Exam 6Us

Front 1

List 3 Criminal indictments brought against the SEUA.

(Porter)

Back 1

1. Continuing agreement and concert of action to take control of 90% of fire market.
2. Fixing premium rates and agents commissions.
3. Using boycott and other forms of coercion and intimidation to force non-SEUA members to comply.
4. Withdrawing rights of agents to represent SEUA members if they also represent non-SEUA companies.
5. Threatening insurance consumers with boycott and loss of patronage if they didn't purchase insurance from SEUA members.

Front 2

Briefly describe the Sherman Act (1890)

(Porter)

Back 2

Prohibits collusion in attempts to gain monopoly power.

Front 3

Briefly describe the Clayton Act (1914)

(Porter)

Back 3

Identified and made illegal practices that lessened competition or created monopoly power.

Front 4

Briefly describe the Robinson-Patman Act (1936)

(Porter)

Back 4

Amendment to Clayton Act; required price differences to be justified by reduced operating costs; sale of products could not be tied together.

Front 5

Briefly describe the Federal Trade Commission (FTC) Act (1914)

(Porter)

Back 5

Identified and made illegal unfair methods of competition and unfair or deceptive trade practices

Front 6

State regulators and insurance industry believed some forms of cooperation necessary, especially establishing statistical base for adequate rates. This led to what recommendations by the Subcommittee of Federal Legislation?

(Porter)

Back 6

-Congress must be pressured to enact legislation under Commerce Clause which allowed states to continue to regulate insurance
-Sherman Act and Clayton Act must be amended to allow cooperative arrangements to establish adequate rates and coverages
-FTC Act and Robinson-Patman Act must be amended to exclude insurance

Front 7

Briefly describe the McCarran-Ferguson Act (1945)

(Porter)

Back 7

-Returned regulation of insurance back to the states because it was in public interest
-Exceptions:
-if states are not regulating the activities
-Sherman Act continues to apply to the use of boycott, coercion, or intimidation
-If Congress passes law that applies only to the insurance industry, it will supersede any state regulation

Front 8

Following the McCarran-Ferguson Act, the NAIC and state legislatures began developing and implementing various insurance laws. Briefly describe what these laws were designed to do.

(Porter)

Back 8

-Allow cooperation in setting rates
-Keep Congress from controlling competition

Front 9

In 1948, the NAIC approved two model rate regulation bills. What were the two main purposes of these bills?

(Porter)

Back 9

1) Ensure rates not excessive, unfairly discriminatory, and were adequate.
2) Allow cooperation in setting rates.

Front 10

Describe what the NAIC model rate regulation bills (proposed 1948) did to allow cooperation in setting rates and to ensure rates were not excessive, unfairly discriminatory, and were adequate.

(Porter)

Back 10

-Required prior approval of rates
-Explained how to file rates
-Described the role of rating organizations
-Recommended anti-rebating provisions.

Front 11

In 1947, THe NAIC dopted the Act Relating to Unfair Methods of Competition with the purpose to preempt application of the FTC Act to insurance industry. List 4 activities deemed to be unfair and deceptive.

(Porter)

Back 11

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. Unfair discrimination
7. Rebating.

Front 12

After McCarran, describe three insurance regulatory actions to help with the concern of insurer insolvencies.

(Porter)

Back 12

1. Guaratny Association Model Act in 1969 - All states currently have guaranty funds
2. 1971 NAIC implemented Early Warning Test Programs (1977 IRIS) - Goal to prevent need for guaranty fund assessments by taking over insurers and returning them to active operation or merging them with other going concerns
3. 1989 NAIC adopted accreditaion program - Create similar financial solvency regulation standards in all states.

Front 13

After McCarran, briefly describe three ways regulators have addressed unavailable or unaffordable insurance coverages.

(Porter)

Back 13

1) To address availability, majority of states have formed FAIR plans - Insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties
2) Another way to address availability is with laws governing captive insurance organizations - insurers that insureds own and control
3) Buyers guides explaining standard policies and option can also help consumers find available and affordable choices.
4) 1968 National Flood Insurance Act addressed affordability
5) 2002 TRIA provided transparent system of shared public and private compensation for insured losses resulting from terrorist acts.
6) 1981 Risk Retention Act to address affordability of commercial insurance.

Front 14

Describe common characteristics of surplus lines laws

(Porter)

Back 14

1) Permit only specially licensed producers to place surplus lines business
2) Licensee must make placement with unauthorized/nonadmitted insurers that meet specified financial and managerial requirements
3) Before placement can occur, risk must be declined by admitted market through a dilligent search of states' admitted insurance market

Front 15

State laws and regulations can be void under the U.S. Constitution under certain circumstances. Name two.

(Porter)

Back 15

1) When state law contradicts federal law
2) When the courts determine that a state law interferes with the purpose or results of a federal law although the state law does not expressly contradict the federal law.
3. When a state law imposes an improper burden on interstate commerce, even though a federal law does not exist.

Front 16

States are given primary regulatory control over the businss of insurance with certain exceptions. State two.

(Porter)

Back 16

1) The Sherman Act prohibits boycott, coercion, and intimidation.
2) Federal antitrust laws apply to the extent that state laws do not regulate such activities.
3) Federal laws enacted specifically to regulate business of insurance preempt any state laws that apply to the same activities addressed by federal laws.

Front 17

The Business of Insurance is currently defined as any activity that has one or more of three characteristics. List two of these.

(Porter)

Back 17

1) Risk of the policyholder or insured is shared and underwritten by the insurer.
2) Direct contractual connection between insurer and the insured.
3) Activity is unique to entities within the insurance industry.

Front 18

House Energy and Commerce Committee identified three principal causes of Product Liability insurance price and availability crisis of the 1970s. List two

(Porter)

Back 18

1) Questionable ratemaking and reserving practices of insurers
2) Unsafe Products
3) Uncertainties in the tort and legislation system

Front 19

Describe two examples of federal intervention in the business of insurance.

(Porter)

Back 19

1) Risk Retention Act - Enabled product manufacturers, wholesalers, distributors, and retailers to form their own risk retention groups to spread and assume their products and completed operations exposures. Groups licensed in one state are permitte to operate in any other.
2) National Flood Insurance Act - NFIP established in 1968 as a federal response to a private insurance industry uninsurable risk. Federal Insurance Administration administers NFIP under direction of FEMA.

Front 20

Briefly describe property/casualty insurers participation through Write-Your-Own (WYO) flood insurance program.

(Porter)

Back 20

-Private insurers write flood insurance and allow the federal government to function as a reinsurer in event of a flood loss. FIA still determines rates, limits, eligibility.
-Private insurers can issue flood policies at these rates and keep 30% for admin expenses.

Front 21

Briefly describe a contract of adhesion.

(Porter)

Back 21

Contract drawn up by only one party, the insurer. Ambiguous language will be interpreted in favor of the insured.

Front 22

Briefly describe the doctrine of reasonable expectations.

(Porter)

Back 22

Insureds reasonable expectation of coverage will be honored even if that involves reading the policy provisions in ways not intended by the insurer.

Front 23

List 4 services provided by insurance advisory organizations

(Porter)

Back 23

1) Filing rates or prospective loss costs and forms
2) Develop rating systems
3) Collect and tabulate statistics
4) Research topics important to members and the industry
5) Provide a forum for discussion of issues important to members.
6) Educate members, the industry, insurance regulators, and the public about particular issues.
7) Monitor regulatory issues of concern to members.

Front 24

Consumer groups can have a strong influence on State Legislators. Consumer complains have led to major legislation in insurance. Give three examples.

(Porter)

Back 24

1) Redlining prohibitions
2) Unfair claims practices laws
3) Unfair trade practices laws
4) Compulsory insurance laws
5) High-risk driver pools
6) FAIR plans
7) Windstorm and other catastrophe pools
8) Tort Reform

Front 25

Law requires commissioners to submit an annual report to legislature which summarizes activities of department and status of insurance industry in state. State four requirements of this report.

(Porter)

Back 25

1) Statement of income and expenses of the insurance department
2) Exhibit summarizing the financial status and business transactions of licensed insurers in state
3) Listing of insurers closed for that business year
4) Names of insurance companies in receivership or other official financial difficulty with a brief explanation of status.
5) Recommendations by insurance commissioner about insurance laws and the department operations

Front 26

The insurance environment is affected by the passage by a state legislature of laws other than for insurance. Briefly describe 3 examples.

(Porter)

Back 26

1) Banking - See Gramm-Leach-Bliley Act (1999)
2) Contracts - in exchange for consideration (premium) by one party (insured), the other party (insurer) agrees to a performance (loss payment or claims adjustment)
3) Premiums - financing of premiums installments, laws about financial services are necessary to ensure transaction is fair and equitable

Front 27

The insurance environment is affected by the passage by a state legislature of laws other than for insurance. Briefly describe 3 examples. (Card 2)

(Porter)

Back 27

1) Fraud - is against the law in every state; increasingly state insurance departments are establishing fraud units; claims fraud, director and officer fraud, and agency fraud
2) Investments - Large amounts of funds are required to be on reserve; insurers use investment income to offset u/w loss
3) Lobbying - lobbying is an attempt to influence any decision related to any matter being considered.

Front 28

State 3 NAIC fundamental insurance regulatory objectives

(Porter)

Back 28

1) Promotion of the public interest through regulation of insurance and the fair, just, and equitable treatment of insurance consumers and customers
2) Reliability of insurance institutions as to solvency, financial solidity, and guaranty against loss
3) Maintenance of improvement of state regulation of insurance.

Front 29

State three reasons some model laws are changed or never adopted by states

(Porter)

Back 29

1) State may view as inappropriate or unnecessary due to coverage in other state laws
2) Legislators might decide to modify a model law to meet their states particular needs or better match other laws
3) Legislature considers many matters and may see NAIC model law as just another agenda item

Front 30

State the three criteria an insurer must meet to satisfy the NAIC's financial regulation standards and to be accredited.

(Porter)

Back 30

1) Laws and regulations used by the state must meet certain basic standards of NAIC model
2) Regulatory methods of the state must be acceptable
3) Department practices must be adequate

Front 31

The Support and Services Office of the NAIC includes a research division. State four main activities that are performed by the research division.

(Porter)

Back 31

1) Giving information to state insurance departments
2) Helping staffs of insurance departments with technical and regulatory questions
3) Giving information to federal and state government agencies and others
4) Helping to develop the NAIC financial and statistical databases.
5) Providing pertinent statistical material and research studies
6) Giving other NAIC departments support through research

Front 32

Describe two aspects of statistical work done by the NAIC research division

(Porter)

Back 32

1) Quality Monitoring - checks completeness and correctness of financial data, works with state insurance departments regarding monitoring of insurer filings and data quality

2) Routine reporting - premiums, losses, loss ratio, average premiums; assets, surpluses, profits, insolvencies; real estate holdings
3) special reporting - in response to non-routine requests, examples include market share reports, guaranty fund assessment, product liability, market entries and exits
4) Model statistics reporting plans for major lines - will improve precision of ratemaking and help track insurance markets on multistate basis

Front 33

State three arguments for Elected Commissioners

(Porter)

Back 33

1) Appointed insurance commissioner subject to dismissal for cause which could make term uncertain.
2) Appointed might continue regulating in the same manner as predecessor when a different approach is required
3) Appointed might or might not be as aware of public's concerns
4) Appointed might feel inclined to yield to the interests of those responsible for the appointment

Front 34

State three arguments for Appointed Commissioners

(Porter)

Back 34

1) No need to campaign or raise funds for a campaign, so not unduly influenced by particular group.
2) Experienced and knowledgeable person can be designated wheras an elected might not be knowledgeable about insurance
3) Less likely to be swayed by public opinion which may have an adverse effect on insurance regulation
4) More likely to be perceived as a career state government employee interested in insurance regulation whereas an elected may be seen as a politician.

Front 35

Identify four typical duties of the Insurance commissioner

(Porter)

Back 35

1) Overseeing operation of state insurance department
2) Promulgating orders, rules, and regulations necessary for administration of insurance laws
3) Determining whether to issue business licenses to new insurance companies, agents, and brokers, and other insurance entities.
4) Reviewing insurance pricing and coverage
5) Handling financial and market conduct exams of insurers
6) Holding hearings on insurance issues
7) Taking action when violations of insurance laws occur
8) Issuing annual report on status of states insurance industry and department
9) Maintaining records of insurance department activities

Front 36

List three contributing factors to a commissioner's regulatory philosopy

(Porter)

Back 36

1) The law
2) Whether appointed or elected
3) Pattern of insurance regulation in state
4) State's business climate
5) Relationship of insurance commissioner with state governor and legislature and with the public

Front 37

Give three examples of a commissioner's regulatory style

(Porter)

Back 37

1) Issue a few or many orders
2) holds press conferences
3) Meet with state and federal legislatures
4) Lobby behind the scenes
5) Decide how state's insurance department is to regulate.

Front 38

Give two examples of politically inspired insurance laws

(Porter)

Back 38

1) Reporting of business written by zip, amount of money spent on advertising, number of agents by specified characteristics
2) HO pricing not have a minimum standard for AOI
3) Certain driver characteristics cannot be considered in rating

Front 39

Give two examples of how the commissioner influences insurance department operations or regulation

(Porter)

Back 39

1) Commissioner who addresses needs, interests, and attitudes of those involved in states budget might benefit from bigger budget
2) Rapport with state legislature can influence regulation so that insurance issues may more likely be addressed
3) Future plans can affect operation of a state's insurance department, because if the commissioner is using position as a stepping stone to a higher position, he might deny all rate increases for public support

Front 40

Briefly describe the four basic types of filing laws

(Porter)

Back 40

1) Prior approval - regulator must authorize rate or coverage filing before it can be used
2) File and use - must submit the rate or coverage to department before it can be used
3) Use and file - company can go ahead and use the rate or coverage, provided that its sent to regulator within a short period of time
4) No file - not required to make a filing
5) State-mandated rates
6) Flex rating - requires a filing only if certain percentage increase

Front 41

What are the most common reasons for rate or coverage disapproval?

(Porter)

Back 41

1) Not in the public's interest
2) Illegal
3) Unfairly discriminatory
4) Rate excessive, inadequate or not meeting minimum standards

Front 42

What are the purposes of a financial examination?

(Porter)

Back 42

-Detect as early as possible those insurers in financial trouble and/or engaging in unlawful and improper activities
-Develop the information needed for timely, appropriate regulatory action

Front 43

Briefly describe a market conduct examination.

(Porter)

Back 43

Review of the ways in which insurers do business - advertising, soliciting, policy issuing, claims handling

Front 44

Name the two main reasons insurance department may not have a fraud unit

(Porter)

Back 44

1) Restraints on budgets
2) Lack of insurance fraud laws

Front 45

State two reasons an insurance department will rehab an impaired insurer

(Porter)

Back 45

1) Liabilities exceed assets
2) Insurance company refused to submit books, records, accounts, or affairs to insurance department
3) Insurer has willfully violated its charter

Front 46

Give two examples of consumer services provided by regulators

(Porter)

Back 46

1) Help with claims, complaints, and inquiries from the general public
2) Offer educational programs to inform policyholders about insurance loss prevention and reduction
3) Publish information about guides for the purchase of insurance

Front 47

List three methods state insurance departments communicate with the insurance industry

(Porter)

Back 47

1) Written material - informational newsletters and bulletins
2) Surveys of insurance companies
3) Advisory groups
4) Announce to news media
5) Annual reports

Front 48

Revenue for the state insurance departments can come from many sources. List three.

(Porter)

Back 48

1) Premium taxes
2) Fees and assessments
3) Appropriation from the state treasury
4) Fines and penalties
5) Services for which state insurance departments charge fees

Front 49

List three reasons for differences in insurance department budgets among states

(Porter)

Back 49

1) Size of insurance department
2) size of domestic market
3) state population
4) Tax revenue

Front 50

List two regulatory duties of an Insurance Commissioner

(Porter)

Back 50

1) Promulgating regulations and rules necessary to enforce insurance laws
2) Licensing insurance companies and insurance producers
3) Reviewing insurer rates and forms
4) Examining financial practices and market conduct of insurers
5) Taking action against those in violation of insurance laws and regulation

Front 51

Briefly describe a domestic insurer, foreign insurer, and alien insurer

(Porter)

Back 51

Domestic - incorporated in the state writing insurance buisiness

Foreign - licensed to operate in a state, but incorporated in another state

Alien - licensed in a U.S. state but incorporated in another country

Front 52

Briefly describe two purposes of rate regulation

(Porter)

Back 52

1) Insurer financial stability, which results in consumer protection

2) Pricing insurance so that it is fair, equitable, and affordable

Front 53

Describe three ways in which the insurance product is uniqure

(Porter)

Back 53

1) Insurers set rates before actual costs are known
2) Regulatory environment somewhat different by state
3) Insurance industry has many information-sharing and joint product-development mechanisms - would be anti-trust issue in other industries

Front 54

Describe the degree of rate regulation and rationale for ocean marine insurance

(Porter)

Back 54

-Very little regulation
-Highly individualized risks
-No statistical info to justify rates
-Knowledgeable buyers and sellers

Front 55

Describe the degree of rate regulation and rationale for inland marine insurance

(Porter)

Back 55

-Generally only informal filings needed
-Highly individualized risks
-No statistical info to justify rates
-Diverse coverages and classifications

Front 56

Describe the degree of rate regulation and rationale for surety

(Porter)

Back 56

-Rate manuals filed, little regulatory review
-Less detailed stat plan and ratemaking data
-Fewer statistically based rating plans
-Subjective risk evaluation
-Less credible loss experience

Front 57

Describe the degree of rate regulation and rationale for title insurance

(Porter)

Back 57

-Rate manuals filed, little regulatory review
-No stat plan or ratemaking data
-Few rating or risk evaluation factors
-Underwriting and exposure identification key to controlling losses
-Driven more by buisiness expenses than by insured losses

Front 58

Describe the degree of rate regulation and rationale for commercial general liability

(Porter)

Back 58

-General regulation, except during tight markets
-Sophisticated buyers

Front 59

Describe the degree of rate regulation and rationale for private passenger auto

(Porter)

Back 59

-Often regulatory review of overall rates and details of rating plan
-Legally required or socially desirable for consumers to purchase
-Uninformed consumers
-Highly uniform stat plan with credible rate data
-Complex rates and classification system

Front 60

Describe the degree of rate regulation and rationale for workers compensation

(Porter)

Back 60

-Close regulation, prior approval or rates and classification system
-legally required of most employers
-costly, widespread business
-Complex rating and classification system

Front 61

List the statement of principles governing P&C Ratemaking

(Porter)

Back 61

1) A rate is an estimate of the expected value of future costs
2) A rate provides for all costs associated with the transfer of risk
3) A rate provides for the costs associated with an individual risk transfer
4) A rate is reasonable and not excessive, inadequate, or unfairly discriminatory if it is an actuarially sound estimate of the expected value of all future costs associated with an individual risk transfer

Front 62

Explain the statement: "The very nature of insurance products requires that insurers maintain a sufficient amount of free policyholders surplus to provide a margin for risk and uncertainty."

(Porter)

Back 62

Unlike a manufacturer, insurers cannot determine in advance what actuarial costs will be. If costs exceed expected, deficiency must come from available resources.

Front 63

Briefly describe two types of risk usual to all business

(Porter)

Back 63

1) Business risk - firm's inability to maintain a competetive positionand stable growth in earnings
2) Financial risk - firm's inability to cover fixed debt obligations as they become due

Front 64

State two types of risk unique to insurance

(Porter)

Back 64

1) Price inadequacy
2) Reserve Error
3) Underwriting risk

Front 65

Identify four regulatory activities to ensure insurer solvency

(Porter)

Back 65

1) Maintaining a uniform system of financial reporting
2) Monitoring insurer solvency
3) Monitoring capital adequacy through risk-based capital
4) Accreditation of state insurance departments

Front 66

State two primary objectives of financial examinations

(Porter)

Back 66

1) Detecting as early as possible those insurers in financial trouble and/or engaging in unlawful and improper activities
2) Developing information needed for timely, appropriate regulatory action

Front 67

Briefly describe Full Scope and Limited Scope examinations

(Porter)

Back 67

-Full Scope - very broad and encompass a thorough review of insurers records and financial position; emphasis placed on risk-based analysis to identify potential problems

-Limited Scope - should be scheduled between regularly scheduled full-scope exams; Occur when regulator needs to validate info by other regulators or unusual complaints

Front 68

Briefly describe Special Association Examinations

(Porter)

Back 68

-Special Association - circumstances justify direct intervention by the NAIC
-Generally three situations - written reports from zone examiners indicate examination conducted by state of domicile inadequate; domiciliary state is reluctant to schedule an exam when IRIS results or other info indicate need; state in which company is licensed requests it

Front 69

State the objectives of the State Insurance Department Accreditation Program

(Porter)

Back 69

-Provide consistency of solvency regulation among states
-Improve standards of solvency regulation and financial exams conducted in all states

Front 70

State three potential factors that contribute to insurers becoming insolvent

(Porter)

Back 70

1) Rapid premium growth
2) Inadequate rates and reserves
3) Out-of-line expenses
4) Lax controls over managing general agents
5) Reinsurance uncollectible
6) Fraud

Front 71

Which factor precedes nearly all of the major failures and why?

(Porter)

Back 71

Rapid premium growth - reduces the margin for error in the operation of insurers; usually indication of bargain rates and lax u/w standards

Front 72

The regulator is expected to take whatever steps necessary to require the insurer to protect its claims-paying ability. If he finds an insurer might be in trouble, what may he require the insurer to do?

(Porter)

Back 72

-Increase level of reinsurance
-Tighten underwriting acceptance
-reduce expenses
-Increase capital or surplus
-suspend or limit dividends
-limit or withdraw from certain investments
-document the adequacy of rates

Front 73

Knowing when to take over the supervision of the affairs of insurer requires financial and administrative judgment. State two key issues to consider.

(porter)

Back 73

1) How accurate are loss reserves?
2) If assets were liquidated quickly to meet creditor demands, what would proceeds be?
3) Has management enacted tough enough measures to stem the operating losses?
4) Is company's reinsurance adequate and collectable?

Front 74

What is the general purpose of a guaranty fund?

(Porter)

Back 74

To protect policyholders from inability of an insolvent insurer to pay claims.

Front 75

Briefly describe the effect of guarantee funds on consumers

(Porter)

Back 75

-consumers with claims benefits
-indirect cost of funds on consumers is hidden, but real - passed partly back to consumers in form of higher insurance rates
-Guarantee funds remove incentive for consumers to shop the market for financially sound insurers

Front 76

Briefly describe the effect of guarantee funds on the insurance industry

(Porter)

Back 76

High costs of paying for insolvencies through guaranty funds motivate insurers to promote strong financial regulation

Front 77

Why is the price for insolvencies high for insurers?

(Porter)

Back 77

-Insurers are directly assessed for the operation of guarantee funds
-Competition is distorted - insurers that can aggressively market or loosely underwrite can gain a greater share of the market

Front 78

In the 19th century, P/C insurers consistently tried to set rates and commissions collectively. What was their purpose in doing this?

(Harrington)

Back 78

Seeking to prevent destructive rate competition and widespread insolvency

Front 79

Briefly describe Paul vs. Virginia (1868)

(Harrington)

Back 79

-Held that insurance was not commerce and therefore not subject to laws affecting interstate commerce
-States had the power to regulate insurance

Front 80

Briefly describe U.S. vs. South-Eastern Underwriters Association (1944)

(Harrington)

Back 80

-Indicted for alleged violations of Sherman Act
-Federal district court dismissed case citing Paul v. Virginia
-On appeal, U.S. Supreme Court held that insurance was commerce - interstate commerce when transacted across state lines. Congress could regulate insurance - Sherman Anti-trust Act applied to insurance.

Front 81

Briefly describe the McCarran-Ferguson Act (1945)

(Harrington)

Back 81

-Endorsed state regulation
-Exempted the business of insurance from federal antitrust law provided
-Relevant activities were regulated by the states
-Sherman act continues to apply to the use of boycott, coercion, or intimidation

Front 82

Describe pricing trends in the late 1950s

(Harrington)

Back 82

-Pressure for increased rate competition
-Legal decisions led many states to make it easier for insurers to deviate from bureau rates
-Direct writers got approval for lower rates based on their lower operating expenses and targeting lower risk buyers.

Front 83

In the mid 1960s, many states repealed prior approval laws with competitive rating laws. This trend reflected several influences. Briefly describe two.

(Harrington)

Back 83

1) Gradual erosion of bureau pricing and increased admin costs associated with multiple rate filings by numerous insurers.
2) Recognition that solvency regulation eliminated rate regulation's role in preventing insolvencies
3) Hope that price competition would help insurance affordability problems

Front 84

Describe the regulatory environment in the 1970s and 1980s and the effect on the insurance market

(Harrington)

Back 84

1) There was rapid growth in claim costs. Some states increased intensity and scope of rate regulation attempting to limit rate increases.
2) In addition to limiting rate increases many states placed limitations on underwriting and rate classification in auto
3) Workers Comp rates were suppressed causing large growth of residual market

Front 85

In the 1970s and 80s, some prior approval states changed their focus from promotion of rate adequacy to insurer solvency to more restrictive controls with the goal of limiting rate increases. Briefly describe two changes in methods of regulation that resulted from this change in focus.

(Harrington)

Back 85

1) Emphasis on insurance affordability led most prior approval states to consider investment income formally in rate review process.
2) Some states limited amounts and types of expenses that could be included.
3) Some states restricted insurer exit in response to regulatory rate suppression.

Front 86

Briefly describe three insurance trends in the 1990s.

(Harrington)

Back 86

1) Large catastrophe losses led to expanded state intervention of HO pricing and u/w
2) However, some movement towards less invasive regulation (or even deregulation) in other lines
3) Loss trends for auto insurance improve - rate decreases more prevalent and reduced public pressure for using rate regulation to lower rates
4) Favor cost trends in WC, partly due to state reform legislation. Many states modified rate regulation to permit higher rates and provide greater incentives for loss control
5) Some states substantially deregulated WC rates for voluntary market. Changes were followed by substantial reductions in WC residual market size.
6) Deregulation in many states for large commercial lines. This reflected recognition that rate and form regulation served no useful purpose and were instead counterproductive.

Front 87

State three arguments for open competition rate regulation

(Harrington)

Back 87

1) Creates strong incentives for insurers to forecast costs accurately and price and u/w so as to avoid adverse selection
2) competition in pricing and risk selection promotes availability, as shown by small residual markets in competitive pricing states
3) Competitive rating and risk classification provide incentives for higher risk buyers to take actions to control losses
4) Encourages insurers to minimize the sum of claim costs and settlement expenses

Front 88

Describe three arguments for rate regulation

(Harrington)

Back 88

1) Limited exemption from federal anti-trust laws - BUT if this is a problem remove exemption; collusion does not in fact occur; rate advisory orgs promote healthy competition; substantial heterogeneity in rates
2) Protection of consumer against inadvertently purchasing high price insurance - information disclosure easier
3) Purchase is compulsory, so excessive profits need to be prevented - fails to recognize inelastic demand does not produce excessive profits in competitive markets
4) selective suppression of rates can get some parties to purchase insurance they otherwise wouldn't - BUT poor means of creating a subsidy
5) Restrictions on class could achieve greater equity - BUT discourages incentive to control losses

Front 89

List two possible adverse effects for each of the types of rate regulation

(Harrington)

Back 89

1) Prior approval with regulatory lag - cost of compliance, delays in adjusting to trends, greater variation in coverage availability, greater variation in insurer profits over time, higher long-run prices
2) Prior approval with binding rate floors - inefficient non-price competition, slower expansion of efficient firms, higher prices
3) Prior approval with average rate suppression - larger residual market, reduced services, increased risk for insurers, increased insolvency risk, reduced insurer infrastructure investment, reduced entry and increased exit
4) Restrictions on classification - cost of administration, compliance, enforcement; larger residual market, lower (higher) prices for high (low) risk buyers, inefficient incentives for loss control

Front 90

Growth of competitive rating in P/C markets during latter half of 20th century reflected a variety of forces. Describe two.

(Harrington)

Back 90

1) Growing evidence that prior approval rate regulation could neither persistently lower average rate levels nor expand availability
2) Restrictions on insurer rate classification were costly to enforce, inconsistent with widespread availability of coverage in volunteer market, and inconsistent with enhancing overall affordability of coverage

Front 91

State the purposes for which rating bureaus were established

(Wagner)

Back 91

-Establish and maintain adequate rates
-Control excessive commissions
-Standardize policy forms

Front 92

In the early 1900s, what did the Merritt Committee determine the benefits of developing rates using rating bureaus were?

(Wagner)

Back 92

-Relieve insurers of making rates separately, reducing expenses
-Create credible rates

Front 93

In 1944, SEUA was indicted for alleged violations of the Sherman Anti-Trust Act. State four of the alleged violations.

(Wagner)

Back 93

1) Fixing premium rates and commissions
2) Boycotting together to force non-member insurance companies into the conspiracy
3) Compelling public to purchase needed insurance only from SEUA members
4) Refusing non-member insurers access to reinsurance
5) Disparaging non-members for their services and facilities
6) Punishing independent agents representing non-SEUA members by boycott

Front 94

In 1958, U.S. Senates Antitrust and Monopoly Subcommittee directed to study insurance rate issue. State three conclusions from this (O'Mahoney Committee)

(Wagner)

Back 94

1) Reported lack of congressional guidance in McCarran-Ferguson as to bureau regulation
2) Affirmed that competition should be the prime regulator of insurance
3) Allowing competitors to form rates in concert was serious threat to naturally competitive structure of the market
4) Urged state regulators to reconsider their rejection of a file and use system

Front 95

State three insurance industry effects of the O'Mahoney Committee

(Wagner)

Back 95

1) Brought senseless rate hearings and litigation to an end
2) Rate enforcement activities stopped
3) Bureau began to be viewed as a provider of services in a competitive marketplace
4) Independent insurers gained significant market share in the 1950s
5) Bureaus began to lose influence over the marketplace

Front 96

In the late 60s, there began a consolidation of bureaus. State two reasons for this.

(Wagner)

Back 96

1) Natural extension of multiline insurer as opposed to monoline
2) Substantial expense savings associated with consolidations

Front 97

In 1988, twenty state attorneys general filed suit against the ISO relating to the use of standardized policy language for commercial general liability insurance. Briefly describe the actions ISO took to insulate itself from such accusations.

(Wagner)

Back 97

-ISO added public members to its board
-ISO staff began producing prospective advisory loss costs without input from industry committees

Front 98

In 1993, the ISO entered into a consent agreement with the attorneys general that resulted in the dismissal of the 1988 suit. Briefly describe the actions ISO took as part of that agreement.

(Wagner)

Back 98

-Majority of the board would consist of public members
-ISO staff became responsible for policy form developments

Front 99

Describe two ways rating bureaus are helpful to regulators

(Wagner)

Back 99

1) Use of bureau policy provisions as to coverage serves as a useful tool for regulators in the review of forms used by non-bureau affiliated insurers in that they often serve as minimum standards
2) Help to assure price competition is based on relatively similar products

Front 100

Before using cat models, the traditional method made several assumptions about the 20-30 year period used in the excess calculation. State these assumptions.

(Muslin)

Back 100

-Cat activity was normal
-Population demographics were stable
-Insurer losses by peril were stable
-Changes in coverage or construction practices did not affect ratio of wind to non-wind losses

Front 101

Early in the development and use of simulation models, there were many challenges. Briefly describe three.

(Muslin)

Back 101

1) Raw insurance data for modeling was often exposure, which unlike premiums or losses, was not reported in financial statements or other externally verifiable sources
2) Raw data was often sent to modeling company in policy level detail and processed in modelers proprietary computer program, making it difficult to follow the calculations
3) Seismic or meteorological simulations and damage functions at the core of the models are extremely complex and difficult to follow without extensive technical expertise

Front 102

State two reasons most members of financial community accepted modeling with relatively little controversy, despite the news of higher reinsurance costs, lower profits, pressure on ratings, etc.

(Muslin)

Back 102

1) Modeling process represented a clear technological improvement over available alternatives
2) Modeling was not wholly foreign to insurers. Similar to techniques used to perform economic forecasts used in investment decisions.
3) Insurers have the benefit of a competitive environment for modeling services
4) Insurers lacked the type of safety net available to individual consumers, such as windpools, leaving them little choice but to accept use of the techniques favored by their reinsurance and investors or face loss of reinsurance or equity capital

Front 103

Achieving a better estimate of loss exposures unique to the individual property owner promises many benefits to the consumer. Describe three.

(Muslin)

Back 103

1) Reduced Information Risk - Investors demand higher returns to compensate for uncertainty. Improved information will reduce this risk and lead to lower prices and/or greater availability
2) Stable pricing - since models use long term seismic or weather data and all available information on the risk to develop loss estimates, they should be less susceptible to variations than other methods
3) Comprehensibility of prices - identifying characteristics that represent higher exposure to loss will help consumers better understand and control insurance costs
4) Rational behavior - when cost of a good reflects its economically correct long term price, consumers will take that cost into account and act accordingly
5) Fair pricing - more accurate information will reduce subsidies and reward consumers who engage in loss mitigation

Front 104

A regulator may be able to externally validate models without need for full disclosure of inner workings. Describe two ways.

(Muslin)

Back 104

1) Comparison of predicted wind fields in a series of simulated storms vs. those actually observed in recent events
2) Comparison of statistics such as mean minimum barometric pressure, mean wind speed, or number of storms of certain categories for a large number of simulated events v. actual historical averages
3) Comparison of relative damage estimates by type of structure to actual observed damage in recent storms
4) Comparison of predicted losses for individual events to actual insurer losses

Front 105

There are several powerful disincentives for insurers to manipulate model results to the detriment of policyholders. List three.

(Muslin)

Back 105

1) If rates are inflated, insurer may lose market share to competitors using more reasonable estimates
2) Model is usually used within the insurance organization for several purposes, including the assignment of financial ratings and reinsurance evaluation
3) Inflated loss estimates would put downward pressure on financial ratings and reinsurance evaluation
3) Inflated loss estimates would put downward pressure on financial ratings
4) Inflated loss estimates would increase the need for and cost of reinsurance, depressing earnings and adversely affecting stock price

Front 106

Several safeguards have been suggested to reduce risk of manipulation. List two.

(Muslin)

Back 106

1) Require a legal affidavit attesting that the user has not manipulated assumptions
2) Require a formal opinion from the modeler on the proper execution of the model when run by the insurer
3) Modelers could provide regulators with rate ranges that reflect geographic, building structure, and deductible options

Front 107

Definition of an "insurance contract" under IRFS

(Defrain)

Back 107

A contract under which one party ACCEPTS A SIGNIFICANT INSURANCE RISK from another party by AGREEING TO COMPENSATE the policyholder if a specified uncertain future event adversely effects the policyholder.

Front 108

List 4 requirements of Phase 1 of IRFS

(Defrain)

Back 108

1) Elimination of catastrophe and equalization provisions
2) Adequacy tests of insurance liabilities and impairment tests of reinsurance assets
3) Prohibition of offsetting insurance liabilities with reinsurance recoverables
4) certain disclosures

Front 109

3 steps to determine liabilities according to IRFS

(Defrain)

Back 109

1) Calculation of unbiased probability weighted expected cash flows
2) Application of discounting
3) Application of margins

Front 110

List factors that would require higher risk margins:

(Defrain)

Back 110

-Less is known about the estimate
-Low frequency/high severity
-Longer duration
-wide probability distribution
-emerging experience increases uncertainty

Front 111

Outline 3 approaches to determine risk margins

(Defrain)

Back 111

1) Confidence level (Var) technique: the needed load to the expected value to result in a specific probability that the insurer has sufficient funds to pay for the liabilities
2) Conditional Tail Expectation (CTE): Probability weighted average of all scenarios in the tail - mean estimate
3) Cost of capital method: the amount necessary to produce an adequate return, after factoring in investment return

Front 112

Purpose of supervisor review stage:

(Vaughan)

Back 112

Involves reviewing/evaluating:

-That the insurers strategies, processes & reporting procedures comply with Solvency II
-The firm's risk and its ability to evaluate those risks

Front 113

2 elements reviewed in the Supervisor Review Process

(Vaughan)

Back 113

1) That the insurers strategies, processes & reporting procedures comply with Solvency II
2) The firm's risks and its ability to evaluate those risks

Front 114

4 functions of Risk Focused Surveillance Framework:

(Vaughan)

Back 114

1) Risk focused exams
2) Off site risk focused financial analysis
3) Examination of internal and external changes in the organization
4) Annual supervisory plan for the insurers

Front 115

List some criticisms of internal models:

(Vaughan)

Back 115

-Structure of the models
-Inputs of the models
-Underlying assumption that the past can fully predict the future
-Failure to account for extreme changes in correlation during troubled times
-Tendency of firms to ignore certain risks
-Internal models don't necessarily prevent regulatory arbitrage

Front 116

3 lessons learned from the work on Solvency II

(Vaughan)

Back 116

1) It is important to have a series of checks and balances
2) it is preferable to have a combination of principles based and rules based regulation
3) Other supervisory tools are important

Front 117

3 Pillars of Solvency II

(Vaughan)

Back 117

-Pillar I: Quantitative requirements
-Pillar II: Supervisory review
-Pillar III: Supervisory reporting/public disclosures

Front 118

2 capital requirements specified by Pillar I:

(Vaughan)

Back 118

1) Solvency Capital Requirement
2) Minimum Capital Requirement

Front 119

3 Methods to calculate the Solvency Capital Requirement

(Vaughan)

Back 119

1) Standard Formula - TVAR = integral x*f(x) from VAR_0.995 to infinity
2) Internal Models - black box model
3) Partial Internal models

Front 120

2 Advantages of internal models

(Vaughan)

Back 120

1) better alignment between firm risk and capital requirements
2) stronger risk management culture

Front 121

What rules does solvency II provide about investments?

(Vaughan)

Back 121

Prudent Person standard

Front 122

Describe ORSA

(Vaughan)

Back 122

Own Risk Solvency Assessment (ORSA): this is an internal assessment of solvency need based on the risk profile

Front 123

2 objectives of ORSA

(Vaughan)

Back 123

1) Tool for decision making
2) Tool for supervisors to better understand the firm's risk

Front 124

Purpose of pillar 3 (Supervisory reporting/public disclosure)

(Vaughan)

Back 124

Increasing the transparency of the insurer's risks & capital position. the intention is to provide the market with sufficient information to exercise its disciplinary function.

Front 125

2 large categories of differences between US regulation and Solvency II

(Vaughan)

Back 125

1) Role of internal models
2) other differences

Front 126

Differences between US regulation and solvency II regarding role of internal models:

(Vaughan)

Back 126

US Regulation:
1) Slowly introducing internal models; companies will use an internal model if it engages in a specific business that is exposed to risks not well captured in the standard model
2) Regulators rely on insurer's actuaries to ensure that the model & results are appropriate
3) Dependent on TVAR

Solvency II:
1) Internal models are encouraged
2) supervisors review the model & need to authorize their use
3) Depend on 99.5% VAR

Front 127

Differences between US regulation and Solvency II regarding Other Differences

(Vaughan)

Back 127

US Regulation:
1) The standard formula is not calibrated to a particular VAR/ TVAR (capital requirements)
2) risks captured are different from Solvency II
3) Calculates the greatest PV of the deficit under several possible scenarios. Reserves are derived using a TVAR approach
4) Rules based and Prudent Person approach
5) No ORSA

Solvency II:
1) Capital requirements are based on a consistent standard (99.5% VAR)
2) Different risks from US regulation
3) Market consistent approach for calculating technical provisions/reserves
4) Prudent person approach to investments
5) Has ORSA

Front 128

3 reasons behind the shift from rules based to principles based regulation:

(Vaughan)

Back 128

1) due to increasing complexity, the rules based approaches can not adequately address the differences among companies
2) Insurers will try to game the system of rules-based regulation
3) Rules-based systems tend to stifle evolution

Front 129

3 assumptions behind the theory that insurers would enhance their risk management in response to principal based regulation:

(Vaughan)

Back 129

1) Companies have an incentive to properly manage risk
2) regulators can distinguish between firms that did and did not effectively manage risk
3) regulators would take action once they identified a firm that did not effectively manage its risk

Front 130

3 arguments that companies may not have incentive to properly manage risk:

(Vaughan)

Back 130

1) Policyholders less likely to provide market discipline as they are protected by guarantee funds
2) higher incentive to take risk as the financial condition deteriorates
3) management compensation often based on short term performance

Front 131

2 types of errors when the regulators try to identify risky activity

(Vaughan)

Back 131

-Type I error: some firms that are destined to fail are incorrectly treated as healthy
-Type II error: some healthy firms are incorrectly treated as troubled

Front 132

2 reasons that internal models make the supervisors job more difficult

(Vaughan)

Back 132

1) Models rely on discretion
2) Supervisors need technically competent staff to evaluate the model

Front 133

2 advantages of having multiple regulators review the insurer

(Vaughan)

Back 133

1) It is less likely that there will be regulatory error
2) It is more likely that the regulator will take action if the insurer runs into trouble

Front 134

Define "goodwill"

(Blanchard / IASA 14)

Back 134

The value of the underlying franchise, including that represented by a trained workforce, brand name recognition & an in-place distribution system.

Front 135

Statutory treatment of goodwill

(Blanchard IASA 14)

Back 135

-Assets and liabilities of the purchased company are valued using statutory accounting principles
-Goodwill = purchase price - statutory surplus
-Goodwill is amortized over twenty years

Front 136

GAAP treatment of goodwill

(Blanchard/ IASA 14)

Back 136

-The newly purchased assets & liabilities are valued at fair value
-Goodwill = purchase power - (fair value of assets - fair value of liabilities)
-Goodwill is not amortized, but instead frozen, and instead tested for impairment annually

Front 137

Differences between SAP and GAAP treatment of Guarantee Fund Assessment

(Blanchard / IASA 14)

Back 137

-SAP: recognizes the liability immediately following an insolvency if based on prospective premium writing, estimates premium to be written during year
-GAAP: if based on prospective premiums, waits until the premium is written before accruing the liability

Front 138

Differences between Statutory and GAAP treatment of Mortgage Loans

(Blanchard/ IASA 14)

Back 138

SAP: valuation allowance is based on the difference between the net value of collateral (fair value less the costs to obtain and sell) and the investment in the mortgage loan. Changes to the valuation allowance directly impact unassigned surplus.

GAAP: valuation allowance is based on the present value of discounted expected future cash flows. Changes to the valuation allowance are included as a component of earnings.

Front 139

Describe the SAP valuation rules of DTA (deferred tax asset):

(Blanchard/ IASA 14)

Back 139

Focuses on the amounts of the DTA which are more certain or immediately recoverable

Front 140

Differences between Statutory and GAAP treatment of Subsidiaries

(Blanchard / IASA 14)

Back 140

-A company is said to have control if it owns more than 10% under SAP, 50% under GAAP
-The subsidiary's financials are consolidated with the parent under GAAP, but held separately under SAP

Front 141

SAP valuation of subsidiaries:

(Blanchard / IASA 14)

Back 141

-publicly trades subsidiaries: market value
-insurance subsidiaries: statutory equity plus the admitted goodwill
-noninsurance subsidiaries which do not have significant ongoing operations other than for the parent: underlying equity adjusted to a statutory basis, plus the admitted goodwill
-noninsurance subsidiaries which do have significant ongoing operations other than for the parent: GAAP equity

Front 142

GAAP treatment of subsidiaries

(Blanchard / IASA 14)

Back 142

Combined with parent

Front 143

SAP treatment of salvage and subrogation

(Blanchard / IASA 14)

Back 143

- recognized salvage and subrogation upon receipt or
-accrue for an estimated amount by reducing the related reserves

Front 144

GAAP treatment of salvage and subrogation

(Blanchard / IASA 14)

Back 144

-if the losses have not been paid, the related reserves are reduced by the estimated recovery
-if the losses have been paid, the estimated recovery is recorded as an asset

Front 145

Outline the difference in focus between SAP and GAAP

(Blanchard / IASA 14)

Back 145

-SAP: balance sheet / surplus adequacy

-GAP: Income statement

Front 146

Different purposes of SAP and GAAP accounting

(Blanchard / IASA 14)

Back 146

-SAP: Company's ability to meet obligations to policyholders
-GAAP: provide economic information about the earnings of the firm

Front 147

Differences between statutory and GAAP treatment of Acquisition Costs

(Blanchard / IASA 14)

Back 147

-GAAP will create DPAC asset and recognize expenses over time
-Statutory recognizes expenses immediately

Front 148

Differences between statutory and GAAP treatment of non-admitted assets

(Blanchard / IASA 14)

Back 148

- SAP recognizes non-admitted assets
-GAAP recognizes the assets at full value

Front 149

Characteristics of assets that receive reduced admitted values under SAP:

(Blanchard / IASA 14)

Back 149

-less liquid
-will have a smaller realizable value in the event of a liquidation

Front 150

Differences between Statutory and GAAP treatment of DTA (deferred tax asset)

(Blanchard / IASA 14)

Back 150

SAP is more restrictive in recognition

Front 151

Describe the GAAP valuation rules of DTA

(Blanchard / IASA 14)

Back 151

GAAP recognizes the full DTA balance, and the value is only reduced if it is more likely than not that a proportion of the DTA can not be realized in the future.

Front 152

GAAP valuation of bonds

(Blanchard / IASA 14)

Back 152

-Held in trading portfolios: Market value, with temporary changes in market value recognized in earnings
-available for sale: market value, with temporary changes in value recorded as unrealized gains or losses
-intended to be held till maturity: amortized value

Front 153

SAP valuation of bonds

(Blanchard / IASA 14)

Back 153

-investment grade bonds: amortized costs
-non-investment grade bonds: lower of amortized cost and market value

Front 154

Differences between SAP and GAAP valuation of stocks

(Blanchard / IASA 14)

Back 154

Essentially the same

Front 155

GAAP valuation of real estate

(Blanchard / IASA 14)

Back 155

- Real estate held with the intent to sell: lower of carrying value (book value - depreciation - amortization - impairment) and fair value, less cost to sell
-other real estate investments: historical cost, less accumulated depreciation and allowance for impairment

Front 156

SAP valuation of real estate

(Blanchard / IASA 14)

Back 156

-Real estate occupied by the company and real estate for the production of income: depreciated cost, net of related obligations
-Real estate held with the intent to sell: lower of depreciated cost, or fair value, net of related obligations

Front 157

Differences between Statutory and GAAP treatment of Loss Reserves

(Blanchard / IASA 14)

Back 157

-GAAP allows discounting under certain circumstances
-Regarding the actuary's range of reserves, if there is no point estimate, SAP would book the midpoint of the range, but GAAP would book the low end

Front 158

Differences between Statutory and GAAP treatment of Retroactive Reinsurance

(Blanchard / IASA 14)

Back 158

- Statutory recognizes the undiscounted recoveries, wheras GAAP recognizes the present value
-Statutory recognizes the recoveries as a negative write-in liability, wheras GAAP recognizes as ceded reserves.

Front 159

Statutory treatment of structured settlements

(Blanchard / IASA 14)

Back 159

The annuity purchase price is recorded as a paid loss, and the claim is closed.

Front 160

GAAP treatment of structured settlements

(Blanchard / IASA 14)

Back 160

- if a release of liability has been signed, treatment is the same as statutory
-if no release of liability is signed, establish a loss reserve equal to the annuity value, with an offsetting reinsurance recoverable asset of the same size

Front 161

Differences between Statutory and GAAP treatment of Reinsurance Recoverables

(Blanchard / IASA 14)

Back 161

- SAP reserves are net of recoverables, but GAAP is gross
-SAP recognizes a provision for reinsurance, but GAAP does not

Front 162

Differences between Statutory and GAAP treatment of Policyholder Dividends

(Blanchard / IASA 14)

Back 162

-Statutory: dividends are not recorded as liabilities until they are declared
-GAAP accrues for all dividends (including undeclared) at the balance sheet date, using estimate of the amount to be paid

Front 163

Differences between Statutory and GAAP treatment of Pensions

(Blanchard / IASA 14)

Back 163

-GAAP allows recognition of an asset if a pension plan is overfunded
-Statutory: the overfunded amount is a non-admitted asset

Front 164

For which parties does the insurer need to accrue a liability for postretirement benefits under GAAP accounting

(Blanchard / IASA 14)

Back 164

-vested participants
-current retirees
-active participants not currently elligible

Front 165

For which parties does the insurer need to accrue a liability for postretirement benefits under SAP accounting:

(Blanchard / IASA 14)

Back 165

-vested participants
-current retirees

Front 166

If an actuarial document contains materially different results to a prior report from the same actuary, the later report needs to:

(ASOP 20)

Back 166

-State clearly that the earlier results are no longer valid
-Explain why the results have changed

Front 167

Examples of items that should be disclosed in the actuarial report

(ASOP 20)

Back 167

-The actuary responsible for the document
-The date and subject of the document
-The intended users of the report
-The scope and intended purpose
-Acknowledgement of qualifications
-any cautions about risk and uncertainty
-Any limitations / constraints on the use of actuarial findings
-Any conflict of interest

Front 168

Disclosures necessary if any of the used assumptions/methods are prescribed by law

(ASOP 20)

Back 168

-The applicable law
-The assumptions or methods prescribed by the law
-That the report was prepared in accordance with the law

Front 169

Disclosures necessary if the actuary states reliance on other sources and does not accept responsibility

(ASOP 20)

Back 169

-The assumption or method set by the other source
-The other source
-The reason that the other source set the assumption or method
-Either (if applicable): the assumption or method significantly conflicts with that which the actuary believes to be reasonable for the purpose of the report/ the actuary was unable to judge the reasonableness of the assumption or method without performing a substantial amount of additional work; or that the actuary was unqualified to assess the reasonableness

Front 170

If an actuarial document contains materially different results to a prior report from the same actuary, the later report needs to:

(ASOP 41)

Back 170

-state clearly that the earlier results are no longer valid
-explain why the results have changed

Front 171

Examples of items that should be disclosed in the actuarial report:

(ASOP 41)

Back 171

-The actuary responsible for the document
-The date and subject of the document
-The intended users of the report
-The scope and intended purpose of the report
-Acknowledgment of qualifications
-Any cautions about risk and uncertainty
-Any limitations/ constraints on the use of actuarial findings
-Any conflicts of interest

Front 172

Disclosures necessary if any of the used assumptions/methods prescribed by law:

(ASOP 41)

Back 172

-The applicable law
-The assumptions or methods prescribed by the law
-That the report was prepared in accordance with the law

Front 173

Disclosures necessary if the actuary states reliance on other sources and does not accept responsibility:

(ASOP 41)

Back 173

-The assumption or method set by the other source
-The other source
-The reason that the other source set the assumption or method
-Either (if applicable): the assumption or method significantly conflicts with that which the actuary believes to be reasonable for the purposes of the report/the actuary was unable to judge the reasonableness of the assumptions or method without performing a substantial amount of additional work/ that the actuary was unqualified to assess the reasonableness

Front 174

Actions the actuary must take if constraints apply to the analysis which may potentially materially impact the results

(ASOP 41)

Back 174

-Notify the principal of the risk
-Communicate the contraints to the principal

Front 175

Items regarding the unpaid claim estimate that need to be identified by the actuary

(ASOP 43)

Back 175

-Intended measure of unpaid claim estimate, in addition to whether it is discounted
-Whether the reserve is gross or net of specified recoverables
-Extent of reinsurance collectability risk
-types of unpaid claim adjustment expenses included in the unpaid claim estimate
-the claims covered by the estimate

Front 176

Factors that the actuary should consider when determining the appropriate method to derive the reserves

(ASOP 43)

Back 176

-Purpose (internal analysis vs external reporting)
-Nature of claims and exposure
-development of characteristics of the claims
-characteristics of the available data
-applicability of the various methods to the available data
-Reasonableness of the assumptions underlying the various methods

Front 177

Items that need to be disclosed when deriving the unpaid claim estimate

(ASOP 43)

Back 177

-intended purpose of the estimate
-significant limitations
-scope
-accounting date, valuation date, and review date
-specific significant risks and uncertainties
-significant events, assumptions, or reliances that have material impact on the estimates
-basis for the range
-If the estimate is an update of a prior estimate, changes of assumptions, procedures or methods that had a material impact

Front 178

What must be included in the Actuarial Report?

(SAO)

Back 178

-An exhibit that ties to the Annual Statement and compares the actuary's conclusions to the carried amounts
-Summary exhibit that contains the actuary's best estimate/range
-Documentation of the data reconcilliation to schedule P
-More extensive comments on trends that indicate the presence/absence of risk & uncertainties that may result in material adverse deviation
-More extensive comments on factors that caused unusual IRIS ratios, in addition to how these factors were addressed in the prior and current analyses

Front 179

Items to be included in the AOS:

(SAO)

Back 179

-Range of reasonable estimates for loss & LAE reserves, net and gross of reinsurance (if calculated)
-The company's recorded loss & LAE reserves, net and gross of reinsurance (if calculated)
-The company's recorded loss & LAE reserves, net and gross of reinsurance
-The difference between the carried reserves, and point estimate and/or range, net and gross of reinsurance
-If there is adverse development in excess of 5% of surplus in at least 3 of the 5 past years, a description of the reserve elements and/or management decisions that were major contributors to this adverse development

Front 180

Factors that the actuary should consider when trying to determine whether to rely on the work of others:

(SAO)

Back 180

-The amount of the reserves covered by the other actuary's analysis in comparison to the total reserves
-The nature of the exposure and coverages
-How reasonably likely variations in the other actuary's analysis may impact the total reserves on which the actuary is opining
-Credentials of the other actuary (AAA, FCAS, ACAS)

Front 181

Actions the actuary can take if the data can not be reconciled to Schedule P:

(SAO)

Back 181

-Confirm that the person responsible for the data is aware of the differences
-Recommend that the company inform the auditors about the difference
-Discuss the issue in the SAO, and elaborate on it in the AOS

Front 182

What should the actuary comment on if mass tort exposure exists?

(SAO)

Back 182

-Whether there is material exposure
-The aggregate amount of money held
-The significant variability & uncertainty inherent in the estimate
-Whether the actuary believes the liability is actuarially estimable
-The difficulties involved in providing an actuarial estimate of these liabilities
-Whether the liabilities are being handled by a dedicated and experienced claims/legal unit

Front 183

Requirements to be a qualified actuary

(SAO)

Back 183

-Member in good standing with the CAS
-A member in good standing with the AAA, and who has been approved as qualified for signing casualty loss reserve opinions by the Casualty Practice Council of the AAA

Front 184

What does the insurer need to provide to the commissioner within 5 days of the appointment of the actuary?

(SAO)

Back 184

-Name and title
-Manner of appointment of the actuary
-Statement that the person meets the requirements to be a qualified actuary

Front 185

What does the insurer need to do if the actuary is replaced?

(SAO)

Back 185

-Notify the Insurance Department within five days
-within 10 days, provide an additional letter to the Commissioner stating whether in the 24 months prior to the actuary being replaced, where there any disagreements with the actuary regarding the risk of material adverse deviation; required disclosures; scopes; procedures or data quality?
-Request in writing to the former actuary whether he/she agrees with the statements in the aforementioned letter. This letter from the actuary should be forwarded to the commissioner together with the insurer's letter

Front 186

4 exemptions from producing SAO:

(SAO)

Back 186

1) Small Companies
2) Insurers under supervision or conservatorship
3) nature of the business
4) Financial hardship

Front 187

Requirement for the "small company" exemption

(SAO)

Back 187

Insurers with under $1M of total direct & assumped premiums in a CY, and under $1M total direct and assumed loss and LAE reserves at year end

Front 188

Requirement for the "Financial Hardship" exemption

(SAO)

Back 188

If the projected reasonable cost of the actuarial opinion would exceed the lesser of:

1) 1% of the insurer's capital and surplus from the latest quarterly statement of the year for which the exemption is sought
2) 3% of the direct and assumed premiums during the year for which the exemption is sought

Front 189

Parts of the SAO

(SAO)

Back 189

-Identification paragraph
-Scope
-Opinion
-Relevant Comments

Front 190

5 Types of Statement of Actuarial Opinion

(SAO)

Back 190

1) Reasonable Provision
2) Deficient Provision
3) Redundant Provision
4) Qualified Provision
5) No Opinion

Front 191

The Identification Paragraph of the SAO mentions:

(SAO)

Back 191

-The appointed actuary
-the actuary's relationship to the company
-The actuary's qualifications for acting as the appointed actuary
-date of appointment

Front 192

Comments about reinsurance that the actuary should make:

(SAO)

Back 192

-Retroactive Reinsurance
-Financial Reinsurance
-Reinsurance Collectability

Front 193

3 sources to determine reinsurance collectability

(SAO)

Back 193

1) Management
2) Reinsurance ratings
3) Schedule F (Look for regulatory action or overdue paid losses)

Front 194

List the IRIS ratios that the actuary will have to discuss if the ratios have exceptional values

(SAO)

Back 194

-1 yr development to surplus (ratio 11)
-2 yr development to surplus (ratio 12)
-Estimated current reserve deficiency to surplus (ratio 13)

Front 195

Factors that could be considered when choosing a materiality standard

(SAO)

Back 195

-percentage of surplus
-percentage of reserves
-amount of adverse deviation that would cause a drop in financial strength ratings
-amount of adverse deviation that would cause surplus to fall below minimum capital requirements
-amount of deviation that would cause RBC to fall to the next action level
-multiples of retained risk

Front 196

Factors that the actuary should considere when there is insufficient historical data

(SAO)

Back 196

-Whether there is adequate data to evaluate the reserves
-If industry data or another company's data were used, is this data reasonably similar to the company for which the actuary is providing an opinion
-Whether to provide disclosures about the data used
-Whether to provide disclosures about the resulting variability and uncertainty

Front 197

Define "Long Duration Contracts"

(SAO)

Back 197

Contracts with terms greater than 13 months where the insurer can not cancel or increase the premium

Front 198

List 3 exclusions from the definition of "long duration contracts"

(SAO)

Back 198

1) Financial guaranty
2) Mortgage Guaranty
3) Surety

Front 199

What is listed in the Loss Reserves section of Exhibit A:

(SAO)

Back 199

-Reserves for unpaid losses
-Reserves for unpaid LAE
-Reserves for unpaid losses D&A
-Reserves for unpaid LAE D&A
-Retroactive reinsurance reserves D&A
-Other loss reserve items

Front 200

Disclosures about the Risk of Material Adverse Deviation that the actuary should make

(SAO)

Back 200

-The materiality standard
-How this standard was derived
-Whether there are significant risks that could produce material adverse deviation
-if the risk exists, major factors that could result in material adverse deviation

Front 201

Actions that the actuary should take if they realize between submitting an opinion, and the date of the balance sheet for which the next opinion shall be issued, that there is an error in the data that would have materially impacted the opinion

(SAO)

Back 201

-alert the audit committee within five business days
-this notification needs to include an amended opinion
-the insurer needs to forward this amended opinion to the insurance commissioner within the next five business days, and also copy the actuary
-if the actuary does not receive this copy, he should notify the commissioner

Front 202

Economic income equation:

(Tax)

Back 202

Economic income = PV(future premiums) - PV(future losses)

Front 203

How is the discount rate to be used in tax calculated

(Tax)

Back 203

For each AY, the discount rate is the 60 month moving average of the "federal mid-term rates," ending Dec 1 of the prior AY.

Front 204

Reason that tax calculations use Schedule P Part 1, instead of Part 3:

(Tax)

Back 204

-Part 3 contains only DCC, not AAO. Part 1 contains all LAE

-Part 1 is audited, whereas part 3 is not

-Some actuarial methods rely on judgment to select paid LDFs. The IRS method does not involve judgment

Front 205

Portion of tax exempt income that is taxed due to proration provision:

(Tax)

Back 205

15%

Front 206

Due to the DRD, what portion of dividends are tax exempt?

(Tax)

Back 206

-if the taxpayer owns less than 20% of the firm, 70%

-if the taxpayer owns between 20 and 80%, 80%

-if the taxpayer owns more than 80%, 100%

Front 207

Equations to derive RTI from incurred losses according to direct and incurred methods.

(Tax)

Back 207

Direct: Paid Loss + change in discounted reserves

Indirect: Statutory incurred loss - change in reserve discount

Front 208

Equation to derive RTI from bond income according to direct & indirect methods

(Tax)

Back 208

Direct: 15% * municipal bond income

Indirect: Statutory income - 0.85 * municipal bond income

Front 209

Equations to derive RTI from dividends according to direct and indirect methods:

(Tax)

Back 209

Direct: 40.5% of unaffiliated common stocks
Indirect: Statutory income - 59.5% of dividends

Front 210

Equation to derive RTI from revenue offset according to direct and indirect methods.

(Tax)

Back 210

Direct: WP - 0.80 * Change in UEPR

Indirect: Statutory EP + 0.20 * change in UEPR

Front 211

AMTI equation

(Tax)

Back 211

AMTI = RTI + 0.75 * Income that escapes taxation

Front 212

ARIT equation

(tax)

Back 212

ARIT = RIT - prior year's minimum tax credit

Front 213

Factors that management need to consider when deciding portions of stocks versus bonds to hold:

(Tax)

Back 213

-relative tax rates
-yield
-diversification
-asset liability management
-SAO
-Management dislike of erratic income

Front 214

Reasons municipal bonds often provide a higher after tax yield than corporate bonds of similar risk levels

(Tax)

Back 214

-Callability: most municipal bonds are callable

-Liquidity: municipal bonds are less liquid

-Tax legislation: the proration provision reduces the tax advantage of municipal bonds

Front 215

Relationship between RTI and AMTI that would produce the optimal tax strategy

(Tax)

Back 215

AMTI = RTI * 1.75

Front 216

Equation and Normal Range for GWP:PHS

(IRIS)

Back 216

Equation: GWP / PHS

Normal Range: < 900%

Front 217

Factors to consider if Ratio 1 is unusual:

(IRIS)

Back 217

-Compare to Ratio 2
-Line of business
-profitability
-direct vs assumed

Front 218

Equation and Normal Range for NWP : PHS

(IRIS)

Back 218

Equation: NWP /PHS

Normal Range: < 300%

Front 219

Factors to consider if Ratio 2 is unusual

(IRIS)

Back 219

-if member or group of affiliates, what is the aggregate ratio?
-profitability
-line of business
-adequacy of reinsurance protection

Front 220

Equation and normal range for change in NWP

(IRIS)

Back 220

Equation: (Current NWP - Prior NWP) / Prior NWP

Normal range: -33% to 33%

Front 221

Factors to look into if change in NWP ratio is unstable

(IRIS)

Back 221

-Are the assets properly valued and liquid enough to meet cash demands?
-Are the reserves adequate?

Front 222

Increased NWP does not necessarily mean there is a greater chance of insolvency, if it is accompanied by:

(IRIS)

Back 222

-low NWP : PHS (ratio 2)
-adequate reserving (Ratios 11, 12, and 13)
-Profitable operations (Ratio 5)
-stable product mix

Front 223

Equation and normal range for surplus aid : PHS

(IRIS)

Back 223

Equation: Surplus Aid / PHS
Surplus Aid = Ceding Commission Ratio * sum of UEPR (non-affiliates)

Normal Range: <15%

Front 224

Issues related to a high Surplus Aid ratio:

(IRIS)

Back 224

-It may indicate that management believes that surplus is inadequate
-surplus aid may improve the results of the other ratios to such a degree that it conceals important areas of concern

Front 225

Equation and normal range for 2yr overall operating ratio

(IRIS)

Back 225

Equation: 2 yr loss ratio + 2 yr expense ratio - 2 yr investment ratio

Normal Range: <100%

Front 226

Equation and normal range for Investment Yield

(IRIS)

Back 226

Equation: 2* Net investment income earned / (Cash & invested assets between current and prior yrs)

Normal Range: Between 3% and 6.5%

Front 227

Equation and normal range for gross change in PHS

(IRIS)

Back 227

Equation: (Change in PHS) / (Prior PHS)

Normal Range: Between -10% and 50%

Front 228

Equation and normal range for change in adjusted PHS

(IRIS)

Back 228

Equation: Change in adjusted PHS / Prior PHS

Change in adjusted PHS = change in PHS - change in surplus notes - capital paid in - surplus paid in

Normal Range: Between -10% and 25%

Front 229

Equation and normal range for adjusted liabilities: Liquid assets

(IRIS)

Back 229

Equation: Adjusted Liabilities = liabilities - liabilities equal to deferred agent balances

liquid assets = liquid assets - investments in parents, subsidiaries and affiliates

Normal Range: < 100%

Front 230

Equation and normal range for gross agent balances:PHS

(IRIS)

Back 230

Equation: Gross agents balances in the course of collection/ PHS

Normal Range: < 40%

Front 231

Equation and normal range for 1 yr reserve development to PHS

(IRIS)

Back 231

Equation: (One year reserve development) / (prior year PHS)

Normal Range: <20%

Front 232

Equation and normal range for estimated current reserve deficiency to PHS

(IRIS)

Back 232

Equation: Deficiency / PHS

Reserves Required = Premiums Earned * ratio of reserves:Premium

Normal Range: < 25%

Front 233

Retrospective Plans Adjustment

(RBC)

Back 233

30% for primary, 15% for reinsurance

Front 234

2 reasons Asset Risk is less important in P&C than Life:

(RBC)

Back 234

1) P&C insurers have much lower ratios of assets to capital

2) P&C policies are generally designed for insurance protection only. On the other hand, life policies are used for investment purposes in addition to the insurance protection.

Front 235

Exclusions from Bond Size Adjustment Factor calculation

(RBC)

Back 235

-US Government Bonds
-Class 1 bonds issued by a US government agency
-Bonds of parents, subsidiaries, and affiliates

Front 236

Procedure to determine Bond Size Adjustment Factor:

(RBC)

Back 236

-for first 50 issuers: the bond charge is multiplied by 250%
-for next 50 (51 to 100), the charge is multiplied by 130%
-for issuers between 101 and 400, the factor is 100%
-for the issuers above 400, the factor is 90%

Front 237

RBC factors for preferred stocks

(RBC)

Back 237

Class 1: 2.3%
Class 2: 3.0%
Class 3: 4.0%
Class 4: 6.5%
Class 5: 12.0%
Class 6: 30%

Front 238

RBC factors for bonds

(RBC)

Back 238

Federal government: 0.0%
Class 1: 0.3%
Class 2: 1.0%
Class 3: 2.0%
Class 4: 4.5%
Class 5: 10.0%
Class 6: in/near default: 30%

Front 239

RBC factor for cash:

(RBC)

Back 239

0.3%

Front 240

RBC factor for unaffiliated common stocks

(RBC)

Back 240

15%

Front 241

Justification for having a P&C RBC charge for stocks lower than the Life charge:

(RBC)

Back 241

-Life Insurers usually have liabilities expressed in fixed dollar terms, and so stocks would be a risky investment for them

-On the other hand, P&C insurers have inflation sensitive liabilities, and so stocks would be more appropriate since they are also inflation sensitive

Front 242

Exclusions from the Asset Concentration Factor

(RBC)

Back 242

-Treasury Securities
-Class 1 bond
-Affiliated investments
-Home office real estate

Front 243

RBC factor for interest rate risk

(RBC)

Back 243

No charge

Front 244

RBC charge for various types of subsidiaries

(RBC)

Back 244

-Domestic Insurance: Calculated the same way as a normal insurance company
-Alien Insurance: 50% of the firm value
-Investment: treated as if the firm itself owns the security
-Non-insurance: 22.5% of carrying value

Front 245

RBC factor for off-balance sheet risk

(RBC)

Back 245

1%

Front 246

RBC factor for reinsurance recoverables

(RBC)

Back 246

10%

Front 247

3 reasons supporting an RBC reinsurance charge

(RBC)

Back 247

1) reinsurance collectibility problems led to several major insurance company insolvencies in the 80s.
2) some financially troubled companies allegedly used sham reinsurance transactions with affiliated companies to hide their financial problems
3) many reinsurance contracts do not contain full risk transfer

Front 248

RBC factor for involuntary market pools

(RBC)

Back 248

0%

Front 249

3 reasons that the original charge for involuntary pools was removed:

(RBC)

Back 249

1) Incentive to be a service carrier
2) no pool has defaulted
3) the pool imposes joint and several liability on all members

Front 250

RBC factor for intercompany pooling agreements

(RBC)

Back 250

0%

Front 251

2 reasons that the original charge for intercompany pools was removed:

(RBC)

Back 251

1) Some rate regulations force the insurer to use the different legal entities
2) the risk to each entity is reduced by using intercompany pools, and the aggregate risk is not increased

Front 252

RBC factor for miscellaneous receivables

(RBC)

Back 252

5% (1% for "Interest, dividends, and real estate income due and accrued")

Front 253

What does the Reserving Risk Charge provide for?

(RBC)

Back 253

Susceptibility of loss reserves to adverse development

Front 254

What does the written premium risk charge provide for?

(RBC)

Back 254

Risk that the future business will be unprofitable, and the resulting underwriting losses will have to be covered by surplus funds

Front 255

RBC factor for UEPR

(RBC)

Back 255

0%

Front 256

Claims made adjustment:

(RBC)

Back 256

20% for Med Mal business

0% for other lines

Front 257

Adjustment for diversification by line of business

(RBC)

Back 257

Reserving: 70% + 30% * Loss Concentration Factor

Written Premium: 70% + 30% * Premium concentration factor

Front 258

Growth Charge Equations:

(RBC)

Back 258

Reserving risk growth charge = 50% * (Growth - 10%) * 90%

Written premium risk growth charge = 25% * (Growth - 10%) * 90%

Front 259

Components of R0:

(RBC)

Back 259

-investments in insurance affiliates
-non-controlled assets
-guarantees for affiliates
-contingent liabilities

Front 260

Components of R1:

(RBC)

Back 260

-fixed income securities (cash, bonds, bond-size adjustment factor, mortgage loans)
-short-term investments
-collateral loans
-asset concentration adjustment for fixed income securities

Front 261

Components of R2:

(RBC)

Back 261

-Equity investments (common stocks, preferred stocks, real estate)
-Other invested assets
-Aggregate write-ins for invested assets
-Asset concentration adjustment for equity investments

Front 262

Components of R3:

(RBC)

Back 262

Credit risk

Front 263

Components of R4:

(RBC)

Back 263

Reserving risk

Front 264

Components of R5:

(RBC)

Back 264

Written Premium Risk

Front 265

RBC requirement equation:

(RBC)

Back 265

RBC = R_0 + (R_1^2 + R_2^2 + R_3^2 + R_4^2 + R_5^2)^0.5

Front 266

RBC ratio equation

(RBC)

Back 266

Adjusted Surplus / RBC Surplus

Adjusted Surplus = surplus - non-tabular discount

Front 267

RBC action levels and corresponding triggers:

(RBC)

Back 267

(fill in later)

Front 268

Potential uses of RBC

(RBC)

Back 268

-Minimum capital requirements
-solvency monitoring
-legal authority
-rate making
-marketing

Front 269

How are premiums grouped in part 1

(Schedule P)

Back 269

Calendar Year

Front 270

How are losses grouped in part 1?

(Schedule P)

Back 270

Accident Year

Front 271

Are losses cumulative or incremental in part 1?

(Schedule P)

Back 271

Cumulative (except prior year's row)

Front 272

Are reserves in part 1 net / gross of non-tabular discount? Tabular discount?

(Schedule P)

Back 272

-Gross of non-tabular
-Net of tabular

Front 273

Explain how to derive the average value of an outstanding claim from schedule P:

(Schedule P)

Back 273

Part 1, Col 13 (case reserves) / Part 1, col 25 (claims outstanding)

Front 274

Explain how to derive a triangle of reported losses using schedule P data:

(Schedule P)

Back 274

Part 2 - Part 4

Front 275

Explain how to derive a triangle of Outstanding Case Reserves using Schedule P data:

(Schedule P)

Back 275

Part 2 - Part 3 - Part 4

Front 276

Explain how to derive a triangle of claims closed using Schedule P data:

(Schedule P)

Back 276

Part 5: reported - part 5: outstanding

Front 277

Parts of schedule P that include DCC expenses

(Schedule P)

Back 277

All parts

Front 278

Parts of schedule P that include AOO expenses

(Schedule P)

Back 278

Part 1 only

Front 279

Three sections of part 5

(Schedule P)

Back 279

1) Cumulative claims closed with loss payment
2) Claims outstanding
3) Cumulative reported claims

Front 280

6 Requirements to be treated as loss sensitive

(Schedule P)

Back 280

1) Increase in losses results in an increase in net payment
2) Sensitivity must be at least 75% on primary business and 50% on reinsurance treaties, prior to the application of limits
3) The swing of the plan must be at least 20% for primary, 10% for reinsurance
4) The maximum net payment must be at least 15% greater than the expected net payment for primary, and 7.5% for reinsurance
5) The loss sensitive payments must be either premiums or reinsurance commissions
6) The losses and loss sensitive payments must flow through the income statement.

Front 281

Formula for Premium Sensitivity:

(Schedule P)

Back 281

Change in billed premium / change in reported losses, where:

-billed premium = section 4 (EP) - section 5 (accrued premiums)

-reported losses = section 2 (IL) - section 3 (IBNR reserves)

Front 282

3 reasons that it is usual for policies with exposure audits to have increases in premium over time:

(Schedule P)

Back 282

1) Some insureds understate payroll to lower the deposit
2) Insurers may accept understated exposure estimates to produce competetive deposit premiums
3) The company may book a low written premium to defer state premium taxes.

Front 283

Define the 2 types of adjustment expenses

(Schedule P)

Back 283

1) DCC: expenses that vary with the amount of the loss
2) AAO: expenses which vary with the number of claims

Front 284

3 reasons companies place less emphasis on AAO than DCC reserves:

(Schedule P)

Back 284

1) Small & not subject to much uncertainty
2) Not included in IRIS tests
3) some companies do not believe that they need to hold AAO reserves

Front 285

Outline the formula approach to allocate ALAE:

(Schedule P)

Back 285

-45% of the most recent CY paid ULAE belongs to the most recent AY
-5% belongs to the year prior to the most recent year
-If the distribution to a year from these two steps results in a number greater than 10% of earned premiums for the year, that amount should be capped at 10%
-The remaining 50% of the CY ULAE, plus the amount capped, if any, is distributed to all years in proportion to the loss payments during the latest CY

Front 286

2 assumptions of the Formula Approach of allocating ALAE:

(Schedule P)

Back 286

1) Half the ULAE is incurred when the claim is reported and half when settled

2) 90% of the claims are reported in the year the accident occurs. The remainder is reported in the following year.

Front 287

2 examples of disadvantages of the Formula Approach of allocating ALAE:

(Schedule P)

Back 287

1) Allocating 45% to the most recent AY is too high for lines with long reporting lags.

2) Some components of AAO are more closely related to the number of claims than the loss size

Front 288

Main users of Calendar Year/Accident Year; Report Year; Policy Year

(Schedule P)

Back 288

Calendar Year: Accountants

Policy Year: Underwriters/actuaries

AY: Reserving Actuaries

RY: Claims Personnel

Front 289

Definition of "Provision for Reinsurance"

(Schedule F)

Back 289

Minimum bound of uncollectible reinsurance, used in Statutory accounting

Front 290

Provision for Reinsurance for an Unauthorized Reinsurer Formula

(Schedule F)

Back 290

Provision = Unsecured total recoverables + 0.20 * recoverables over 90 days overdue + 0.2 * amounts in dispute

Amounts in dispute included in both "unsecured total recoverables" and "amounts in dispute"

Front 291

Provision for reinsurance for an authorized slow paying reinsurer formula

(Schedule F)

Back 291

Provision = max(0.20 * unsecured total recoverables, 0.20 * recoverables over 90 days overdue)

Both terms include amounts in dispute (the latter only includes overdue amounts)

Front 292

Provision for reinsurance for an authorized non-slow paying reinsurer formula

(Schedule F)

Back 292

Provision = 0.20 * recoverables over 90 days overdue

includes overdue amounts in dispute

Front 293

Provision for reinsurance for residual market pools formula

(Schedule F)

Back 293

There is no provision for reinsurance for the residual market pools.

Front 294

3 limits to the provision for reinsurance

(schedule F)

Back 294

1) can not exceed the reinsurance recoverables
2) unauthorized reinsurers only: provision for recoverables more than 90 days past due may not exceed the funds securing total recoverables
3) Unauthorized reinsurers: the provision for disputed recoverables may not exceed the funds securing the total recoverables

Front 295

2 Differences between provision for reinsurance and reinsurance written off

(Schedule F)

Back 295

1) Uncollectible reinsurance written off amount is a retrospective disclosure. However, the provision is a prospective estimate.

2) The amount written off is an objective fact. The provision is a formula driven estimate.

Front 296

What is contained in each of the 8 parts of schedule F:

(Schedule F)

Back 296

1) Assumed Reinsurance
2) Porfolio reinsurance
3) Ceded Reinsurance
4) Aging of ceded reinsurance
5) Unauthorized reinsurance
6) non slow paying authorized reinsurance
7) Slow paying authorized reinsurance
8) restatement of balance sheet

Front 297

3 categories that reinsureds are broken into, in schedule F part 1:

(Schedule F)

Back 297

1) Affiliated vs unaffiliated
2) US vs alien
3) Type of company (pools, etc)

Front 298

4 categories that reinsureds are broken into in Schedule F Part 3

(Schedule F)

Back 298

1) Authorized vs unauthorized
2) affiliated vs unaffiliated
3) US vs alien
4) type of company (Pools, etc)

Front 299

Type of security held by the assuming company

(Schedule F)

Back 299

-Funds held by the company
-letters of credit
-ceded balances payable
-miscellaneous balances
-other allowable offset items

Front 300

Equation to determine if a reinsurer is slow paying

(Schedule F)

Back 300

Reinsurance recoverable on paid losses more than 90 days overdue / (total reinsurance recoverables on paid losses + amounts recieved in prior 90 days)

Front 301

Examples of items in schedule F, Part 8 that are restated to zero:

(Schedule F)

Back 301

-Reinsurance recoverables on loss payments
-ceded reinsurance premium payable
-funds held by the company under reinsurance treaties
-provision for reinsurance

Front 302

Examples of items in schedule F, part 8 that are restated to values other than 0

(Schedule F)

Back 302

-Loss Reserves
-Unearned Premiums

Front 303

Balancing items in schedule F, part 8

(Schedule F)

Back 303

-Net amount recoverable from reinsurers
-total assets

Front 304

3 problems with schedule F

(Schedule F)

Back 304

1) 20% trigger for slow paying reinsurers is an arbitrary dividing line
2) ignores some indicators of potential uncollectibility
3) misplaced focus (does not detect inadequate reinsurance)

Front 305

2 indicators of potential uncollectibility that are ignored by schedule F

(Schedule F)

Back 305

1) Reinsurer's potential liabilities in an adverse situation
2) capital structure of a reinsurer

Front 306

3 intended incentives of the provision for reinsurance

(Schedule F)

Back 306

1) encourages insurers to use authorized reinsurance
2) encourages ceding companies to seek collateral from unauthorized or slow-paying reinsurers
3) encourages ceding companies to demand timely payment

Front 307

2 unintended consequences of the provision for reinsurance

(Schedule F)

Back 307

1) unauthorized reinsurers sometimes provide better or cheaper coverage
2) securing recoverables may be expensive

Front 308

2 proposed solutions to account for the problem of schedule F

(Schedule F)

Back 308

1) Change the schedule to be a supplement for management estimates
2) create exhibits that show the terms of the current reinsurance arrangements

Front 309

2 reasons that the regulators do not like the idea of changing Schedule F to a supplement to management estimates

(Schedule F)

Back 309

1) This implies that the GAAP procedure is correct and the statutory is an arbitrary addition
2) if there is a wide difference between the provision and GAAP users may ignore the provision

Front 310

4 areas of investigation that can be identified from exhibits which show the terms of current reinsurance arrangements:

(Schedule F)

Back 310

1) Low policy limits may suggest there are exposures that reinsurers are unwilling to accept
2) if reinsurance is mainly ceded to offshore reinsurers, it is possible the insurer was unable to find domestic insurers willing to accept the exposures
3) if the cessions are below industry avg, the company may be retaining too much exposure
4) if the reinsurance is concentrated in facultative placements instead of general treaties, the reinsurer may have inadvertant gaps in coverage

Front 311

3 reasons that exhibits showing the terms of current reinsurance arrangements are more appropriate for statutory accounting than for GAAP:

(Schedule F)

Back 311

1) Reinsurance is unique to the insurance industry. GAAP is geared for general accounting
2) they will require a lot of expertise to understand
3) Reinsurance reduces risk by also reduces returns. Equity investors do not mind if they get extra return to compensate.

Front 312

2 reasons that it is difficult to determine when reinsurance payments are due:

(Schedule F)

Back 312

1) Many contracts do not contain due dates
2) ceding companies may wait until the losses reach a certain level before submitting to the reinsurers

Front 313

4 types of companies excluded from the Col 5 of Part 3, which is designed to identify fronting companies

(Schedule F)

Back 313

1) Affiliated transactions
2) Pools
3) Small amounts
4) Captives

Front 314

Definition of "fronting company"

(Schedule F)

Back 314

An arrangement where an insurer writes a large portion of business via another insurer

Front 315

Reason that regulators dislike fronting arrangements

(Schedule F)

Back 315

They can't monitor the books of insurers who are not licensed.

Front 316

3 situations in which statutory accounting allows discounting of reserves

(Discounting)

Back 316

1) Tabular reserve discounts
2) Reserve discounts are allowed for certain monoline med mal writers
3) Reserve discounts may be specifically allowed by the insurance commissioner, to help a domestic company to continue to operate despite low statutory surplus

Front 317

Condition that GAAP accounting allows discounting of reserves:

(Discounting)

Back 317

Payment schedule is known, or can be reasonably estimated

Front 318

Tabular discounts are permitted on:

(Discounting)

Back 318

-indemnity portion of WC long term disability claims
-long term disability claims on accident and health insurance policies

Front 319

Formula for discount rate for non-tabular discounts

(Discounting)

Back 319

Min(investment yield - 1.5%, treasury rate yield)

Where investment yield is the yield of invested assets if invested assets >(or <?) reserves; otherwise it is the yield on total assets

Front 320

2 disclosures needed if discount rates change

(Discounting)

Back 320

1) discounted liabilities at both the current and prior rates
2) change in the discounted liability due to the change in the discount rate

Front 321

3 things described in the note "Summary of significant Accounting Policies"

(Notes)

Back 321

1) Source of rules
2) Exceptions in the report to the rules
3) In cases where the rules allow options, the option selected by the insurer

Front 322

Time period during which a "subsequent event" can occur

(Notes)

Back 322

Between the accounting date of the report and the date the the report is filed

Front 323

2 Categories of "subsequent events"

(Notes)

Back 323

Type 1: Recognized Subsequent Events: Provide additional evidence with respect to conditions that existed at the date of the balance sheet

Type 2: Non-recognized subsequent events: provide evidence with respect to conditions that did not exist at the date of the balance sheet

Front 324

Types of subsequent events that should be disclosed in the Notes:

(Notes)

Back 324

-Type 1 events that were, for some particular reason, not already reflected in the financials
-Type 2 events that have a material impact on financials
-Type 3 events that could conceivably have a material impact on financials, but turn out not to

Front 325

Disclosure that has to be made in the "unsecured reinsurance recoverable" section

(Notes)

Back 325

If the insurer has any unsecured receivables from an individual reinsurer over 3% of PHS

Front 326

3 reasons why reinsurers may dispute amounts recoverable:

(Notes)

Back 326

1) Aggressive practices of ceding company
2) Aggressive claims practices of assuming company
3) Legitimate disagreement on how to interpret an issue not addressed in the contract

Front 327

Requirement to qualify a claim as being in "dispute"

(Notes)

Back 327

Formal written communication from the reinsurer denying the claim

Front 328

2 criteria to disclose reinsurance recoverables in dispute

(Notes)

Back 328

1) Amount in dispute from one insurer exceeds 5% of surplus
2) if the aggregate from all insurers exceeds 10% of surplus

Front 329

Regulators are concerned about the amounts in dispute for 2 reasons

(Notes)

Back 329

1) Insurer with large amounts in dispute, but low provisions may have overstated their surplus
2) a ceding company may avoid having a reinsurer listed as slow-paying, by considering some of the recoverables to be in dispute.

Front 330

4 disclosures regarding the uncollectibile reinsurance written off during the year

(Notes)

Back 330

1) Name of reinsurer
2) losses incurred
3) LAE incurred
4) Premiums earned

Front 331

3 disclosures regarding commutations

(Notes)

Back 331

1) Name of reinsurer
2) Loss and LAE
3) Premium

Front 332

3 reasons why it is important to disclose a commutation

(Notes)

Back 332

1) Indicates that the insurer's future net exposure to risk may change
2) Large commutations can result in significant distortions to the income statements and balance sheets
3) may significantly impact the reinsurance collectibility risk

Front 333

Outline statutory accounting treatment of retroactive reinsurance

(Notes)

Back 333

-the assets reduce by the amount of the premium
-the recoverables from retroactive reinsurance are a write in contra-liability for the ceding company
-the gain from the retroactive reinsurance transaction is called special surplus
-the gain will only convert from Special Surplus into Unassigned Surplus once the losses are paid

Front 334

What needs to be disclosed in the Reinsurance Accounted for as a Deposit section?

(Notes)

Back 334

All contracts that receive deposit accounting instead of reinsurance accounting

Front 335

2 reasons that the disclosure of changes in incurred losses & LAE is important

(Notes)

Back 335

1) Informs the reader of the quality of the current earnings

2) May indicate a problem with the reserving practices of the firm

Front 336

Reason intercompany pooling arrangements need to be disclosed in the Notes:

(Notes)

Back 336

In order to accurately assess the solvency of a given member, it is important to know the details of the pooling arrangement, including the members of the pool.

Front 337

Disclosures necessary if the insurer participates in intercompany pooling arrangements:

(Notes)

Back 337

-The lead company & affiliated companies, in addition to their retrospective pooling percentages
-lines of business subject to pooling arrangements

Front 338

Define a "structured settlement"

(Notes)

Back 338

An arrangement where the insurer makes periodic payments to the claimant

Front 339

Disclosures necessary regarding structured settlements

(Notes)

Back 339

-total amount of contingent liabilities - and amount from a single writer exceeds 1% of surplus

-amount of liabilities from this writer

-location of writer

-whether the writer is located in the insurer's domiciliary state

Front 340

When do premium deficiency reserves need to be established?

(Notes)

Back 340

If the unearned premium is insufficient to cover losses & expenses associated with the unexpired portion

Front 341

2 disclosures regarding PDR

(Notes)

Back 341

1) Reserve size
2) whether investment income was calculated in PDR calculation

Front 342

2 reasons that PDRs are rarely generated

(Notes)

Back 342

1) calculated at an aggregate level
2) overhead costs are excluded

Front 343

2 disclosures that are needed regarding high deductible plans

(Notes)

Back 343

1) the amount of outstanding losses that will generate future deductible billing
2) the amount of paid losses, for which the deductible has not yet been collected

Front 344

4 disclosures needed for asbestos/pollution reserves

(Notes)

Back 344

1) Lines of business affected
2) the reserving methodology used
3) Nature of exposures
4) For each of the most recent five calendar years, on both a net & gross basis: beginning reserves / incurred loss & LAE / calendar year payments for loss & LAE / ending reserves

Front 345

List the Sis Principal Functions of Reinsurance

(Reinsurance Accounting)

Back 345

1) Increase Large Line Capacity
2) Provide Catastrophe Protection
3) Stabilize Loss Experience
4) Provide Surplus relief
5) Facilitate withdrawal from a market segment
6) Provide underwriting guidance

Front 346

Two requirements must be met for a contract to be considered as indemnifying the cedent

(Reinsurance Accounting)

Back 346

-Reinsurer assumes significant insurance risk under the reinsured portions of the underlying insurance contracts
-It is reasonably possible that the reinsurer may realize a significant loss from the transaction

Front 347

Describe significant insurance risk

(Reinsurance accounting)

Back 347

There must be possibility of significant variation in either amount of cash flows, or in timing of cash flows between assuming and ceding companies.

Front 348

Describe the potential for a significant loss

(Reinsurance accounting)

Back 348

PV of all net cash flows under reasonably possible scenarios must be evaluated

-Compare PV (all net cash flows) to PV (amounts paid to reinsurer)

-Use same interest rate in all cases

Front 349

Describe the Substantially All exemption from risk transfer

(Reinsurance accounting)

Back 349

Exempt contracts where the reinsurer assumes substantially all of the insurance risk relating to the reinsured portions of the underlying insurance contracts

Front 350

Provide two examples of contractual features that should be considered when determining whether a reinsurer has assumed a significant amount of insurance risk under a reinsurance contract

(Reinsurance accounting)

Back 350

-Contractual features that limit the amount of insurance risk to which reinsurer is subject - Eg, experience refunds, cancellation provisions, adjustable features

-Contractual features that delay the timely reimbursement of claims by the reinsurers - Eg, payment schedules or accumulating retentions from multiple years

Front 351

Describe the Reinsurance Attestation Supplement

(Reinsurance accounting)

Back 351

Requires CEO and CFO to confirm that:

1) There are no separate written or oral agreements between the reporting entity and assuming reinsurer

2) Every reinsurance contract is documented for which risk transfer is not reasonably self-evident and details the transaction's economic intent
3) Reporting entity complies with all requirements set forth in SSAP 62
4) Appropriate controls are in place to monitor the use of reinsurance

Front 352

Novation

(Reinsurance Accounting)

Back 352

Legal replacement of one insurer by another

-extinguishes cedent's liability to policyholder

-Results in the removal of related assets & liabilities from financial statements

Front 353

Describe the 10-10 Rule

(Reinsurance Accounting)

Back 353

-Reinsurance accounting exhibits risk transfer if there is at least a 10% chance of a 10% or greater loss for a reinsurer

-Loosely derived from accounting standard language requiring the reinsurer face a reasonable chance of a significant loss

Front 354

Describe Expected Reinsurer Deficit (ERD)

(Reinsurance Accounting)

Back 354

Probability of a NPV underwriting loss for the reinsurer times the NPV of the average severity

-Generally, transfer of risk shown if ERD > 1%
-Consistend with 10-10 rule (10% loss * 10% chance)

Front 355

Describe common pitfalls in risk transfer analysis

(Reinsurance Accounting)

Back 355

1) Profit Commissions - should generally not be considered in risk transfer analysis - usually are not triggered during a reinsurer loss
2) Reinsurer Expenses - Only cash flows between cedent and reinsurer should be considered in risk transfer analysis
3) Interest Rates and Discount Factors - SSAP 62 requires a constant interest rate for discounting across all simulated scenarios - should not vary because analysis only considers insurance risk
4) Premiums - important to model the actual functioning of the contract
-application of loss ratio caps and experience adjustments are based upon the nominal premium and loss amounts
-Discounting of premium and losses happens after the contract losses and premiums are determined fees other than premiums
-For fees that depend on future events, must be included in the model
5) Evaluation date - Risk transfer assessment is made at the inception date based on facts and circumstances known at the time - date contract comes into force or original effective date
6) Co

Front 356

Describe several considerations when doing a risk transfer analysis

(Reinsurance Accounting)

Back 356

1) Parameter Selection (alpha, beta, gamma, ...)
2) Interest rate - i
3) Payment Pattern: 1/(1+i) + 2 / (1+i)^2 + 3 / (1+i)^3 + ...
4) Loss distribution - gaussian, poisson
5) Parameter risk (alpha +/- sigma)
6) Use of pricing assumptions - can be used for selecting parameters for small or immature books; account for risk load in pricing
7) Commutation clauses - commutation requirement restricts the amount of risk transferred

Front 357

Commutation

(Reinsurance Accounting)

Back 357

Process where the future value of an unpaid claim(s) and associated expenses is current valued, taking into account financial and non-financial aspects, to accelerate payment and close the case(s)

Front 358

Buyer / Primary ceding company's attraction to a commutation

(Reinsurance Accounting)

Back 358

1) Accelerated settlement of the obligation
2) Improvement in current wealth (i.e., valuing cash over non-cash assets)
3) Cash flow for reinvestment or liquidity to use for other purposes
4) Certain immediate amount substituted for future uncertain amount
5) Possible admin savings associated with monitoring and collecting
6) Creating a marginal underwriting loss and federal income tax marginal adjustment

Front 359

Seller / Reinsurers Attraction to a commutation

(Reinsurance Accounting)

Back 359

1) Accelerated settlement of the obligation
2) Improvement in perceived wealth when considering financial and non-financial aspects
3) Limited attracted cash flow alternatives
4) Certain result, not dependent on future events such as retroactive legislation or judicial results
5) ALAE and ULAE savings
6) Creating a marginal underwriting gain with probable adverse current tax consequences

Front 360

Define Ambivalence Point

(Reinsurance Accounting)

Back 360

Point estimate monetary figure representing the highest value the seller is willing to pay the buyer

Formula: AP = (AP - Tax Basis Reserve) * Tax Rate + Basis of Seller's Ambivalence Point

Front 361

5 Benefits of reinsurance

(Reinsurance Accounting)

Back 361

1) Expands capacity
2) Shares large risks
3) Spreads the risk of catastrophes / stablizes underwriting results
4) aids in withdrawing from line
5) reduces net liability to amounts appropriate to the insurer's financial resources

Front 362

2 Classes of reinsurance contracts

(Reinsurance Accounting)

Back 362

1) Treaty: transfers the entire class
2) facultative: transfers individual risks

Front 363

2 types of pro-rata contracts

(Reinsurance Accounting)

Back 363

1) Quota Share
2) Surplus Share

Front 364

2 types of excess of loss contracts

(Reinsurance Accounting)

Back 364

1) Excess per risk
2) aggregate excess per loss

Front 365

4 required terms of reinsurance agreements

(Reinsurance accounting)

Back 365

1) the reinsurance agreement must contain an insolvency clause
2) recoveries due to the ceding company must be available without delay
3) the agreement should provide no guarantee of profit for either party
4) the agreement must provide for reporting of premiums & losses at least quarterly

Front 366

3 additional criteria for a retroactive reinsurance agreement to be treated as reinsurance

(Reinsurance Accounting)

Back 366

1) premium must be specific, fixed amount stated in the agreement
2) compensation if the losses turn out to be better or worse than expected, is prohibited
3) the contract can not be cancelled or rescinded without the approval of the domiciliary commissioner

Front 367

2 components of insurance risk

(Reinsurance Accounting)

Back 367

1) The ultimate amount of net cash flows (underwriting risk)
2) the timing of those cash flows (timing risk)

Front 368

2 criteria needed for a contract to be treated as a reinsurance contract

(Reinsurance Accounting)

Back 368

1) The reinsurer assumes significant insurance risk
2) it is reasonably possible for the reinsurer to realize a significant loss

Front 369

Describe how the ceding company will account for Retroactive Reinsurance

(Reinsurance Accounting)

Back 369

-Reserves are recorded on a gross basis. The recoverables are recorded as a contra liability
-any surplus gained should be recorded as special surplus fund
-this gain shall not be classified as unassigned funds until the actual retroactive reinsurance recovered exceeds the consideration paid
-Upon elimination of the contract, the remaining balance can be transferred from special surplus to unassigned surplus
-the initial gain should be recorded as a write-in item in the statement of income, identified as "Retroactive Reinsurance Gain"

Front 370

Describe how the assuming company will account for Retroactive Reinsurance

(Reinsurance Accounting)

Back 370

-The assumed retroactive reinsurance is excluded from the existing reserves. Instead, it is recorded as a separate write-in liability

-The initial loss is recorded as a write-in item, "Retroactive Reinsurance Loss" under Other Income

Front 371

Funds held or deposited with reinsured companies are admitted assets as long as:

(Reinsurance Accounting)

Back 371

-they do not exceed the liabilities that they secure
-the reinsured is solvent

Front 372

Accounting actions needed for a reinsurance contract in which the ceding commissions exceeds the anticipated acquisition costs:

(Reinsurance Accounting)

Back 372

-ceding company needs to establish a liability equal to the difference between the two

-this liability is amortized pro-rata over the effective period of the reinsurance agreement.

Front 373

2 things that need to be disclosed in the Reinsurance Assumed and Ceded section of the Notes to the Financial Statements

(Reinsurance Accounting)

Back 373

1) the maximum return commission due to the reinsurers if all reinsurance was cancelled

2) the accrual of additional or return commission based on the loss experience

Front 374

2 things that need to be disclosed if the insurer is reinsuring under a quota share treaty which includes a provision that may limit the reinsurer's losses below the quota share percentage:

(Reinsurance Accounting)

Back 374

1) Number of contracts with such provisions
2) if the reinsurance credit reflects the impact of the provisions

Front 375

2 ways to account for a reinsurance agreement that doesn't qualify for reinsurance accounting

(Reinsurance Accounting)

Back 375

1) the ceding company records the amount paid as a deposit (assuming records it as a liability)

2) at expiration, the difference between the amount paid and the amount received is recorded as other income

Front 376

2 criteria for the deposit to be recorded as an admitted asset of the ceding company

(Reinsurance Accounting)

Back 376

1) The assuming entity is licensed
2) There are funds held by the ceding company

Front 377

Describe the steps in a basic risk transfer review

(Reinsurance Accounting)

Back 377

1) Understand the reinsurance contracts terms and conditions
2) Reporting dates and premium due dates need to be determined
3) Monte-Carlo simulation used to model direct loss payments and then project the treaty cessions - ceded losses are discounted to the effective date of the treaty
4) Final premium amounts are determined based on the nominal treaty results - must be careful to model appropriate premium payment dates; premium payments are discounted to the treaty effective date
5) Reinsurer profits/loss is calculated for each iteration of the simulation - NPV of all payments made by cedent minus NPV of all payments made by reinsurer
6) ERD is calculated - viewed as probability of a NPV underwriting loss for the reinsurer multiplied by the NPV of the average severity of the reinsurer underwriting losses

Front 378

Accounting Treatment of commutations

(Reinsurance Accounting)

Back 378

-ceding company eliminates the reinsurance recoverable
-records the cash received as a negative paid loss
-any gain/loss is treated as underwriting income

Front 379

Outline the treatment of a runoff contract by the transferring entity

(Reinsurance Accounting)

Back 379

-the payment to the reinsurer is recorded as a paid loss
-if the payment is less than the reserves transferred, the difference is recorded as a decrease to the losses incurred
-the reinsurance recoverable increases by the amount of the transferred reserve

Front 380

Outline the treatment of a runoff contract by the reinsurer:

(Reinsurance Accounting)

Back 380

The payment is recorded as a negative paid loss.

Front 381

List an advantage of IEE data over Annual Statement data

(IEE)

Back 381

Allocates revenue and expense to line

Front 382

3 parts of IEE

(IEE)

Back 382

1) Allocation to Expense Group
2) Allocation to lines of business net of reinsurance
3) Allocation to lines of direct business written

Front 383

3 components of "Other Underwriting Expenses"

(IEE)

Back 383

1) Acquisition / field supervision & collection expenses
2) General expenses
3) Taxes, licenses, and fees

Front 384

Surplus is allocated to line in proportion to:

(IEE)

Back 384

Mean net loss & LAE reserves + Mean UPR + EP for the year

Front 385

Formula for investment gain ratio

(IEE)

Back 385

Investment gain ratio = Net Investment Gain / (Loss & LAE reserves + UEPR - Agent Balances + PHS)

Front 386

Components of "net investment gain" in the IGR

(IEE)

Back 386

-Investment income
-Realized capital gain

Front 387

Prepaid expenses

(IEE)

Back 387

Commission expenses incurred + Taxes, licenses & fees incurred + Other acquisition, field supervision expenses incurred + 1/2 * general expenses incurred

Front 388

Formula for Funds attributable to insurance transactions

(IEE)

Back 388

Mean net loss & LAE reserves + Mean UPR* [1 - prepaid expense/ written prem] - Mean net agent balances

Front 389

Formula for investable funds associated with LOB

(IEE)

Back 389

Mean net loss & LAE reserves + Mean UPR - mean net agent balances + Allocated PHS

Front 390

2 broad methods to allocate surplus

(IEE)

Back 390

1) Allocate by leverage ratios
2) Allocate by relative risk

Front 391

Differences in surplus assumptions by pricing actuary, and surplus used in IEE

(IEE)

Back 391

-Pricing actuary calculates an assumed surplus

-IEE uses actual surplus

Front 392

Difference of the treatment of investment income by pricing actuary and IEE

(IEE)

Back 392

-Pricing actuary bases on the reserves anticipated to be held in the future based on the new business

-the IEE bases it on actual reserves held by the insurer

Front 393

3 different ways of determining the portion of the investment income to credit to the policy holders

(IEE)

Back 393

-allocate everything
-differentiate by type of investment income
-allocate risk free income

Front 394

2 definitions of surplus

(IEE)

Back 394

1) Balance sheet definition: surplus = assets - liabilities
2) Income statement definition: surplus = prior years surplus + current year's income

Front 395

2 accounting methods for nonadmitted assets

(IEE)

Back 395

1) method 1: write off the nonadmitted assets as an expense (in the income statement)
2) Method 2: classify the asset as nonadmitted & charge surplus directly

Front 396

Non-admitted portion of interest due and accrued

(IEE)

Back 396

Interest due and accrued over 90 days overdue is non-admitted

Front 397

Non-admitted portion of accrued retrospective premium

(IEE)

Back 397

10% of the unsecured accrued retrospective premium is non-admitted

Front 398

Non-admitted portion of Real Estate

(IEE)

Back 398

The permanent excess of book over the market value is a nonadmitted asset

Front 399

Equation for the cost of double taxation (after tax)

(IEE)

Back 399

Investment yield * corporate tax rate * (1- personal tax rate)

Front 400

Equation to derive total amount of capital which is subject to the cost of holding capital

(IEE)

Back 400

-surplus - equity in the unearned premium reserve - equity in the undiscounted reserves

-Deferred Tax Asset should be subtracted from this amount

Front 401

3 components of liabilities

(SSAP 5)

Back 401

1) present responsibilities to transfer/use assets at a specified/determinable date based on the occurrence of a specified event/on demand
2) The entity has little/no discretion to avoid the responsibility
3) The transaction/event that obligates the entity has already occurred

Front 402

Define loss contingency/asset impairment

(SSAP 5)

Back 402

An existing condition involving uncertainty as to possible loss that will ultimately be resolved when one or more future events occur or fail to occur

Front 403

2 necessary criteria to charge a loss contingency / asset impairment to operations

(SSAP 5)

Back 403

1) Information prior to the issuance of the financial statements indicates that the asset has been impaired/liability incurred at the date of the financial statements
2) The amount of loss can be reasonably estimated

Front 404

How should management book the reserve if there is a range

(SSAP 5)

Back 404

-if a particular amount within the range appears to be a better estimate, that amount should be booked
-if no amount in the range appears to be better than the others, the midpoint should be booked

Front 405

How should management book the reserve if there is no range?

(SSAP 5)

Back 405

The best estimate should be booked

Front 406

Criteria to make a disclosure about loss contingency/asset impairment

(SSAP 5)

Back 406

-a contingency / asset impairment is not recorded because only one of the two conditions is met
-there is an exposure to loss higher than the amount accrued

Front 407

2 disclosures that need to be made regarding loss contingency/asset impairment

(SSAP 5)

Back 407

1) nature of the contingency
2) estimate of the possible loss/range of loss; or statement that such an estimate can not be made

Front 408

Disclosures that the insurer needs to make if the contingency involved is a guarantee:

(SSAP 5)

Back 408

1) Nature & amount of the guarantee
2) Approximate term
3) How the guarantee arose
4) The events that would require the guarantor to perform under the guarantee
5) The current status

Front 409

Define "subsequent events"

(SSAP 9)

Back 409

Events that occur subsequent to the balance sheet date, but before the issuance of the statutory financial statements

Front 410

2 categories of subsequent events

(SSAP 9)

Back 410

-Type 1: Recognized subsequent events - provide additional evidence with respect to conditions that existed at the date of the balance sheet

-Type 2: unrecognized subsequent events - provide evidence with respect to conditions that did not exist at the date of the balance sheet

Front 411

Which events should already be reflected in the financial statement

(SSAP 9)

Back 411

Type 1

Front 412

Disclosures about Type 2 events in the financial statements

(SSAP 9)

Back 412

-Nature of the event
-Estimate of its financial impact, or a statement that the estimate cannot be made

Front 413

When is Written Premium recorded for most contracts; and what is the exception to this rule.

(SSAP 53)

Back 413

-Effective date
-exception of WC, which can be recorded on an installment basis

Front 414

When are the additional premium for endorsements and changes in coverage recorded?

(SSAP 53)

Back 414

Effective date of change

Front 415

2 methods to uniformly earn premium throughout the year:

(SSAP 53)

Back 415

1) Daily pro rata: compares the number of days which have elapsed to the number remaining
2) monthly pro rata: assumes that the same amount of business is written on any day of the month, and therefore the mean will be written in the middle of the month

Front 416

Accounting treatment of flat fees

(SSAP 53)

Back 416

Included in "Other Income"

Front 417

How is EBUB recorded, both before and after the exposure is audited?

(SSAP 53)

Back 417

-Prior to the audit, companies should estimate EBUB. Premium is modified by the level of this estimate

-Once the audit is completed, EBUB shall be adjusted to reflect exposures. This adjustment is recognized as revenue immediately.

Front 418

Rule to determine non-admitted EBUB

(SSAP 53)

Back 418

10% of the EBUB in excess of the collateral held is nonadmitted. If any EBUB over this level is not anticipated to be collected, it should be written off.

Front 419

Accounting treatment of advance premiums:

(SSAP 53)

Back 419

-recorded as a liability
-not considered income until due

Front 420

Necessary disclosure if the premium written through MGAs or TPAs exceed 5% of surplus

(SSAP 53)

Back 420

-Name and address
-federal employer identification number
-whether the party holds an exclusive contract
-type of business written
-type of authority granted
-total premium written

Front 421

How are premium/liabilities recorded under Tail Coverage contracts with an indefinite period:

(SSAP 65)

Back 421

-The premium should be fully earned at inception

-The liabilities for unreported claims should be recognized at inception

Front 422

How are premium/liabilities recorded under Tail Coverage contracts with a fixed period

(SSAP 65)

Back 422

-The premium should be earned over the term

-losses should be recorded when reported

Front 423

Accounting action required of insurer if it provides tail coverage at no additional charge

(SSAP 65)

Back 423

Establish a policy reserve to ensure that premiums are not earned prematurely

Front 424

Accounting treatment of structured settlements in which the insurer is the owner and payee

(SSAP 65)

Back 424

-No reduction in loss reserves
-the annuity is recorded as an "other than invested asset" at its present value
-the income from the annuity is recorded as miscellaneous income

Front 425

Accounting treatment of structured settlements in which the claimant is the payee

(SSAP 65)

Back 425

-loss reserves can be reduced
-the cost of the annuity is recorded as a paid loss

Front 426

Difference between SAP and GAAP treatment of structured settlements when the claimant is the owner and payee, but has not released the insurer

(SSAP 65)

Back 426

-GAAP: the gain from the purchase of the annuity needs to be deferred
-SAP: recognizes gain immediately

Front 427

Disclosures necessary when entering into a structured settlement:

(SSAP 65)

Back 427

-The amount of reserves which the company no longer needs to carry because it has purchased annuities with the claimant as payee
-the extent to which it is contingently liable for the liabilities
-if the aggregate value of annuities (for which the insurer has not received a release of liability) from a given life insurer exceed 1% of the surplus, it must disclose the name, location of the insurer and aggregate value of annuities

Front 428

2 requirements to qualify a contract as Long Term contract:

(SSAP 65)

Back 428

-Policy term greater than or equal to 13 months
-Reporting entity cannot cancel contract nor increase premium

Front 429

3 tests necessary to establish UEPR for long term contracts:

(SSAP 65)

Back 429

1) Managements best estimate of the amounts refundable to the contract holders
2) Gross premium * (projected future gross losses & expenses from the unexpired term / projected total gross losses & expenses)
3) Projected future gross losses & expenses to be incurred during the unexpired term, minus the present value of future guaranteed gross premiums

Front 430

Are loss reserves for high deductible policies net or gross of the deductible?

(SSAP 65)

Back 430

Net (unless the deductible is deemed to be uncollectible)

Front 431

Rules to determine nonadmitted balances of recoverables from high deductible policies

(SSAP 65)

Back 431

-If the insurer does not hold collateral, deductible recoveries that are over 90 days overdue are nonadmitted

-If the insurer holds collateral, 10% of the deductible recoverable in excess of collateral is nonadmitted. If amounts in excess of this 10% are deemed uncollectible, they should be nonadmitted as well

Front 432

When do dividends to policyholders become liabilities?

(SSAP 65)

Back 432

When they are declared.

Front 433

Identify three ways in which government insurance programs vary

(Government - Nyce)

Back 433

1) Purpose or rationale
2) Level of government involvement
3) Whether program run at state or federal level

Front 434

Government insurance programs can be grouped into three different types of plans. Identify these and give an example of each.

(Government - Nyce)

Back 434

1) Property-casualty insurance plams - E.g. Terrorism risk insurance programs
2) Social Insurance Plans - E.g. social security, unemployment insurance
3) Financial security plans - E.g. FDIC

Front 435

Briefly discuss the primary objective of private insurance versus government provided insurance

(Government - Nyce)

Back 435

Private insurance seeks to provide actuarial equity. Public insurance programs aim to provide social equity.

Front 436

Identify and briefly describe three reasons for government involvement in providing insurance

(Government - Nyce)

Back 436

1) Fill unmet needs - government provides protection against loss that would otherwise not be provided - E.g. TRIA
2) Compel insurance purchase, facilitate compulsory insurance purchase - E.g. - WC and personal auto - since states require this insurance, must have mechanism to ensure availability at a reasonable cost
3) Obtain Efficiency and provide convenience - similar because providing convenience reduces time and/or resources needed to expend to obtain coverage with added efficiency. For compulsory insurance marketing and commissions are unnecessary
4) Achieve collateral social purpose - Insurance oftenseen as a social good. Can reduce risk to society. Beneficial both to society and to overall economy.

Front 437

Identify and briefly describe the three levels of government involvement in insurance. Give an example of each.

(Government - Nyce)

Back 437

1) Exclusive insurer - reasons - by law, no private insurer offers a competing plan. Function as primary insurer.

2) Partner with private insurer - reason - private insurers no longer able to adequately provide coverage - TRIP and NFIP
3) Competitor to private insurers - Reason - private insurance hasn't failed, but not running efficiently - E.g. competitive WC funds in some states

Front 438

Describe the characteristics of the Fair Access to Insurance Requirements (FAIR) Plans and the relationship to private insurance

(Government - Nyce)

Back 438

Characteristics of government plan - Make basic prop insurance available when it is unavailable due to property location or other reasons

Relationship to Private Insurance - typically insurance pool through which private insurers collectively address unmet need for prop ins. on urban properties; only for consumers who can't get coverage in private market

Front 439

Describe the characteristics of the Work Comp Insurance plans and the relationship to private insurance

(Government - Nyce)

Back 439

Characteristics of Government Plan - Helps employers meet obligations under state statutes

Relationship to private insurance - Can operate as an exclusive insurer - a competitor to private, or as a residual market

Front 440

Describe the characteristics of the Beach and Windstorm Plans, and the relationship to private insurance

(Government - Nyce)

Back 440

Characteristics of Government Plan - Make windstorm cause of loss available when it is unavailable due to property location

Relationship to private insurance - Some states are insurance pools of private insurers; others are ultimately guaranteed with tax payer funds; only for consumers who can't get coverage in private market

Front 441

Describe the characteristics of the residual auto plans and the relationship to private insurance

(Government - Nyce)

Back 441

-Characteristics of government plan - help availability and affordability issues for high-risk drivers

Relationship to private insurance - typically insurance pool through which private insurer collectively address unmet need for compulsory auto liability coverage; only for consumers who can't get coverage in private market

Front 442

Identify and briefly describe four reasons for government participation

(Government - Govt insurance note)

Back 442

1) To fulfill needs not met by private insurance - if private companies are leaving a gap, govt should step in to fill that need
2) Compulsory insurance - when insurance is compulsory, govt should make sure it is available & affordable to all
3) Social purposes - for the social good, govt should provide insurance that private companies can't or won't
4) Efficiency - the govt can be more efficient than a private company
5) Convenience - govt programs may be established because it appears easier to set up quickly and may already be set up to provide services

Front 443

For TRIA, WC, SS, and Maryland Auto Fund, describe the government program

(Government - Govt Insurance note)

Back 443

1) TRIA - set up because private insurance does not have the financial capacity to fulfill this need
2) WC - plans in states with state-run plans. These plans make sure WC insurance is available and affordable to all
3) Social Security - provides a minimum floor of income for all people in old age. Nobody is left out - social good
4) Maryland Automobile Fund - State run exclusive residual market insurer - has efficiencies that private companies do not. E.g. - no commissions

Front 444

Describe the funding of the unemployment insurance program

(Government - govt insurance note)

Back 444

Financing is based solely on tax imposed on employers. A federal tax is levied, 90% returned to states, 10% used for administrative and loans to states that need them. Taxes must be experience rated - tax rates move in tandem with firm layoffs. This acts to stabilize employment. Tax rate max, mins, and time lags in adjustment weaken response.

Front 445

Describe the eligibility of a worker for the unemployment insurance program

(Government - govt insurance note)

Back 445

-Earn certain amount of wages or have worked certain amount of time during a one-year time period
-Unemployed through no fault of own
-Must be actively seeking work

Front 446

Identify two ways the unemployment insurance program may be considered unsuccessful

(Government - govt insurance note)

Back 446

1) Research suggested payments slightly prolong unemployment spells
2) Only about 2/3 bother to collect, which raises social adequacy questions

Front 447

Identify and briefly describe two federal workers compensation programs

(Government - govt insurance note)

Back 447

1) Federal Employee compensation Act - (FECA) -benefits to non-military federal employees for employment related injuries and disease
2) Longshore and Harbor Workers Compensation Act of 1927 - benefits to maritime workers for employment related injuries and disease while on or near navigable waters
3) Black Lung Benefits Act - benefits for wage loss and medical provided to miners totally disabled from pneumoconiosis and eligible survivors

Front 448

Give two arguments in favor of state workers compensations funds and two counterarguments

(Government - govt insurance note)

Back 448

1) Proponents of state funds argue that they are specialists in WC and offer higher levels of services than a multiline insurer - However, there are private insurers that specialize in providing only WC
2) Overhead expense ratios may be lower than private carriers. Absense of admin costs such as agency commissions and other marketing costs - However, evidence suggests both state funds and private insurers can provide WC in an efficient manner

Front 449

Briefly describe the socialization of insurance costs

(Government - Bartlett)

Back 449

Governments attempt to be constraining rate differences between low and high risk insureds

Front 450

Identify four justifications for the socialization of insurance costs

(Government - Bartlett)

Back 450

1) Equal sharing more fair than pricing on relative risk or benefit
2) Risk-based pricing may harm low or middle-income individuals
3) Limit to what someone should pay, regardless of risk
4) Risk-based prices discourage some from buying insurance
5) Price should be affordable if insurance is compulsory

Front 451

Identify three situations where socialization of insurance costs is feasible

(Government - Bartlett)

Back 451

1) Participation is compulsory
2) Single entity providing insurance has no competitors
3) Government can expropriate the profits and equity of private insurers
4) It is believed that benefits outweigh costs of socialization

Front 452

Identify two situations where socialization of insurance costs is difficult

(Government - Bartlett)

Back 452

1) Individuals have the choice to pick insurer or to not purchase insurance
2) Informed low-risk insureds avoid paying the subsidies for high-risk insureds
3) Insurers can circumvent the socialized insurance plan or withdraw from the market

Front 453

Identify the best example of social insurance in the US and why it works

(government - Bartlett)

Back 453

OASDI because participation is mandatory

Front 454

Regulation may be able to exploit conditions that insulate insurers from competition. Identify four structural factors that facilitate cross subsidization

(Government - Bartlett)

Back 454

1) Entry and exit barriers
2) Market power
3) Special cost advantages
4) Value of firm's reputation
5) Switching costs for consumers

Front 455

Under what circumstances may cross-subsidies be possible when insurers are not insulated from competition?

(Government Bartlett)

Back 455

-Owners must be willing to relinquish a portion of normal profits or equity
-Requires some barriers to exit from the market that subject an insurer to expropriation

Front 456

Name four reasons why an insurer would find it difficult to or be reluctant to exit a market

(Government - Bartlett)

Back 456

1) Prior notice requirement
2) Lose economies of scope in cross marketing lines
3) Lose the sunk costs in establishing operations
4) Regulators may require total exit from all lines in state
5) Insurers must balance costs of regulatory constraints with that of exiting

Front 457

Identify three mechanisms used by regulators to impose cross subsidies on insurers

(Government - Bartlett)

Back 457

1) Rating constraints
2) Underwriting constraints
3) Residual market mechanisms (RMMs)

Front 458

Identify two ways that it may be feasible for organizations to voluntarily cross-subsidize

(Government - Bartlett)

Back 458

1) Provide unique benefits to deter low-risk members from leaving
2) Companies that have special advantages or charters that insulate them from competition

Front 459

Describe the two major advantages of the OASDI program being compulsory

(Government - Wiening)

Back 459

1) Social objective of providing a base of financial security to population is achieved more easily
2) Adverse selection controlled because all people are essentially covered

Front 460

Describe what is meant by saying the Social Security program places an emphasis on social adequacy.

(Government - Wiening)

Back 460

Benefits should provide a certain standard of living to beneficiaries. Therefore, the benefit formula is heavily weighted in favor of certain groups, such as low-income people, the aged, and large families

Front 461

State whether OASDI is self-supporting and identify from where the funds needed to run the program come

(Government - Wiening)

Back 461

It is financially self-supporting. Funds needed primarily from:
-Payroll tax contributions of covered employees, employers, self-employed
-Interest on the trust fund investments
-Taxation of part of the OASDI benefits

Front 462

Define Full Funding and identify three reasons full funding is unnecessary for social security

(Government - Wiening)

Back 462

Full funding exists when assets accumulated are sufficient to pay all liabilities accrued to date. Full funding considered unnecessary for Social Security for several reasons:
-Program expected to operate indefinitely into the future and not terminate in future
-Program is compulsory: new workers pay taxes and support program
-If program has financial problems, federal govt can tax and borrow.

Front 463

Identify the types of benefits the OASDHI program provides

(Government - Wiening)

Back 463

-Retirement benefits
-Survivor benefits
-Disability income benefits
-Medicare benefits

Front 464

There are three types of insured status to become eligible for various benefits. Identify these and briefly describe requirements to qualify

(Government - Wiening)

Back 464

Fully Insured - 40 credits or have worked full-time for 10 years

Currently insured - Earned at least six credits during last 13 quarters ending with the quarter in which death, disability, or entitlement to retirement benefits occurs

Disability insured -
-31 or older: at least 20 credits must be in past 10 years
-24-30: Worker must have worked half the time between 21 and time when worker becomes disabled
Before 24 - must have earned 6 credits in 3-year period ending when disability starts

Front 465

In addition to the retired worker age 62 or older, identify and describe three other beneficiaries of Social Security retirement benefits

(Government - Wiening)

Back 465

1) Retired workers spouse if at least 62
2) Retired workers unmarried children under 18
3) Retired workers unmarried disabled children 18 or older if severely disabled before 22 and continue to be disabled
4) Retired workers spouse at any age if caring for dependent children under 16 or for disabled children as defined above

Front 466

Identify and describe four beneficiaries of Social Security survivors benefits

(Government - Wiening)

Back 466

-Unmarried children under 18
-Unmarried disabled children
-Surviving spouse caring for children under 16 or for unmarried disabled children
-Surviving spouse 60 or older if deceased is fully insured
-Disabled widow or widower, 55-59, under certain conditions if deceased is fully insured
-Dependent parents 62 and older if the deceased is fully insured

Front 467

State the requirement that a disability must meet to qualify a worker for disability income benefits.

(Government - Wiening)

Back 467

Physical or mental condition that prevents him from doing any substantial gainful work, and the condition must be expected to last at least twelve months or result in death

Front 468

In addition to diabled beneficiaries, identify who else may receive disability income benefits

(Government - Wiening)

Back 468

-Unmarried children under 18
-Unmarried disabled children as defined above
-Surviving spouse caring for children under 16 of for unmarried disabled children as defined above
-Surviving spouse 62 or older, even if not caring for child

Front 469

Identify and briefly describe the benefits included in Medicare Hospital Insurance (Part A)

(Government - Wiening)

Back 469

-Inpatient hospital care - up to 90 days/benefits period
-Skilled nursing facility care - patient must be hospitalized for at least three days and must require skilled nursing care - 100 days per benefits period
-Home Healthcare services - covered if patient requires skilled care for an injury or illness - prior hospital stay not required
-Hospice Care - physician certified terminally ill beneficiaries covered in medicare certified hospice
-Blood transfusion furnished by hospital or skilled nursing facility
-Additional benefits - including mammograms, pap smears, diabetes glucose monitoring...

Front 470

Give a detailed description of the inpatient hospital care benefit period. Describe the benefits paid for the period

(Government - Wiening)

Back 470

Provided for up to 90 days for each benefits period - benefit period starts when patient first enters hospital, ends after out of hospital or skilled nursing facility for 60 consecutive days

Benefit -
- first 60 days, all expenses covered after the deductible
-61 - 90: a daily coinsurance charge must also be paid
-90+ days: may tap into lifetime 60 days

Front 471

Identify the benefits included in Medicare Supplementary Medical Insurance (Part B)

(Government - Wiening)

Back 471

-Physician services in a hospital, office, or elsewhere
-Medical supplies and durable medical equipment
-Clinical laboratory services, such as blood tests and urinalysis
-Home healthcare visits if the beneficiary is not covered by Part A
-Outpatient hospital services for the diagnosis or treatment of illness or injury
-Blood, except for the first three pints
-Ambulatory surgical services

Front 472

Describe how Medicare Part A and Part B are financed.

(Government - Wiening)

Back 472

Medicare Part A is financed largely by a payroll tax percentage - paid by both employee and employer; self-employed pay double the employee rate; payroll tax applies to all earned income

Medicare Part B is financed largely by a monthly premium paid by insureds and general revenues of the federal government - premiums adjusted annually based on plan experience

Front 473

In addition to the original Medicare Plan, identify and briefly describe three other options under Medicare + Choice (Part C)

(Government - Wiening)

Back 473

-Original Medicare plan with supplemental Policy

-Medicare Managed Care Plan - Must use medicare-approved network of physicians

-Private Fee-for-Service Plan - beneficiaries can buy a private health insurance policy; medicare pays premiums to private plan for covered medicare services; private plan determines premium

-Medicare Medical Savings Account (MSA) - High deductible plan; medicare pays premium and deposits money into MSA; beneficiary uses money in MSA account to pay for medical expenses

Front 474

Briefly describe what Medigap Insurance covers

(Government - Wiening)

Back 474

Pays part or all of the covered charges not paid by Medicare, such as exclusions, deductibles, cost-sharing, provisions, limitations

Front 475

Briefly describe the open enrollment period for Medigap

(Government - Wiening)

Back 475

6-month period from date applicant enrolls in Medicare Part B and is 65 during which insurers cannot reject or charge higher premium due to health during period

Front 476

Briefly describe the terms Earned Right and Universality as they relate to Social Security

(AAA Monographs)

Back 476

-Link between taxed earnings and benefits establishes an earned right
-Program has paid benefits to all those who have worked for sufficient period without regard to income established universality
-Twin concepts have distinguished SS program from other govt programs that provide benefits to more narrowly defined populations

Front 477

Describe the characteristics with which the social security program was designed

(AAA Monographs)

Back 477

-Benefitss based on balance between individual and socail equity
-Financing from participants makes program self-supporting
-Participation is mandatory

Front 478

Describe two ways social security provides individual equity

(AAA Monographs)

Back 478

-Benefits based on age, employment history, occurrence of event paid w/o regard to need
-Benefit formula provides higher benefits to workers with higher earnings or longer careers even if more likely to have saved more

Front 479

Describe two ways social security provides social adequacy

(AAA Monographs)

Back 479

1) Formula for primary insurance amount (PIA) favors lower-paid employers
2) Examination of PIA formula shows benefits replace a higher % of pre-retirement earnings for lower-paid workers than higher-paid
3) Systems also favor less healthy workers and workers with spouses and dependent children

Front 480

Identify the sources of revenue for the social security program

(AAA Monographs)

Back 480

-Payroll tax contributions of covered employees, employers, self-employed
-Interest on the trust fund investments
-Taxation of part of the OASDI benefits

Front 481

Briefly describe three tax changes that would reduce the social security deficit

(AAA Monographs)

Back 481

1) Increase the Payroll Tax across the board - could solve entire problem
2) Increase the limit on Taxable Earnings - could also apply some of payroll tax to all income as for HI, or remove limit completely
3) Increase taxation of benefits - If AGI exceeds a specified threshold, a portion of SS benefit is added to taxable income - treated entire amount as ordinary income
4) Expanded coverage - cover excluded groups such as state/local govt and religious organizations

Front 482

Briefly describe four benefit changes that would reduce the social security deficit

(AAA monographs)

Back 482

1) Reduce benefits across the board
2) Raise the normal retirement age
3) Change benefits formula: PIA formula percentages - reduce the 90/32/15 proportionately, or could reduce only the 32/15 to make formula more progressive
4) Change the benefits formula: bend-point indexing - index bend point using CPI instead of changes in national avg. wage level
5) Change the initial benefits formula: AIME - increase averaging period to 38-40 years
6) Reduce cost of living adjustments (COLA)
7) Double-deck benefits formula - first deck provides a flat dollar amount for all workers to insure adequacy, second deck provides a specified percent of AIME to insure equity
8) Change Auxiliary Benefits - reduce benefit to nonworking spouse to 33%

Front 483

Briefly describe three other alternatives within the defined benefit structure that would reduce the social security deficit.

(AAA monographs)

Back 483

1) Investment of Trust fund assets - invest 40% of trust fund equity in equities, phased in over 15 years
2) Means Testing - would reduce or eliminate benefit payments to participants whose income or assets exceed specified thresholds
3) General Revenue financing from general treasury funds

Front 484

State three arguments for using individual accounts for Social Security

(AAA monographs)

Back 484

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

Front 485

State three arguments against using individual accounts for Social Security

(AAA Monographs)

Back 485

1) Inability of most workers to take total control of own retirement planning
2) Greater uncertainty of benefits tied to performance of securities market
3) Shift in emphasis from social adequacy toward individual equity

Front 486

Briefly describe the characteristics of pure individual account plans for social security

(AAA Monograph)

Back 486

1) All contributions go into accounts
2) All earnings and expenses allocated to accounts
3) All assets are in accounts
4) Benefits paid exclusively from accounts

Front 487

Briefly describe the characteristics of individual add-on account plans for social security

(AAA Monograph)

Back 487

-Leave program essentially intact and suppliment it with individual add-on
-Additional funds used for add-on may be voluntary or mandatory
-May include matching contributions from general revenues

Front 488

Briefly describe the carve-out approach to implementing individual accounts for Social Security

(AAA Monograph)

Back 488

-Portion of payroll taxes (typically 2% from both employer and employee) is diverted from the defined benefit trust fund to individual accounts
-An offset, or carve-out, reduces workers benefits under the current program
-The offset is calculated assuming workers individual account earns a specified target

Front 489

Describe how the carve-out approach may reduce the social security deficit

(AAA Monograph)

Back 489

Increased investment return on individual accounts allows an increase in benefit reduction from current program. This will decrease costs with keeping similar total benefits.

Front 490

Briefly describe three ways social adequacy can be explicitly designed into a system of individual accounts

(AAA Monograph)

Back 490

1) Retain current program benefits as a minimum for the lower-paid workers
2) Retain current program auxiliary benefits
3) Minimum guaranteed benefits
4) Above-market interest rates and/or more favorable anuity purchase rates to lower-paid workers

Front 491

Describe the financing problem with converting to an individual account system

(AAA Monograph)

Back 491

Under current system, each generation largely pays for benefits of preceding generation. Under individual account system, each generally pays for his own benefits. During transition, there will be a generation paying for both.

Front 492

Other than the financing problem, identify three other issues with using individual accounts for Social Security

(AAA Monograph)

Back 492

1) Voluntary or Mandatory Accounts
2) Managing Individual accounts
3) Payout of funds

Front 493

Briefly describe three issues with a voluntary program that do not arise under a single, mandatory plan for using individual accounts for Social Security

(AAA Monograph)

Back 493

1) What benefits would those who stay in traditional SS receive?
2) Should workers who opt out of individual accounts get reduced benefits?
3) Should workers be told program they choose is subject to unspecified changes?
4) Is decision to participate one-time and irrevocable?

Front 494

Briefly describe the increase in program costs with making individual accounts voluntary

(AAA Monograph)

Back 494

-Tracking workers choices and maintaining parallel systems for workers opting-in and opting-out
-Handling initial and ongoing communications with workers about alternatives
-Paying additional costs caused by workers who opt-in or out to maximize their benefits based on particular circumstances

Front 495

Identify three considerations with requiring the conversion of funds to an annuity as opposed to receiving a lump sum upon retirement

(AAA monograph)

Back 495

1) Limit freedom of choice
2) Favor people with longer life expectancy
3) Ensure that retirees do not outlive their resources
4) Address widespread lack of investment skills
5) Reduce cost of annuities
6) Make unisex pricing feasible due to being compulsory

Front 496

Briefly describe how a FAIR plan operates

(Hamilton and Ferguson)

Back 496

-Property owner unable to get coverage through voluntary market applies to FAIR plan through authorized agent or broker
-FAIR plan may write business or contract with voluntary writers to service business for a percentage of the premium. Servicing carrier underwrites, services, settles claims

Front 497

Briefly describe the types of properties that are considered uninsurable under FAIR plans and Beach and Windstorm plans

(Hamilton and Ferguson)

Back 497

Both FAIR plans and Beach and Windstorm plans
-In poor physical condition or with unrepaired previous damage
-subject to poor housekeeping
-In violation of law or public policy
-Not built in accordance with building and safety codes

FAIR plans also consider the following properties uninsurable
-Vacant or open to trespass

Front 498

Briefly describe how a beach and windstorm plan operates

(Hamilton and Ferguson)

Back 498

-The plan issues and services policies, except for LA and MS which use single servicing carrier for u/w, services, and claims
-In all plans, property insurers share in plan losses according to premium volume
-Plans offer coverage only in designated coastal areas

Front 499

With beach and windstorm plans, cancellation is commonly subject to a 30-day statutory notice with three exceptions. State the three

(Hamilton and Ferguson)

Back 499

1) Nonpayment of premium
2) Material misrepresentation
3) Evidence of arson at direction of or by the owner/occupant

Front 500

Describe the purpose of residual market auto insurance

(Hamilton and Ferguson)

Back 500

Program intended to make auto insurance more available and affordable to drivers who cannot otherwise purchase auto insurance

Front 501

Identify three differences between reinsurance facilities and joint underwriting associations

(Hamilton and Ferguson)

Back 501

1) JUAs have limited number of servicing carriers
2) JUAs have greater control over operations
3) JUA rates are based on experience of drivers in plan
4) JUA rates are uniform
5) Drivers in reinsurance facilities do not know they're in residual market

Front 502

Identify three potential disadvantages of automobile assigned risk plans

(Hamilton and Ferguson)

Back 502

1) Stigma of being in the automobile insurance plan
2) Coverage may not be available for all coverages or higher limits
3) May be unfair distribution of losses among insurers

Front 503

Compare the relationship of the insured and insurer and risk placement mechanism for automobile insurance plans, reinsurance facilities, and joint underwriting associations

(Hamilton and Ferguson)

Back 503

In reinsurance facilities, insured does not know they're in residual market. The insurer cannot reject an insured, but cedes premium to facility. In JUAs, and assigned risk plans, driver is assigned to a carrier after being rejected by voluntary carrier.

Front 504

Compare the development of rates charged for automobile insurance plans, reinsurance facilities, and joint underwriting associations

(Hamilton and Ferguson)

Back 504

In a reinsurance facility, insurers charge the same as their voluntary risks, which differ by company. For JUAs, pool experience is used to develop rates, and they are uniform. In an assigned risk plan, they are determined by the regulators and are uniform. For JUAs and assigned risk, the rates are typically higher than the rates in the voluntary market.

Front 505

Compare the Experience sharing mechanism automobile insurance plans, reinsurance facilities, and joint underwriting associations

(Hamilton and Ferguson)

Back 505

From assigned risk plans, the insurer takes all profits and losses from assigned risks. In JUAs, and reinsurance facilities, expenses and losses are shared by all insurers.

Front 506

State the goals of the national flood insurance program (NFIP)

(CPCU)

Back 506

-Provide flood insurance for property owners
-Reduce the cost of disaster relief funded by taxpayer following a flood
-Reduce flood damage through flood plain management and the enforcement of building standards

Front 507

Discuss the Flood Disaster Protection Act of 1973

(CPCU)

Back 507

-Mandated participation in the NFIP and purchase of flood insurance for many
-Enforced by requiring all federally regulated lending institutions to require NFIP flood insurance for properties in floodplains to get mortgage
-Participation in NFIP increased dramatically

Front 508

Discuss the amendments to the NFIP via the National Flood Insurance Act of 1994

(CPCU)

Back 508

-Stronger mandatory flood insurance purchase requirement to increase compliance by lenders
-Increased coverage limits
-Provided flood mitigation grants to assist communities to help reduce flood damage
-Require FEMA to reassess flood hazard map every 5 years

Front 509

Describe the three components of the NFIP used to accomplish its primary goals

(CPCU)

Back 509

1) Flood insurance - federal govt assumes liability for insurance coverage; establishes rates/limits; can borrow from treasury; sale of flood insurance under NFIP subject to rules/regulations set by FEMA
2) Floodplain management
-Implemented through community operated programs that identify and implement controls to prevent or minimize flood damage
-When a community agrees to adopt and enforce floodplain management, the NFIP flood insurance becomes available to property owners in community
3) flood hazard mapping
-FEMA identifies flood hazard areas throughout US
-flood insurance rate maps show base flood elevations, insurance risk zones, and floodplain boundaries

Front 510

Describe the NFIP Write Your Own program

(CPCU)

Back 510

-NFIP policies sold and administered by selected private insurance companies
-Write flood coverage under own name, handle sale, processing and claim payment
-Companies paid a fee for this service
-Federal government responsible for underwriting losses

Front 511

Name two successes of the NFIP's mitigation efforts and two weaknesses identified from the period 1993 to 2003.

(CPCU)

Back 511

Successes
1) Dollar spent on mitigation saves society an avg. of $4 in future losses avoided
2) FEMA mitigation grants are cost-effective and often lead to other non-federally funded mitigation activities, reducing losses
3) Dollar spent on mitigation saves $3.65 because of avoided post-disaster relief costs and increases in federal tax

Weaknesses
1) Discourage individual and state/local govt responsibility to mitigate risk
2) Encourage expectation that federal govt will reimburse disaster victims

Front 512

Name and describe three problems with the NFIP exposed by Hurricane Katrina

(CPCU)

Back 512

1) Financial problems
-Total claims from Katrina and Rita is more than 11 times greater than annual premiums collected
2) Lack of participation
-Failure to buy or renew NFIP policies
-Not enough coverage
-Failure to recognize risk
3) Operational problems
-claims processing
-encouragement of development in high-risk areas
-flood plain management not robust enough

Front 513

Describe three reasons for shortfall in the NFIP premiums

(CPCU)

Back 513

1) Subsidized Insurance Rates
-Authorized by congress to encourage communities to participate in flood insurance program
2) Basis in average annual losses, not in potential catastrophic losses
3) Repetitive Loss Properties

Front 514

Define a severe repetitive loss property

(CPCU)

Back 514

4 or more claims or 2-3 losses > insured value of property

Front 515

Describe how the flood insurance reform act of 2004 addressed repetitive loss properties

(CPCU)

Back 515

-Implemented to reduce the claims from these properties
-Provide assistance to mitigate risk: elevate, relocate, demolish
-If refuse to take action, premiums are raised commensurate with the risk - premiums no longer subsidized

Front 516

Briefly describe the objectives of the National Catastrophe Plan

(CPCU)

Back 516

-Protect homeowners by ensuring the affordability and availability of insurance against the financial consequences of natural catastrophic events
-Spread catastrophic risk broadly among individual insureds, insurers, reinsurers, states, and federal governments
-Reward mitigation of hazards

Front 517

The national catastrophe plan is a comprehensive multi-layered system of risk-bearing capacity. Describe the three proposed layers

(CPCU)

Back 517

1) First layer of protection: The private insurance industry - all peril coverage provided by private insurers
2) Second layer of protection-State and regional catastrophe funds; every state is required to create either a state cat fund or participate in regional cat fund; responsible for creating and managing the insurance capacity of their jurisdiction; up to costs expected for a 1 in 50 year cat loss level
3) Third layer: federally funded reinsurance program - creation of new federal agency (National Catastrophe Insurance Commission); function as chanel between state funds and U.S. Treasury to provide reinsurance to state funds for events beyond 1 in 50 year exposure

Front 518

Describe the reconditioning needs of the NFIP identified by the GAO

(CPCU)

Back 518

-Significant reduction in subsidies
-Increase property owner participation in program
-Develop accurate, digital flood maps
-Provide effective oversight of flood insurance operations

Front 519

Describe the Hurricane Katrina and Hurricane Rita Flood Insurance Buy-in Act of 2005

(CPCU)

Back 519

Retroactive purchase of NFIP insurance by owners not in recognized flood plain:
-Must have had insurance covering wind damage
-Limits lower than max under NFIP
-Premiums 105% of what they would've been
-Premiums deducted from loss payments
-Owners required to maintain flood insurance coverage in future

Front 520

Describe the Consumer Mortgage Coalition Plan differs from the Buy-in Act of 2005

(CPCU)

Back 520

Similar but makes properties located in established flood zones eligible

Front 521

Briefly describe four major challenges facing the NFIP

(Williams)

Back 521

1) Reducing losses to the program from policy subsidies and repetitive loss properties
2) Increasing property owner participation in program to include both high-risk areas and less flood-prone areas still at risk
3) Developing accurate, digital flood maps
4) Providing effective oversight of flood insurance operations

Front 522

Briefly describe three goals of the NFIP

(Williams)

Back 522

1) Provide property flood insurance coverage
2) Reduce taxpayer-funded disaster assistance when flooding strikes
3) Reduce flood damage to properties through floodplain management that is based on accurate, useful flood maps and enforcement of relevant building standards

Front 523

Describe two reasons the NFIP is not financially sound

(Williams)

Back 523

1) Policy subsidies significantly reduce NFIP's income from premiums. 25% of NFIP's policies have premiums that are substantially less than true risk premiums. Properties that were constructed before their communities joined NFIP

2) Repetitive loss properties continue to be a drain on the program. Problematic due to vulnerability of properties to flooding and costs of repeatedly repairing flood damages. Properties account for 1% of NFIP covered properties but 25-30% of losses.

Front 524

Briefly describe the primary groups who use flood maps

(Williams)

Back 524

1) communities participating in the NFIP, to adopt and enforce programs minimum building standards
2) FEMA, to develop flood insurance policy rates based on flood risk
3) Federal regulated mortgage lenders, to identify properties statutorily required to purchase federal flood insurance

Front 525

Define severe repetitive loss property

(Williams)

Back 525

Property covered under flood insurance by the NFIP which:

-Incurred flood-related damage for which 4 or more separate claims payments paid under flood coverage, with each exceeding $5,000, or
-Had at least 2 separate claims with cumulative amount exceeding value of property

Front 526

Describe the mass marketing campaign called "FloodSmart"

(Williams)

Back 526

-Educate public about risks of flooding
-Encourage the purchase of flood insurance
-Mail, TV adds, print advertising and web sites usedd
-3 years since contract began - 24% growth; retention increased from 88% to 92%

Front 527

Describe why placing flood program on more sound financial footing involves trade-offs

(Williams)

Back 527

1) Increasing premiums to better reflect risk makes program more financially sound but could
-reduce voluntary participation
-encourage those required to purchase limit their coverage to minimum required

2) Taxpayers exposure for disaster assistance could increase

Front 528

Statutory formula for carrying value of a bond:

(IASA 2)

Back 528

-NAIC1 & NAIC2: valued at amortized cost

-NAIC3 - NAIC6 bonds: valued at the lower of amortized cost and fair value

Front 529

Statutory valuation rule for stocks:

(IASA 2)

Back 529

Held at fair value (from the valuation of securities database)

Front 530

Statutory valuation for preferred stocks

(IASA 2)

Back 530

-RP1 - RP2 are valued at amortized cost
-P1-P2 are valued at fair value

-RP3-RP6 and P3 - P6 are valued at the lower of amortized cost or fair value

Front 531

Statutory Valuation for mortgage loans

(IASA 2)

Back 531

If issued by insurer
-the initial value is equal to the unpaid principle amount net of loan origination fees
-after issue, the value is reduced by the principle repayments

If purchased by the insurer:
-the initial value is the amount paid to the seller
-again, this is reduced by the principal payments

Front 532

Statutory valuation rule for real estate

(IASA 2)

Back 532

-properties occupied by the company: valued at depreciated cost net of encumbrances
-properties held for production of income: valued at depreciated cost net of encumbrances
-properties held for sale: valued at lower of depreciated cost or fair value, minus encumbrances and estimated costs to sell the property

Front 533

Equation to derive "depreciated cost" of real estate

(IASA 2)

Back 533

Fair value of amount paid + costs to acquire title + costs to place into a usable condition + subsequent expenditures - Depreciation

Front 534

Rule to determine nonadmitted portion of Receivables for Securities

(IASA 2)

Back 534

Balances not received within 15 days are nonadmitted

Front 535

2 reasons that a reinsurer may hold funds with a reinsured company

(IASA 2)

Back 535

-collateral
-ceding company may need an advance of funds to pay losses

Front 536

2 criteria for funds held with reinsured companies to be admitted

(IASA 2)

Back 536

1) Company is solvent
2) funds do not exceed the liabilities due to the company

Front 537

Are bills receivable taken for premiums admitted or nonadmitted?

(IASA 2)

Back 537

Admitted

Front 538

Portion of amounts billed and receivable under deductible & service only plans that is nonadmitted

(IASA 2)

Back 538

10% of (losses under the deductible - collateral). If any amount above this is believed to be uncollectible, this is also nonadmitted.

Front 539

Rule to determine admitted portion of EDP

(IASA 2)

Back 539

EDP is admitted, limited to 3% of surplus

Front 540

Rule to determine nonadmitted portion of rents receivable on real estate

(IASA 2)

Back 540

Portions over 90 days overdue are nonadmitted.

Front 541

Portion of interest due on bonds that is nonadmitted

(IASA 2)

Back 541

Portion that is not past due

Front 542

2 criteria to use the "net adjustment method of translation" when recording assets valued in foreign currencies

(IASA 2)

Back 542

1) Maintained in a Canadian branch
2) less than 10% of insurer's total amounts

Front 543

Describe the "Net adjustment method of translation"

(IASA 2)

Back 543

Report Canadian assets & liabilities in Canadian dollars, and then include a net adjustment to the balance sheet to cover the difference between Canadian surplus in Canadian dollars and USD

Front 544

Treatment of all other foreign assets that do not qualify for the net adjustment method of translation

(IASA 2)

Back 544

Each asset is converted to USD by applying the foreign exchange rate applicable at the balance sheet date

Front 545

Portion of bills receivable not taken for premiums that is nonadmitted

(IASA 2)

Back 545

The entire amount

Front 546

Portion of leasehold improvements that is nonadmitted

(IASA 2)

Back 546

The entire amount

Front 547

Reason that loans on personal security are nonadmitted

(IASA 2)

Back 547

Questionable economic value to fulfill policyholder obligations

Front 548

Reason that loans on company stock is nonadmitted

(IASA 2)

Back 548

It is unlikely that collateral can be used to satisfy policyholder obligations if the insurer becomes insolvent

Front 549

Examples of short term investment instruments

(IASA 9)

Back 549

-Commercial paper
-Certificates of deposit
-Treasury bills
-Repos
-Money Market Mutual Fund

Front 550

Define "Commercial Paper"

(IASA 9)

Back 550

Unsecured promissory notes that are either sold with an interest rate or at a discount

Front 551

Advantage and disadvantage of Treasury Bills compared to Commercial paper

(IASA 9)

Back 551

Pro: safer
Con: lower yield

Front 552

Describe a "repurchase agreement"

(IASA 9)

Back 552

Entity purchases securities, and agrees to resell them later at a stated price on a specific date

Front 553

Describe the accounting treatment of a repurchase agreement

(IASA 9)

Back 553

-The amount paid for the security is recorded as a short-term investment
-The difference between the amount paid and the amount received when resold is interest income

Front 554

Describe the accounting treatment of a reverse repurchase agreement

(IASA 9)

Back 554

-The amount received is treated as a liability
-The difference between the amount received and the amount paid when repurchased is an interest expense

Front 555

Describe a "dollar repurchase agreement"

(IASA 9)

Back 555

A repurchase agreement that involves mortgage backed securities

Front 556

Describe a "Loan backed / Asset backed security"

(IASA 9)

Back 556

Debt obligations that are secured by a pool of assets. The cash flows from the assets are used to meet cash flow requirements of the bond issue.

Front 557

List and describe 2 types of Municipal Bonds

(IASA 9)

Back 557

1) General obligation bonds: backed by full faith and credit of the issuing body
2) Revenue bonds: backed by revenues from specific project

Front 558

Describe Foreign Bonds/ Eurodollar Bonds and Yankee Bonds

(IASA 9)

Back 558

-Foreign bonds are those which are denominated in a currency other than USD

-Eurodollar bonds are issued in the European market and denominated in USD

-Yankee bonds are issued by foreign entities in the US, and denominated in USD

Front 559

Advantage of purchasing Eurodollar or Yankee bonds

(IASA 9)

Back 559

Gain the more attractive yield available outside the US without having to be exposed to foreign currency rates

Front 560

Difference between a cumulative and non-cumulative preferred stock

(IASA 9)

Back 560

-Non-cumulative: if the company does not declare a divident, the preferred stockholder is not entitled to a divident

-Cumulative Preferred Stocks: dividends accumulated until paid by the company

Front 561

Describe a "warrant"

(IASA 9)

Back 561

Entitles the holder to buy a specified amount of stock at a specified price

Front 562

Valuation rules of preferred stock

(IASA 9)

Back 562

-Preferred stocks with mandatory sinking funds which have a rating of PSF1 or 2 are valued at the amortized cost

-Preferred stocks with mandatory sinking funds which have a rating of PSF 3-6 are valued at the lower of market value or amortized cost

-Preferrd stocks without sinking funds which have a rating of P1 or 2 are valued at market value

-Preferred stocks without mandatory sinking funds which have a rating of P3-6 are valued at the lower of market value or amortized value

Front 563

Valuation rule for real estate

(IASA 9)

Back 563

Properties which are occupied by the company, and intended for the production of income: reported at Depreciated cost - Encumbrances

Properties held for Sale: Valued at Min(depreciated costs, fair value) - Encumbrances - Estimated sales costs

Front 564

Describe a cap/floor & collar

(IASA 9)

Back 564

-Cap: effectively sets a maximum level to a price of an underlying instrument, by making a payment if an underlying interest exceeds a predetermined level

-Floor: effectively sets a minimum level to which the price of an instrument can fall, by making a payment if the underlying interest does not exceed a predetermined level

-collar: is the combination of a floor and cap, effectively locking the price of an instrument between a range

Front 565

Main difference between forwards and futures contracts

(IASA 9)

Back 565

The futures contract is traded on an exchange

Front 566

Describe the accounting treatment of derivatives used by the insurer to hedge a bond portfolio:

(IASA 9)

Back 566

Accounted for in a manner consistent with the hedged item

Front 567

Describe the accounting treatment for derivatives that do not qualify for hedge accounting

(IASA 9)

Back 567

Mark to mark method, in which unrealized gains and losses are recognized in earnings

Front 568

2 methods to analyze investment holdings, according to NAIC Model Investment Laws

(IASA 9)

Back 568

1) Defined Limits Version: defines & sets guidelines for the types & percentages of invested assets that insurers can own

2) Prudent Person Version: Instead of setting various guidelines, this relies on the insurer to use judgment

Front 569

Examples of items that are classified as "Other Income"

(IASA 10)

Back 569

-Net gain or loss from agents or premium balances charged off
-finance & service charges not included in premium
-Aggregate write-ins for miscellaneous income
-dividends to policyholders
-federal & foreign income taxes incurred

Front 570

2 uses of "Net gain or loss from agents or premium balances charged off"

(IASA 10)

Back 570

1) analyze insurers efficiency of collecting premium
2) provide proper bad debt treatment for tax purposes

Front 571

Examples of Aggregate write ins for miscellaneous income

(IASA 10)

Back 571

-premiums for life insurance on employees
-checks cancelled because of nonpresentation for payment
-corporate expenses
-fines & penalties
-miscellaneous income/expenses

Front 572

Examples of transactions that would produce Direct Increases to Surplus

(IASA 10)

Back 572

-Increase in Unrealized Capital Gains
-Increase in Unrealized Forex Capital Gains
-Increase in Deferred Tax Asset
-Increase in Surplus Notes
-Incres in Capital Paid In
-Increase in Surplus Paid In
-Increase in remittance from Home Office

Front 573

Examples of transactions that would produce Direct Reductions to Surplus

(IASA 10)

Back 573

-Increase in Unrealized Capital Losses
-Increase in Deferred TAx Liability
-Increase in Nonadmitted Asset
-Increase in Provision for Reinsurance
-Increase in Surplus withdrawn from Protected Cells
-Increase in Dividends to Stockholders
-Increase in Treasury Stock

Front 574

Describe "capital paid in"

(IASA 10)

Back 574

Par value of shares issued or retired during the period

Front 575

Describe "surplus paid in"

(IASA 10)

Back 575

Difference between par value and price of shares issued

Front 576

3 sources of financial reporting

(IASA 15)

Back 576

1) State government
2) GAAP
3) SEC

Front 577

What is covered by the Securities Act of 1933

(IASA 15)

Back 577

Provides for registration of securities to be sold to public. Calls for disclosures via registration statement and prospectus.

Front 578

Purposes of the Securities Act of 1934

(IASA 15)

Back 578

Calls for regulation of national securities exchanges and over the counter markets

Front 579

2 issues addressed by SAB 5-N

(IASA 15)

Back 579

1) SEC allows discounting of liabilities at the same rat ethat company uses to report to the state regulatory authority with respect to the same liabilities
2) a change from discounting at the statutory discount rate to an investment related rate is a change in accounting and therefore has an income impact

Front 580

Purpose of Sarbanes Oxley

(IASA 15)

Back 580

Requires that the issuers principal executive and financial officers certify the financial information in the quarterly and annual reports

Front 581

3 things that Sarbanes Oxley requires the officers certify

(IASA 15)

Back 581

1) They are responsible for establishing, maintaining, and regularly evaluating the effectiveness of the insurer's internal controls
2) They have made certain disclosures to the insurers auditors about the insurers controls
3) they have included information in the insurers quarterly and annual reports about their evaluation and whether there ahve been significant changes in the issuer's internal controls

Front 582

Method of Allocating Management Fees paid to an affiliated company

(IASA 8)

Back 582

Allocated as if borne by the insurer itself

Front 583

Method of allocating management fees for claims handling paid to non-affiliated company

(IASA 8)

Back 583

-if less than 10% of total LAE: allocated to claim adjustment services of the loss adjustment expenses column of the underwriting & expense exhibit

-if greater than 10%: allocated to the appropriate expense classification, as if directly borne by the company

Front 584

Method of allocating management fees for services other than claims handling paid to a non-affiliated company

(IASA 8)

Back 584

-if less than 10% of the total other underwriting expenses: allocated to commission and brokerage (if a % of the premium), or allowances to managers and agents (if not a % of premium)

-if greater than 10%: allocated to the appropriate expense classification as if borne by the company

Front 585

4 things that expense controls should verify

(IASA 8)

Back 585

-Expense transactions are properly recorded
-No unauthorized access is allowed to accounting records
-effective control of purchasing/receiving
-periodic reconciliation of records

Front 586

List 2 examples of expense controls

(IASA 8)

Back 586

1) Expense Information System (EIS)

2) Standards for Authorization and Payment

Front 587

Brief description of Expense Information System

(IASA 8)

Back 587

This records/edits/classifies & allocates expenses. Usually linked to other systems, to assist in multiple accounting entries arising from a given transaction

Front 588

Definition of "responsible accounting"

(IASA 8)

Back 588

Divide the insurer into several cost centers and allocate responsibilities to each segment

Front 589

List the 4 characteristics of measurement of performance, to be used in responsibility accounting

(IASA 8)

Back 589

1) Relevant to the responsibilities of those being measured
2) About activities controllable by the relevant staff member
3) Understandable
4) Explainable

Front 590

3 keys to successfully implement a benchmarking program in the P&C industry

(IASA 8)

Back 590

1) The insurer must be open to new ideas
2) The insurer must recognize that the best companies are not always direct competitors
3) The insurer should set a goal to improve the performance over a specified time horizon

Front 591

Describe the accounting treatment of the proceeds of selling an option

(IASA 9)

Back 591

-Initially reported as a liability
-If the option is exercised, record as part of the payment for the underlying security
-If the option expires, treated as a realized capital gain
-If the option is eliminated through a closing purchase transaction, the consideration received less the cost of the closing purchase is treated as a capital gain or loss