinger Solvency State Regulation, What is the purpose of the “large net worth deductible”
To reduce coverage in paying sophisticated corporate insureds
According to Ettlinger Solvency State Regulation, What takes priority in a liquidation proceeding paying losses or covering expenses of administering the liquidation?
-Expenses associated with administering the liquidation
According to Ettlinger Solvency State Regulation, Do guarantee funds provide coverage for reinsurance or unlicensed insurers?
Neither!
According to Ettlinger Solvency State Regulation, List 2 reasons why regulators are often unsuccessful in rehabilitating troubled insurers:
1 – Regulatory control WEAKENS insurer ABILITY to MAINTAIN a MARKET for its products
2 – Continued deterioration of company’s finances rapidly leads to liquidation
According to Ettlinger Solvency State Regulation, List once assetts are liquidated, list who gets paid first and in what order:
1- costs of administering liquidation
2- partial payments of debts to employers for services rendered within 1 year of liquidation
3- claims for policy losses
4- claims for unearned premiums
5-claims for general creditors
According to Ettlinger Solvency State Regulation, What effect do the existence of guaranty funds have on consumer behavior?
Removes incentive to shop the market for a financially sound insurer
According to Ettlinger Solvency State Regulation, List 2 adverse impacts to insurers that guaranty funds have
1- assessments
2 – competition is distorted because insurers can underwrite irresponsibly to obtain greater market share
According to Ettlinger Solvency State Regulation, do Guaranty funds have a role in preventing insolvency or are they just getting involved after the insolvency occurs?
They have a role in preventing…The Fund board can make recommendations on solvency protection and participate in the correction of a hazardous member company.
According to Ettlinger Solvency State Regulation, List 4 actions a regulator might require of an insurer to prevent insolvency of a troubled insurer:
1 – Raise more capital
2 – Cease writing certain LOBs
3 – Reduce Dividends
4 – Improve reinsurance coverage
According to Ettlinger Solvency State Regulation, Identify 3 consequences to Insurance CONSUMERS that result from insurer solvency:
1 – claims may not be fully paid
2 – Delayed settlement
3 – Insurance costs will go up due to pass on of guarantee fund assessments
According to IASA Other Expenses, List 4 purposes that management keeps a more detailed classification for management expenses.
1) business plan and budget preparation
2) evaluating plans and results in terms of how resources are used and expenses generated
3) determining prices for various products
4) justifying prices to consumers and regulators
According to IASA Other Expenses, list the 3 categories of expenses that SSAP 70 established
1) Loss adjustment Expenses
2) Other Underwriting Expenses
3) Investment Expenses
According to IASA Taxes, Can tax basis discounted reserves exceed annual statement discounted reserves?
NO!
According to IASA Taxes, Can Annual Statement discounted reserves be grossed up before discounting for tax purposes?
Yes as long as the discounting basis is disclosed in the Annual statement.
According to IASA Taxes, List 4 adjustments to statutory income that must be made to determine taxable income.
1) Subtract tax exempt income (bond interest on municipal bonds)
2) Add proration on tax exempt income
3) Adjust for change in discounting of loss reserves
4) Dividend Received Deduction (DRD)
According to IASA Taxes, Define retaliatory premium taxes.
If the aggregate of taxes (and other obligations) imposed by state of domicile is greater than the aggregate of taxes (and other obligations) of taxing state, Then the greater amount is imposed by the taxing state.
According to IASA Taxes, Define reciprocal premium taxes.
If the aggregate of taxes (and other obligations) imposed by state of domicile is less than the aggregate of taxes (and other obligations) of taxing state, Then the lesser amount is imposed by the taxing state.
According to IASA Taxes, List 4 state taxes that are specific to the insurance industry:
1) Gross Premium Tax
2) Fire Prevention Tax
3) Licensing and Filing fees
4) Underwriting profits tax on Marine coverage (some states tax ocean marine)
According to IASA SEC reporting, Annual reports must contain 3 following 3 types of Information:
selected financial data from the past 5 years on factors including revenues,
income, and assets
According to IASA SEC reporting, does the SEC allow reserve discounting?
the SEC will allow discounting of the liabilities at the same rate the company uses
to report to the state regulatory authorities with respect to the same liabilities
a change from discounting at a statutory discount rate to an investment related
According to IASA SEC reporting, List the 5 disclosures required by the SEC when it comes to estimating environmental, products and asbestos liabilities:
the existence of exposure
According to Gorvett Data Sources, What are AM Bests’ 3 categories of QUANTITATIVE Tests that factor into Best’s Rating?
1) Profitability tests
2) Leverage Tests
3) Liquidity Tests
According to Gorvett Data Sources, What are AM Bests’ 5 categories of QUALITATIVE Tests that factor into Best’s Rating?
1) Spread of Risk
2) Reserve adequacy
3) INVESTMENTS - Quality and estimated Market Value of assetts
4) Reinsurance adequacy and soundness
5) Management
According to Gorvett Data Sources, What is a data source for detailed information on an insurer’s long term investments?
Annual Statement – Schedule D
According to Gorvett Data Sources, What is a data source for detailed information on the value of an insurer’s subsidiaries?
Annual Statement – Schedule D
According to Gorvett Data Sources, What is a data source for historical aggregate financials for P&C industry?
AM Bests Aggregates and Averages
According to Gorvett Data Sources, What is a data source for summary reports on individual insurers and groups, including a review and description of the company’s business and operations and a summary of recent financial performance?
AM Bests “INSURANCE REPORTS”
According to Gorvett Data Sources, What is AM Bests FPR rating and how is it different from the “AM Best Rating”
FPR Rating, or Financial Performance Rating is only based quantitative analysis, whereas AM Bests rating is based on both Quantitative and Qualitative evaluations.
According to Gorvett Data Sources, list 3 organizations that give insurer ratings
1) Moody’s
2) Standard and Poor’s
3) AM Best
According to AM Bests annual review of Excess and surplus lines, Define Alien insurer:
An insurer domiciled outside of the US
According to AM Bests annual review of Excess and surplus lines, Define Foreign insurer:
A Foreign insurer is an insurer domiciled in a US state, but not the state in question
According to AM Bests annual review of Excess and surplus lines, compare and contrast the different regulatory standards for foreign surplus lines carriers and alien surplus lines carriers:
Foreign surplus lines insurers need to have certain capitalization requirements as well as certain standards in agent/broker training. Alien insurers have similar requirements but have additional requirements (must hold $2.5 million in US trust fund by FDIC insured bank, and more if they cannot differentiate their surplus business from standard market business)
According to AM Bests annual review of Excess and surplus lines, in 1994 the NAIC passed a bill that made greater capital requirements for Alien surplus lines carriers. Explain the primary reason behind this increase:
Alien insurers are not subject to guaranty funds protection in the event they become insolvent. Thus they need a higher capital requirement.
According to AM Bests annual review of Excess and surplus lines, list 4 leading causes of insolvencies amongst E&S carriers.
1) Inadequate Loss Reserves (most common)
2) Alleged Fraud
3) Overstated Assett Valuations
4) Failure of affiliates (most strong E&S carriers are members of well diversified insurance organizations) When the affiliates fail, the E&S insurer has no recourse to guaranty fund mechanisms.
According to AM Bests annual review of Excess and surplus lines, T/F: To write business an ALIEN Excess and Surplus lines carrier must be approved by NAIC
False, it is the role of the International Insurers Department IID of the NAIC.
According to AM Bests annual review of Excess and surplus lines, what is the Role of the International Insurers Department IID of the NAIC with regards to Alien surplus lines insurers.
1) Review the applications of the alien insurers wishing to conduct E&E business in the US
2) Establish Capitalization and other requirements to be imposed upon the alien insurers
According to AM Bests annual review of Excess and surplus lines, AM best attributes the favorable financial strength ratings for surplus lines carriers to 4 factors. List them
1) Due to lack of Guaranty Fund access, the Market demands higher level of capital
2) Use of More Conservative Operating Leverage
3) Disciplined UW standards and Strong Risk Management techniques
4) Being strategic members of Large well diversified organizations
According to AM Bests annual review of Excess and surplus lines, The Gramm-Leach-Bliley Act proposed uniform licensing requirements of agents across states. The NAIC does not have that.
FUCK YOUR MOMMA
According to Wilcox Guaranty Associations, what are the three Principles of Guaranty Funds?
1) Risk Protection
2) Sufficiency of Payments (liquidations result in insufficient funds)
3) Speed of Resolution – liquidating companies can take many years
According to Wilcox Guaranty Associations, List 4 limits on claim payouts by Guaranty Funds.
1) $ 300K maximum payout per claimant (99.9% of claims are below $300K) this way a few large claims won’t exhaust all the $$$
2) Net Worth Restriction – after payout, guaranty fund has option to recover those losses paid to companies with a net worth over $50 million
3) Lines of business not covered (title insurance, warranties/service contracts, ocean marine, government insurance, fidelity, surety, financial guaranty)
4) Claims of other insurance companies and reinsurers (because they know or can reasonably expect the financial condition of various companies)
According to Wilcox Guaranty Associations, Provide 2 arguments that say that the 25 year period that was studied by Wilcox was a “sound test” when compared with other generations.
1) Everyone of the 13 costliest catastrophes occurred int his period
2) The P&C industry experienced 6 monster liquidations during this period, involving the highest losses in association history
According to Wilcox Guaranty Associations, Describe 2 actions a guaranty fund board is authorized to perform that could help prevent insolvencies:
1) Can Make recommendations to a state regulator about actions needed to be taken to prevent insolvencies
2) Can actively participate in the correction activities for companies experiencing financial difficulties
According to Wilcox Guaranty Associations, Describe 2 disadvantages of Guaranty Funds from the perspective of a strong insurer
1) Added costs (solvent insurers are directly assessed for paying for guaranty fund)
2) Consumers Lack incentive to shop around for a financially sound insurance companies. Weak companies may aggressively market their products, attract insureds, since the existence of a guaranty fund.
According to IEE, List the 3 parts of the IEE.
-Part 1: Allocation to Expense Groups
-Part 2: Allocation to Lines of Business net of reinsurance
-Part 3: Allocation to Lines of Direct Business Written
According to AAA Social Security Reform, List 3 sources of Revenue for Social Security.
1) Payroll tax of 12.4% is split between employer and employees
2) Investment income from trust funds
3) taxation of social security benefits
According to AAA Social Security Reform, The current SS tries to balance 2 forms of equity, list them:
1) Individual Equity (for example formula provides higher benefits for workers with higher earnings and longer careers)
2) Social Equity
According to AAA Social Security Reform, list 3 examples of social equity in the SS formula:
1) lower wage workers’ benefits are a higher percentage of their pre-retirement income
2) formula for Primary insurance amount favors lower paid employees
3) System favors less healthy workers and workers with spouses and dependents
According to AAA Social Security Reform, List the two types of changes that the AAA suggests could fix the problem of impending insolvency of SS.
1) Increase taxes to generate more revenues
2) Reducing Benefits
According to AAA Social Security Reform, List 4 examples of tax increases that could be used to better fund SS:
1) Increase payroll tax
2) Increase limit on taxable earnings
3) Increase taxation of benefits
4) Expand coverage to groups like gov employees and religious organizations
According to AAA Social Security Reform, List 4 benefit changes that could help prevent SS insolvency.
1) Increase retirement age
2) Reduce benefits across the board
3) Change the benefit formula
4) Reduce Cost of Living adjustment
According to AAA Social Security Reform, Some people want to have individual manage their own SS individual account. List 3 arguments FOR this:
1) Workers have DIRECT CONTROL and ownership of accounts
2) Workers would be able to obtain better return on their SS contributions
3) Additional Investment would give economy a boost
According to AAA Social Security Reform, Some people want to have individual manage their own SS individual account. List 3 arguments AGAINST this:
1) Inability of most workers to take total control of their individual retirement planning
2) Greater uncertainty of benefits tied to performance of securities market
3) Shift in emphasis from social adequacy to individual equity
According to AAA Social Security Reform, The AAA made recommendations and gave options to reform SS in order to prevent insolvency, when do they suggest that these actions take place?
Right Fucking NOW!!!!!!!!!!!
According to AAA Social Security Reform, The AAA says it is necessary to ACT NOW, give two consequences of not acting RIGHT FUCKING NOW.
1) Can lead to inequities (intended or not) in the DISTRIBUTION of Benefit REDUCTIONS
2) Doesn’t give current beneficiaries a chance to plan for decreased benefits, and could lead to dissatisfaction in system.
According to CPCU Flood Insurance and Katrina, the NFIP had been considered successful by many until 1 event exposed major flaws, what event was that?
Hurricane Katrina exposed financial and operation flaws of the NFIP
According to CPCU Flood Insurance and Katrina, the national Flood Insurance act of 1968 established NFIP with 2 goals in mind, list them.
1) Reduce Flood damage through community Flood plain management
2) Reduce need for Federal Disaster Relief
According to CPCU Flood Insurance and Katrina, List the 3 goals of NFIP,
1) Provide Flood insurance to property owners
2) Reduce the cost of disaster relief funded by the taxpayer
3) Reduce flood damage through flood plain management and enforcement of building codes
According to CPCU Flood Insurance and Katrina, List 3 problems Katrina caused the P&C Industry.
1) Serious financial problems for NFIP
2) Huge backlog of claims
3) Thousands of lawsuits against insurers threatening their financial health
According to CPCU Flood Insurance and Katrina, List 4 likely effects that the problems from Katrina will lead to:
1) Significant tax increase to general public
2) Increase in P&C premiums
3) Lack of affordability and availability
4) Major changes to NFIP and FEMA
According to CPCU Flood Insurance and Katrina, List 3 problems with the NFIP that Katrina exposed:
1) Financial Problems (premium shortfall and repetitive loss properties)
2) Lack of participation (not enough people purchase or didn’t carry enough coverage)
3) Operational Problems
According to CPCU Flood Insurance and Katrina, List 3 OPERATIONAL problems with the NFIP that Katrina exposed:
1) Claims processing
2) Encouragement of development in High Risk areas (subsidization, failure to require coverage behind levees,
3) Flood Plain management NOT ROBUST ENOUGH
According to CPCU Flood Insurance and Katrina, one solution proposed is the national catastrophe plan describe it:
Multi-layered coverage that mixes private insurer, state Cat Funds and National Cat fund layers. Designed to encourage risk mitigation, be affordable and spread risk.
According to Jenkins, there are both direct and indirect costs related to flood damage, list 3 Direct Flood Damage costs.
1) Flood Fighting
2) Temporary housing
3) Administrative assistance
According to Jenkins, there are both direct and indirect costs related to flood damage, list 6 Indirect Flood Damage costs.
1) Loss of business and personal income
2) reduction in property values
3) increased insurance costs
4) loss of tax revenue
5) psychological trauma
6) Ecosystem disturbance
According to Jenkins, List 3 things about the map modernization program
1) Intended to improve accuracy
2) Digital format (easily accessible)
3) Provide basis for assessing impacts of other hazards (ie I fthere was a toxic spill, maps could be used to estimate contaminated areas)
According to AAA materiality, Define what it means to be Material.
An item is defined as being material if it has an impact on the user’s decision/conclusion. When determining if something is material, it is necessary to study its purpose and its users.
According to AAA materiality, should an actuary select a different materiality standard when he feels like it?
Fuck no! An actuary should select a constant standard for all aspects of a given task, once it is selected it should remain constant over the years.
According to AAA materiality, should an actuary select a different materiality standard from accountants and auditors?
Fuck no! Ideally they are the same standard. If there are differences, the reasons behind these need to be clearly communicated to the audience.
According to SSAP 53 Contract Premiums, Is EBUB (earned but unbilled) or audit premium considered admitted or non-admitted according to Statutory accounting.
EBUB is admitted except for 10% of EBUB in excess of collateral is non-admitted.
According to SSAP 62 Reinsurance, in order for a company to meet the required TERMS of a reinsurance contract 4 conditions must be met:
Must contain insolvency clause
2) Recoveries available without delay
3) No guaranty of profit for either party
4) Must require a minimum of QUARTERLY reporting of premium and losses.
According to SSAP 62 Reinsurance, Insurance risk involves uncertainty about 2 things, list them:
1) Underwriting Risk – ultimate amounts unknown
2) Timing Risk
According to SSAP 62 Reinsurance, How is Retroactive Reinsurance accounted for in STAT accounting:
1) Loss reserves are Gross and recoverables are a contra-liability
2) Any surplus gain is put into a special surplus category and cannot be put into unassigned funds until actual recoveries exceed payments.
According to SSAP 62 Reinsurance, From the Assuming company’s perspective in a retroactive reinsurance agreement, how does the accounting work
1) excluded from existing reserves, Instead it is recorded ina separate write in liability
2) The intial loss is recorded as a write-in item, “Retroactive Reinsurance Loss” under other income section
According to SSAP 62 Reinsurance, The ceding commission is designed to cover acquisition costs, how is the accounting done if the expected acquisition costs are greater than the ceding commission?
Establish a liability equal to the difference and the liability is amortizedover the effective period.
According to SSAP 62 Reinsurance, list 4 examples of situations with reinsurance recoverables that would require a disclosure.
) any reinsurer that has unsecured aggregate recoverable over 3% of ceding companies PHS
2) any reinsurer that has IN DISPUTE recoverables of 5% of PHS, or 10% in aggregate for all reinsurers
3) If recoverables were written off during the year, then disclose name of reinsurer and loss, LAE and EP
4) IF there was a commutation, then name of reinsurer, loss, LAE, EP
According to Feldblum Notes on the Financial Statement, when you have a deductible (receivable) on a high deductible policy is that an admitted asset or non-admitted?
-If part of the receivable is 90 days overdue, the entire receivable is NON-Admitted
-For receivables not yet due, 10% of the unsecured receivable is non-admitted
According to Feldblum Notes on the Financial Statement, in the :Reinsurance Assumed and Ceded” Note, what do you disclose about the ceding commission?
1) max commission due to reinsurer if contract is cancelled
2) additional commission due based on actual loss experience
3) An exhibit showing commission equity and UEPR on a ceded, assumed and net basis
According to Feldblum Notes on the Financial Statement, in the “Reinsurance Assumed and Ceded” Note, Define Commission Equity:
= UEPR*(Commission Rate)
According to Feldblum Notes on the Financial Statement, in the “Structured Settlements” Note, List 4 reasons for Structured Settlements.
1) Matching payments to Damages
2) Management of Assetts (some people would blow a lump sum up their nose)
3) Minors
4) Taxes (exempt from federal income tax)
According to Feldblum Notes on the Financial Statement, in the “Structured Settlements” If the claimant is the payee, but the insurer has not received a release of liability, it must disclose 3 things:
1) annuity writer
2) state of domicile
3) aggregate value of annuities
According to Feldblum Notes on the Financial Statement, When does a reinsurance recoverable amount in dispute need to be disclosed?
a) when 1 reinsurer amt. in dispute exceeds 5% of PHS
b) When agg. Amts. In dispute exceeds 10% of PHS
According to ASOP 36 Actuarial Statement of Opinion, List 6 things the actuary needs to consider when calculating the reserves:
1) Coverage Provisions
2) Changing conditions
3) External Conditions
4) Data
5) Assumptions and estimate sensitivity to those assumptions
6) Changes in assumptions, procedures and methods
According to ASOP 36 Actuarial Statement of Opinion, sometimes an actuary will have to review another actuary’s opinion. List 2 things the actuary have to review:
1) assess reasonableness of the data
2) evaluate the appropriateness of the reserving methods and assumptions
According to ASOP 36 Actuarial Statement of Opinion, sometimes an actuary will have to review another actuary’s opinion. If his conclusions materially from the original actuaries, what does he need to do?
1) Contact the actuary and discuss
2) Material differences must be disclosed in review opinion
According to Copflr Actuarial Statement of Opinion, List the 4 mandatory paragraphs or sections of the actuarial statement of opinion.
1) Identification Paragraph
2) Scope Paragraph
3) Opinion Paragraph
4) Relevant Comments
According to Copflr Actuarial Statement of Opinion, List the 4 things that should be identified in the identification paragraph
1) the appointed actuary
2) the actuary’s relationship to the company
3) the actuaries qualifications to act as appointed actuary
4) date of appointment
According to Copflr Actuarial Statement of Opinion, List the 5 types of Opinion an actuary can have on the adequacy of reserves:
1) Reasonable Provision (within range)
2) Deficient Provision
3) Redundant provision
4) Qualified opinion (certain items cannot be estimated, unable ot provide opinion)
5) No Opinion (cannot reach conclusion due to data etc… and state why no opinion could be given)
According to Copflr Actuarial Statement of Opinion, List 4 things that the “Relevant Comments” Paragraph should address
1) Risk of Material Adverse deviation (including materiality standards,major factors of risk)
2) Reinsurance comments (collectability, financial reinsurance, retroactive reinsurance)
3) IRIS ratios (if any of the reserving IRIS ratios have exceptional values, need to explain main reasons)
According to Copflr Actuarial Statement of Opinion, when considering material adverse deviation, what are 5 factors that could be used as a materiality standard)
1) % of Surplus
2) % of reserves
3) amount of adverse deviations that would cause a decreased Rating
4) amount of deviation that would cause surplus to fall below minimum capital requirements
5) amount that would cause next RBC action level
According to Copflr Actuarial Statement of Opinion, List 6 major causes of adverse deviations in reserves:
1) A&E losses, 2) construction Defect,
3) mass torts, 4) high excess layers
5) large deductible WC policies, 6) MedMal Legislation
7) rapid growth, 8) lack of data
According to Copflr Actuarial Statement of Opinion, What is the AOS or Actuarial Opinion summary?
It is a supplement to the SOA, and needs to be signed by actuary. It is confidential and contains proprietary info.
According to Copflr Actuarial Statement of Opinion, List 5 things that are included in the AOS or Actuarial Opinion Summary.
1) The actuary’s range of Loss and ALE reserves net and gross of reinsurance
2) the point estimate Loss and ALE reserves (net and gross)
3) Companies’ book Loss and ALE reserves (net and gross)
4) The difference between carried reserves and ABE
5) If there is adverse development in excess of 5% of PHS in at least 3 out of 5 last years, a description of drivers (reserve elements and mgmt. decisions)
According to IRIS Ratios, What are the 4 categories of IRIS tests?
1) Leverage Ratios (1-4)
2) Profitability Ratios (5-8)
3) Liquidity Ratios (9,10)
4) Loss Reserving Ratios (11-13)
According to IRIS Ratios, In the statistical phase IRIS ratios are calculated, how many unusual values will raise a red flag to make the insurer get further analyzed?
4 or more
According to IRIS Ratios, what are the 2 advantages of using IRIS ratios to regulate insurers?
1) objectivity
2) ease of calculation
According to IRIS Ratios, all IRIS ratios come out as percentages, to which decimal place are they rounded?
All ratios rounded to the nearest percent (except for Investment yield rounded to the tenth of a percent)
According to Marshall Neale Mississippi Flood, What are the two purposes of the Marshall Neale article?
1) Examine the state of Mississippi Homeowners Insurance Market
2) Propose a solution to increase the availability and affordability of coverage
According to Marshall Neale Mississippi Flood, Describe the lawsuit Mississippi vs. Mississippi Farm Bureau
1) attorney general wants to force insurance payment including flood and water damages that were specifically excluded on the policy
2) Seeks declaratory judgement that flood exclusions should be void.
According to Marshall Neale Mississippi Flood, What residual Market mechanism is a good index of the availability and affordability of Miss. Homeowners coverage?
Mississippi Windstorm U/W association (after Katrina, they filed for a 400% rate increase and only got 90%) – Windpool experienced a large growth in policies, indicating it is hard to get coverage in primary markets
According to Marshall Neale Mississippi Flood, how does the Mississippi Wind pool fund its deficits?
It charges primary insurance company based on their market share. This combined with the increasing size of windpool might cause carriers to withdraw from MS market.
According to Marshall Neale Mississippi Flood, what did Mississippi Farm buruea due to decrease its market share?
1) discontinued writing new business,
2) Southern Casualty will pick up business but no longer write wind coverage
According to Marshall Neale Mississippi Flood, List 3 drivers of rate increases in coastal homeowners markets.
1) Reinsurance costs are going up
2) Computer modeling and loss experience
3) increasing residual markets
According to Marshall Neale Mississippi Flood, List 5 consequences if the attorney general wins his case.
1) Premiums will increase dramatically to cover ne wperils
2) NFIP participation will decrease
3) Insolvency risk will increase
4) Changes in contract language on the policy
5) State Regulators look like fools and loose their authority
According to Marshall Neale Mississippi Flood, they recommend to include flood coverage in HO policy, list there 3 principal assumptions regarding this recommendation.
1) Actuarially sound rates
2) Flood continued to be reinsured by NFIP
3) Clear guidelines regarding what is flood damage and what is wind damage (feds will reinsure flood damage)
According to Marshall Neale Mississippi Flood, they recommend including flood coverage in HO policy, list the 3 main benefits:
1) Dramatically improve spread of risk for flood peril
2) Provide comprehensive coverage for hurricane events
3) Reduce expensive litigation
According to Hamilton Ferguson No Fault plans, List 5 weaknesses of current No-Fault plans
1) Thresholds for lawsuits are too low
2) No-Fault plans do not go far enough to eliminate right to sue
3) inflation of medical costs eroded effect of monetary thresholds
4) Determining exactly what types of injury are considered severe enough ot allow suit using a verbal threshold
5) More fraudulent claims are filed due to ease of receiving benefits
According to Hamilton Ferguson No Fault plans, list 2 tpyes of thresholds:
1) Monetary (if medical bills exceed threshold)
2) Verbal (right to sue based on seriousness of injury expressed in words
According to Hamilton Ferguson No Fault plans, list 3 weakness of the auto tort system that were used to promote no-fault auto.
1) Delay in payment
2) high litigation costs
3) lack of equity amongst injured parties
According to Felblum IRS tax reserve discounting, what is the formula for incurred loss in tax accounting
=Paid loss + change in DICOUNTED Reserves
According to Felblum IRS tax reserve discounting, Stat and TAX accounting differ on the treatment of investment income and loss reserves after the year of loss occurrence, describe.
Tax- investment income on assetts backing reserves offset amortization of the interest discount of reserves
Stat –company earns positive investment income (no change in reserves to offset this)
According to Felblum IRS tax reserve discounting, Does the interest rate vary by Accident Year?
Yes, once it is determined it is vintaged
According to Felblum IRS tax reserve discounting, How do you determine the interest rate for an accident year
60 month average of the federal mod-term rates for (3-9 years remaining) ending Dec 1st of the prior accident year.
According to Felblum IRS tax reserve discounting, in order to determine the payment pattern, which exhibit of triangles are used?
Schedule P part 1 because it is audited and includes both DCC and AOO.
According to Felblum IRS tax reserve discounting, how are reserves discounting for 2-year LOB’s?
3 year payment pattern
According to Felblum taxable income, List 5 adjustments to Statutory income to arrive at Taxable income:
1) Tax Exempt Income
2) Dividends Received Deduction
3) Proration
4) Revenue offset
5) Reserve Discounting
According to Felblum taxable income, Is tax exempt income completely tax free?
No –PRORATION (15% of tax exempt income is added to regular taxable income)
According to Felblum taxable income, Describe the Dividend Received Deduction (DRD)
Partially exempts the dividends from taxes in order to reduce double taxation (the size depends on if you own the company)
If you own less than 20% - then 70% is tax exempt
If you own 20-80% then 80% is tax exempt
If you own more than 80% then 100% tax exempt
According to Felblum taxable income, Describe the revenue offset in tax accounting
(assumes 20% acquisition costs) removes acquisition costs from UEPR
Earned Premium = WP – 80%*Change in UEPR
According to Felblum taxable income, List 2 sources of tax that are more heavily taxed by the alternative minimum tax than by regular income tax:
1) tax free bonds
2) stockholder dividends
According to Felblum tax strategy, according to tax strategy, who is incented to hold bonds and who is incented to hold stocks?
Insurers incented to hold bonds
Personal investors incented to hold stocks
According to Felblum tax strategy, What are 5 factors an insurer needs to consider when determining what percentage of bonds to hold?
1) yield
2) diversification
3) Asset liability management (reserves and stocks are both inflation sensitive)
4) SAO
5) management dislike of erratic income
According to Felblum tax strategy, Municipal bonds are less taxed then corporate bonds (advantage!) what are 3 disadvantages of municipal bonds?
1) Callability
2) Less liquid
3) Proration provision on tax-free income
According to Felblum tax strategy, When will an insurer have an optimal tax strategy
When RIT = AMIT
According to Felblum taxable income, when should an insurer buy more taxable securities and when should it buy more tax free?
Expecting less UW profit, then buy taxable
Expecting more UW proits, buy tax exempt
According to IRIS ratios, List the 4 Leverage Ratios and their exceptional values
1) GPW/PHS (greater than 900%)
2) NPW/PHS (greater than 300%)
3) Change in Net Writings (greater than 33% or less than -33%)
4) Surplus Aid to PHS (greater than 15%)
According to IRIS ratios, List the 4 Profitability Ratios and their exceptional values
1) 2 YR overall Operating ratio (greater than 100%)
2) Investment yield (greater than 6.5 or less than 3.0%)
3) Gross Change in PHS (greater than 50% or less than -10.0%)
4) Net Change in adjusted PHS (greater than 25% or less than -10.0%)
According to IRIS ratios, List the 2 Liquidity Ratios and their exceptional values
1) Liabilities to liquid assets (greater than 105%)
2) Agent’s balances to PHS (greater than 40%)
According to IRIS ratios, List the 3 Loss Reserving Ratios and their exceptional values
1) 1 Year reserve development to PHS (greater than 20%)
2) 2 Year reserve development to PHS (greater than 20%)
3) Estimated current reserve deficiency to surplus
According to IRIS ratios, What does the analyst need to compare to when analyzing IRIS ratios for a given insurer?
Compare to peer group (AM Best provides summary peer group statistics)
According to Canadian Accounting, What do federal regulators cvoncentrate on and what do provincial regulators concentrate on?
Federal – stability and solvency of insurers
Provinvial – market conduct
According to Canadian Accounting, is accounting for insurers in Canada on a SAP or GAAP basis?
GAAP – but hey have a special portion of the surplus called “Reserves Required” to account for not easily liquid stuff
According to Canadian Accounting, are investments at book value or market value?
BOOK VALE
According to Canadian Accounting, what is the Investment Valuation Reserve?
Investment Valuation Reserve recognizes the difference in book and market value, this reserve is included in the “reserves required”
According to Canadian Accounting, What is Canada’s version of RBC?
Minimum Capital Test
According to Canadian Accounting, List 3 things included in Capital Available for the Minimum Capital Test?
1) Equity (shares, contributed surplus, retained earnings, reserves)
2) Preferred shares
3) amount ot recognize changes in market value
According to Canadian Accounting, List 4 things that must be subtracted from capital available
1) investments in subsidiaries
2) investments in affiliates
3) DPAC
4) Goodwill