Accounting Practices

Question 1

Codification of SAP Project

Answer 1

• produced a comprehensive guide to SAP that provided a consistent and comprehensive basis of accounting and reporting
• Guide is called the NAIC Accounting Practices and Procedures Manual (and consists of the various SSAPs

Question 2

Reasons for the codification of SAP

Answer 2

• Provide efficiency of reporting
• Allow regulators and NAIC to aggregate financial information more easily
• Financial information is comparable between companies
• Provide further national uniformity to financial reporting

Question 3

Concepts underlying SSAPs (Statements of Statutory Accounting Principles)

Answer 3

CCR
- Conservatism (estimates should be conservative to protect policyholders)
- Consistency (regulators need financial info comparable across companies)
- Recognition (solvency assessments are based on balance sheet, the income statement is secondary)

Question 4

Hierarchy of Accounting Rules

Answer 4

SENSG
1. SSAPs
2. Emerging Accounting Issues Working Group
3. NAIC Annual Statement Instructions
4. SAP Statement of Concepts
5. Sources of nonauthoritative GAAP accounting guidance & literature

Question 5

Deviations from NAIC APPM (Accounting Practices and Procedures Manual)

Answer 5

• If an insurer wants to deviate from APPM or state-prescribed accounting practices, the regulator must provide notice 5 days in advance of approval to all states where the insurer is licensed
• This notice must disclose
  - description of the request
  - quantitative impact

Question 6

SSAP-53: What is a Premium Deficiency Reserve

Answer 6

A PDR is a liability equal to the amount by which future outflows exceed future inflows
- outflows include: losses, LAE, commissions and acquisition, maintenance costs
- inflows include: recorded UEPR, future installment premiums on existing policies

Question 7

SSAP-53: What is Earned But Unbilled Premium (EBUB)

Answer 7

EBUB is an estimate of audit premium for WC
- written/earned premium is adjusted by the EBUB amount
- after policy expiration, an audit is performed and EBUB is adjusted by the appropriate amount
- EBUB is then immediately recognized in the financial statements

Question 8

SSAP-5R: 3 Components of a liability

Answer 8

• responsibility to transfer assets upon occurrence of a specified event
• responsibility cannot be avoided
• event has occurred

Question 9

SSAP-5R: Loss Contingency/Asset Impairment (Definition and 3 Levels)

Answer 9

Definition:
- a condition involving uncertainty regarding amount of loss
- resolved when future event occurs or fails to occur

Levels:
1. probable (likely to occur)
2. reasonably possible (between probable and remote)
3. remote (slight chance of occurring)

Question 10

SSAP-5R: If a financial instrument has characteristics of both liabilities and equity, then how should it be reported in financial statements?

Answer 10

As a liability, to the extent the instrument embodies an unconditional obligation to the issuer

Question 11

SSAP-55: 2 Categories of LAE

Answer 11

1. DCC (Defense Cost & Containment): defense, litigation, medical cost containment expenses (whether internal or external)
   
   • examples
     - litigation management
     - rehab nurses
2. A&O (Adjusting & Other): expenses other than DCC
   
   • examples
     - adjuster fees
     - attorney fees

Question 12

SSAP-63: What is an involuntary pool?

Answer 12

• state-mandated
• provides coverage to high-risk customers who can’t otherwise find coverage
• premiums & losses are shared according to participants’ share of voluntary market
• also called residual market plans

Question 13

SSAP-63: What is a voluntary pool?

Answer 13

• not-state-mandated
• provides greater capacity for risks with very high insurable values (e.g. aircraft, nuclear)
• premium & loss-sharing mechanism not specified

Question 14

SSAP-63: What is an intercompany pool?

Answer 14

• relates to business pooled among affiliated entities
• premiums & losses are shared according to quota-share reinsurance agreement

Question 15

SSAP-63: How are U/W results for voluntary & involuntary pools accounted for (gross or net)?

Answer 15

Gross
- this means that premiums, losses, expenses are recorded separately in financial statements not netted against each other
- business ceded to a pool is treated as “normal” reinsurance

Question 16

SSAP-63: Are equity interests in a pool treated as admitted or non-admitted assets?

Answer 16

Admitted (this is a “cash advance” to provide funding for the pool and is separate from receivables and payables related to a pool’s underwriting results)

Question 17

SSAP-63: Can members of a pool be subject to join & several liability?

Answer 17

Yes

Question 18

SSAP-63: If a reporting entity is part of a pooling arrangement where participants cede substantially all of their business to the pool, the financial statements shall include:

Answer 18

• description of the terms of the arrangement including LOBs covered
• identification of the lead entity and all participants including pool percentages
• amounts due to/from lead entity and all particpants
• other arrangements that fall outside of the normal pooling agreement including reinsurance with non-affiliated reinsurers

Question 19

SSAP-65: Calculate UEP reserve (given 3 tests of estimates)

Answer 19

• For the most recent 3 policy years, take the maximum of the 3 tests
• For older policy years, combine all older policy years for each test, then take the maximum
• Add each of these estimates together

Question 20

SSAP-65: What are the 3 tests for UEP reserve?

Answer 20

1. Test 1: management’s best estimate of the amounts refundable to the contract-holders at the reporting date
2. Test 2: (gross premium) * [(projected future loss) / (projected total loss)]
3. Test 3: (projected future loss) - (investment income) - (PV of premiums)

Question 21

SSAP-66: What is a term for a contract that has retrospective features?

Answer 21

loss-sensitive contract

Question 22

SSAP-66: Are premium adjustments due “to” or “from” insured considered to be admitted assets?

Answer 22

Yes, but with certain exceptions, like if amounts are deemed uncollectible

Question 23

SSAP-66: 2 ways of estimating retrospective premium adjustments

Answer 23

1. Apply the historical ratio (retrospective rated developments) / (earned standard premium) to the premium for the policy being rated
2. For each risk, compare known to anticipated loss development (including IBNR) to estimate return or additional premium earned at that point in time

Question 24

SSAP-66: Accounting treatment o “accrued additional” & “accrued return” retrospective premium

Answer 24

Accrued additional retrospective premium
- record as a receivable
- with a corresponding entry in written premium or an adjustment to earned premium

Accrued return retrospective premium
- record as a liability (as a change in unearned premium)
- with a corresponding entry in written premium or an adjustment to earned premium

Question 25

SSAP-66: Required financial statement disclosures regarding retrospectively rated policies

Answer 25

- estimation method for premium adjustments - accounting method for premium adjustments - amount & proportion of net premiums subject to retrospective adjustments - calculation of non-admitted retrospective premiums

Question 26

SSAP-9: 2 types of subsequent events

Answer 26

1. TYPE I: (Recognized Subsequent Event) Events or transactions that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements - e.g. insolvency 2. TYPE 2: (Nonrecongized Subsequent Event) Events or transactions that provide evidence with respect to conditions that did not exist at the balance sheet date but arose after that date - e.g. catastrophic event

Question 27

SSAP-9: Subsequent Event (definition)

Answer 27

Events that occurred after the balance sheet date but before issuance and audit of the financial reports

Question 28

SSAP-9: Required Actions for Subsequent Events

Answer 28

Material Type 1: UPDATE financial statements Type 2: DO NOT update financial statements, but disclose in Notes to Financial Statements the nature of event and estimate of financial effect