Domain C Flashcards

Question

Why ORSA is better than FCT ? (4)

Answer 1

- Include all material risks - Include assessment of internal control for better management - Qualitative assess as well as quantitative - Use stress-testing to set internal capital target to reflect risk appetite

Answer 2

- O : Oversight by senior management - R : Risk identification and assessment of materiality - S : Sought good reporting and Monitoring - A : (Audit) Objective Review and Internal Controls - R : Relate risk to capital with internal capital target

Answer 3

Enhance an insurer's understanding of the relationship between risk profile and capital needs.

Answer 4

Insurance regulator system to determine required capital levels in European Union. Pillars: - Quantitative (Requirement) - Governance (Supervisory activities) - Transparency (Supervisory reporting and disclosure)

Answer 5

- Increase awareness of potential risks by senior management - Assist in calculation of risk loading using freq-sev methods - Increase regulator confidence in company's risk management

Answer 6

- Catastrophes - Court awards - Legislative changes

Answer 7

ENID is event for which the insurer does not have historical data. Loading: Balancing amount to bring reserves up to amount allowing for all possible future outcomes - Journalist info + - Pending court awarding -

Answer 8

Version : - Use more than 1 model - Regular update (1 year) - If In-house PML, compare to alternate model Validation: - Modeled losses vs actual - Tailed losses vs market price for reinsurance - Use global data to supplement limited Canadian earthquake data

Answer 9

- **Capital and Surplus** Prior approval from OSFI is required under MCT guidelines - **Reinsurance Coverage** In case of whole account, use full stochastic model - **Earthquake Premium Reserve** Voluntary reserve accumulated from earthquake premiums - **Capital market financing** Other risk transfer mechanism (bonds, securities)

Answer 10

In catastrophe modeling, Multi-region exposure refers to the total financial risk an insurer faces when their insured properties are spread across multiple seismic zones that could be affected by a single, massive earthquake event. **Disadvantage :** - Understates PML for insurers with significant exposure in both zones (since the PML is based on the greater of the PMLs region) - Ignore exposure elsewhere that can have a material impact **Reporting of PML for foreign insurer when there is an earthquake exposure outside of Canada :** - Report PML based on Canada exposure **Reporting of PML for canadian insurer when there is an earthquake exposure outside of Canada :** - Report PML based on worldwide exposure

Answer 11

- Summarize data and review key statistics - Look at year-to-year change in exposure and compare with historical data

Answer 12

- Data Quality (impact on limitations and adjustments) - Non-modeled exposure - Model uncertainty (Safety margin) - Multi-region exposure

Answer 13

- Guaranteed Replacement Cost - Adequacy of ITV - Loss Adjustment Expenses - Claim Handling Expenses

Answer 14

- **Risk Management** : Oversight of risk management by senior management - **Data Management** : Improve quality of data and get audited - **Models** : Parameters selection in model - **PML** : Compare PML with previous estimate - **Financial Resources** & Contingency Plan : Ensure financial flexibility

Answer 15

- DATA : Improve in technology to improve data quality - GUIDELINES : Management should set guidelines - MODELS : Use multiple models - MODELS : Update models regularly

Answer 16

- Knowledge of assumptions, methods, limitations - Explain why particular model is used vs alternatives - Qualified staff needed to run in-house models regularly - Document use of model with risk management program (Model Assumptions, methods, limitation, data management)

Answer 17

Scope 1 and 2 (2024): - Separate disclosure - Absolute gross emissions - Measurement approach - GHG protocol Scope 3 (2028): - Category 15 mandatory including - Financed emission (Loans / Investment) - AUM emission (Asset Management) - Ins-associated emissions (UW portfolios)

Answer 18

- Public scenarios (IPCC) not specific enough to model - Time horizon for development is very long so impact of transition, legal and reputational risk is uncertain

Answer 19

1st : Governance Structure Should look over: - Board oversight - Senior management accountability - Compensation linkages - Clear role and responsabilities

Answer 20

**2nd : Business Model Integration** How to integrate in model ? - Identify climate impacts on strategy - Develop Climate Transition Plan - Assess plan achievability scenarios - Set internal metrics/target **3rd : Risk Management Framework** How to consider in management ? - Risk Appetite Framework - ERM Framework - Internal Control Framework - Clear roles Key process in risk management : - Data collection - Tools and models implementation - Monitoring and reporting system - Risk concentration tracking

Answer 21

4st : Scenario Analysis Uses ? - Assess strategy resilience - Identify risk factors - Estimate exposures and losses - Test risk management adequacy Requirements : - Multiple plausible scenarios - Various time horizon - Both physical and transition risks - Understand methodologies and limitations Essential because ? - Historical data is not predictive - Manifest over long time horizons - Relationship are non-linear with potential tipping point - Multiple plausible futures exist that cannot be extrapolated from past - Required forward looking analysis

Answer 22

- Clear and balanced - Reliable and verifiable - Appropriate size (proportional FRFI complexity) - Relevant - Consistent - Specific and comprehensive

Answer 23

- Governance Structure - Business Model Integration - Risk Management Framework - Scenario Analysis - Capital and Liquidity (ORSA, stress-testing)

Answer 24

- **Business model and strategy** Understand impact, mitigation, opportunities for climate-related risk - **Governance and risk management** Appropriate to manage risk - **Financial and operational resilience** Resilient through severe climate risk scenario

Answer 25

- **Credit :** Physical damage from flood reduce value of a property (collateral) - **Market :** Perception of heightened risk that affect investment (market price change) - **Insurance :** Increased in frequency or severity weather-related claims - **Liquidity :** GHG intensive portfolio, can be difficult to sell those assets quickly after a catastrophe - **Operational :** Physical damage to premises or potential reputational damages if company is not acting responsibly regarding climate change

Answer 26

- **TIME :** Manifest over varying time horizons - **TIME :** Can intensify over time - **RISK :** Drive traditional financial risks - **HEALTH :** Can threaten business model vialibility

Answer 27

**Physical Risk :** Risk on asset, businesses and operations arising from more frequent climate related phenomenon induced by climate change and impacts on firm's ability to generate profit. - Ex: Increased claims, Investment values, Assessment of credit risk, Increased work corp claims **Transition Risk:** Risk to a firm's business due to shift towards more sustainable and environmentally friendly operations. - Ex: New techs impacts, Market shift, Policy Changes **Liability Risk:** Failure to address financial and strategy risks arising from climate change through mitigation, adaptation or disclosures - Ex: Board sued due to climate related losses

Answer 28

- Acute : Extreme weather events - Chronic : Long-term shift (sea level, temperature) - Indirect : Public health impact

Answer 29

- **Implicit assumptions that market, system and chain will function at required level** - **Critical infrastructure risk impact** If a climate event knocks out a regional power grid, the resulting business interruption losses for insurers would far exceed the simple property damage. - **Actions to address climate risk may create risk for another** Sea wall create flood risk for another - **Modeling : Inherent assumptions** - **Modeling : Correlation, sequencing, cascading effect**

Answer 30

- Exploratory : Explore range of alternative plausible scenarios (Stress testing) - Normative : Future outcomes are set from plotted pathways (Reverse stress testing)

Answer 31

Tool used to consider social, economic, political and technological environment in which firm operates when considering how it will be affected by climate risk. **Benefit:** Assist firm with thinking of interconnectedness of modern economy

Answer 32

- C : Capturing climate related risks in assumptions - A : Allowing for factors other than damage - U : Updating exposure in model - D : Develop scenarios and metrics to estimate transition and liability risk - A : Analyzing different time horizons (Short : Valuation - Medium : Steering - Long : Rebalancing business) - C : Consider non-linearity or step changes that impact climate risks - S : Segregating the effect of climate change by geography

Answer 33

Increase in costs because of - change in the likelihood of claimants bringing suit - change in awards - change in attitude toward settlement Only for line subject to go to court.

Answer 34

- Consistent with business plan only if realistic - In forecast period, base scenario is required to gave MCT > 150% (internal target) - In forecast period, Asset > Liability

Answer 35

Event that occurs when an adverse scenario triggers a chain in 1 or more inter-dependant assumptions. **Examples:** - Loss of reinsurance - Forced sale or liquidation - Post-Event inflation - Operating expense (higher loss ratio) - Shift in portfolio mix - Regulatory action

Answer 36

- Rate increase - Sell and reinvest asset - Tighten UW guidelines - Review investment strategy - Review reinsurance - Review mix of business

Answer 37

- Base : Assumptions consistent with business plan - Adverse : Developped by stress testing assumptions that threaten financial condition - Solvency : Plausible adverse scenario (above 95th percentile) - Going-concern : Adverse scenario more likely and less severe then solvency (Above 90th percentile) - Integrated : Combine risk factors to produce new plausible adverse scenario (low-prob + high-prob)

Answer 38

1. Base Scenario: MCT > Internal Target 2. Going-concern Scenario: MCT > Regulatory Min (100%) 3. Solvency Scenario: Asset > Liability 4. Final Decision *Only check conditions for years in the forecast period

Answer 39

Determine how far risk factors need to be changed to drive surplus negative and then determine if it is plausible. Useful to find adverse scenario.

Answer 40

Scenario testing vs Sensitivity Testing - **Risk Factor :** Significant changes vs Incremental changes - **Time Horizon :** Observe future state (ripple effect, actions) vs Shorter time horizon, shock immediate - **Complexity :** Complex vs Simpler

Answer 41

Stress testing is to identify risks (5 risks) - Risk mitigation (Ex: Reinsurance program for flood) - Risk Securitization and warehousing - Risk Reputational (Ex: Flood coverage is optional) - Risk Credit and Counter-party Risk (Ex: Credit risk for reinsurer) - Risk Concentration (Ex: High-risk flood zones)

Answer 42

**Risk management technique** to evaluate **effects on financial condition** of **specified changes** corresponding to **exceptional but plausible events.**

Answer 43

- Scenario should **cover all important business** and product lines - Create **non-historical scenarios** (external data) - **Cover severe and sustained downturn** (Large losses, loss of reputation, operational risk)

Answer 44

- Identify and control risk to adjust strategy - Complement to other risk management tool - Support capital management identifying severe events - Improve liquidity management

Answer 45

- Analyst : Build and maintain spreadsheets to do actual calculation - Management : Less technical work and more planning (implementation, management and oversight) - Directors : Integrity of program (overseeing, meet with senior management)

Answer 46

- Documentation available - Robust flexible infrastructure - Controls and reviews - Includes view across organisation and include different risk perspective - Update more frequently

Answer 47

If it happens or expected to happens within 2 year, notify OSFI and submit plans to restore capital to internal target level quickly

Answer 48

Determined by ORSA. Includes risks specified in capital guidelines and all insurer-specific risks **Considerations:** - Stress Testing - Capital level don't fall under supervisory cap - Cannot consider future capital injections - Cannot consider head-office guarantee action - Analysis forward-looking (do not consider past variability of MCT) **Reasons:** - Gives management time to adress issue - Captures risks not addressed by industry-wide capital guidelines

Answer 49

Difference between discounting the cash flows to the beginning of the period and discounting to the end of the period. **Methods:** - Constant yield curve Assumes the yield curve does not change over time. - Unwinding using spot rates The "end of period" curve is effectively the beginning curve shifted forward by one period. - Expectation hypothesis Based on the market's expectation of how interest rates will change. **Steps :** 1. Calculate CF and PV CF 2. For Constant yield method, Unwinding = PV CF (end) - PV CF (beginning) 3. For spot rates, Unwinding = SUM ( CFt x Spot Ratet)

Answer 50

1. Create reference portfolio and calculate rate of return 2. Substract risk-free rate to get indicated liquidity premium 3. Liquidity Premium = r x Indicated Liquidity Premium + Constant

Answer 51

Liquidity premium is an adjustment added to the risk-free rate to reflect that insurance liabilities are often less liquid than the financial instruments - **Exit Barriers** If a policyholder can easily exit the contract and demand their money back, the liability is highly liquid and decrease liquidity premium. - **Low Inherent Value** Contracts with low inherent value (doesn't offer much extra to policyholder) tend to increase liquidity which decreases the liquidity premium. - **Exit Value** If a high inherent value must be paid out upon exit, it increases the liquidity of the liability, thereby decreasing the liquidity premium. Reminder : - Inherent value is essentially the cash-out value of the policy (unearned premium). - "Highly liquid" means that the liability can be converted into cash almost immediately at the request of the policyholder.

Answer 52

1. **Group Data** Decide whether to group your data together into net liabilities or gross and ceded based on availability, volatility and reinsurance 2. **Payment Pattern** Select payment patterns (segmenting data) based on business segments, payout period. 3. **Liquidity Premium** Calculate liquidity premium using a combined approach 4. **Discount Rate + Factors** Calculate discount rate using one of the two approached to have a yield curve 5. **Projected Cash Flows** Calculate projected cash flows using the given projected cash flow percentages (TRIANGLE) 6. **Discounted Cash Flows** Allocate projected cash flows to issue year and calculate discounted cash flows (TRIANGLE) 7. **Fulfillment Cash Flows** FCF = Discounted Cash Flows + Risk Adjustment Risk Adjustment = Factor given x Issue Year Discounted Cash Flows

Answer 53

- Should reflect **Time** value of money - Should reflect **timing** of cash flows - Should reflect **characteristics** of Cash Flow - Should reflect Liquidity **Characteristics** of the liabilities of insurance contracts

Answer 54

No, they can rely on investment specialists. Actuary would be the enquiring professional, and investment specialist would be the responding professional.

Answer 55

Measures - the average maturity of fixed future cash flows and - the sensitivity of previous value cash flows to interest rate changes.

Answer 56

**Assumption :** Cash flows are interest rate sensitive and discounting consistent with calculation from valuation **Duration by lines :** Some patterns as for discounting then total is weighted average **Duration combined :** - Effective duration - If you already have the durations for individual lines of business or specific product groups, you can calculate the combined duration using a weighted average based on the fair value **Rate sensitivity :** - GMA : FCF are interest rate sensitive, CSM is not Because the CSM doesn't react to market interest rate movements in the same way liabilities do, it effectively has a duration of zero. - PAA : LC is interest rate sensitive, LRC excl LC is not The LC itself is calculated based on discounted fulfillment cash flows, making it sensitive to rate changes. **Situation where duration = 0 :** The duration of a liability is considered zero when the cash flows are not sensitive to interest rate changes. Occurs when : - Claims are expected to be paid out within a year - Liabilities (LIC) are undiscounted

Answer 57

- **Macaulay :** Weighted average of time where weights are previous value cash flows (fair values) (ALL CASH FLOWS INCLUDING COST OF CAPITAL) - **Modified :** Macaulay Duration / (1 + yield rate) - **Effective :** Duration = (Fair value if yields decline - Fair value if yields rise) / (2 x Initial Price x Change in yield) Should be used when cash flow are dependant on changes in discount rates

Answer 58

Risk of loss from counterparty's potential inability or unwillingness to fully meet contractual obligations due to insurer. Components: - Balance Sheet Asset (Direct investment like bonds) - Off-Balance Sheet Exposure (Risk not listed) - Collateral and Guarantees

Answer 59

- **Structured Settlements** Purchase annuity from life insurance to pay claimant - **Letters of credit** Guarantee that a third party will meet its obligation - **Non-owned deposit** Asset held by third party (bank) to secure obligation - **Derivatives** Swaps, options, futures

Answer 60

Risk of loss from inadequate or failed internal processes people, systems or from external events. - Include Legal Risk - Exclude strategic risk (voluntary choice) - Exclude reputational risk (consequence not cause) **Components:** - Sum of insurance, market and credit risk - Premium volume and growth - Intra-group pooling

Answer 61

Reduction to capital required recognizing that not all risk categories are likely to suffer their maximum loss simultaneously MCT insurance risk factors for each line of business contain an implicit diversification credit based on the assumption that insurers have a well-diversified portfolio of risks for a given portfolio of business

Answer 62

Risk of loss from changes in prices in various market Components: - Interest Rate - Foreign Exchange - Equity - Real Estate - Right-of-use asset - Other Market

Answer 63

Risk of economic loss due to changes in value of a property or in the amount and timing of cash flows from a property

Answer 64

Fluctuating market lease rates Where lease rate is the cost of using a third party's asset

Answer 65

Other markets are sold for less than the balance sheet value

Answer 66

Risk of economic loss due to fluctuation in the value of common shares and other equity securities

Answer 67

Changes in interest rates will impact assets that change liabilities.

Answer 68

Arising from potential for claims or payouts to be made to policyholder or beneficiaries Components: - LIC (reserve) - Unexpired coverage (incl catastrophe) - Unregistered Reinsurance - Earthquake and Nuclear catastrophes

Answer 69

Margin = 1,1 x Risk Factor x (Net LIC issued excl RANF - AIC reheld excl RANF) Components: - Percentage that varies by coverage - LIC net of salvage / subrogation excl risk adjustment - AIC for reinsurance excl risk adjustment

Answer 70

**Margin** = 20% x (A* + AIC + Cash Outflows fund withheld - Receivables) **Reduction:** Lots of unregistered reinsurance trigger a reduction to capital required (only apply if > 0). ``` Deduction = (A* + AIC + Cash Outflows withheld) - (Receivables + Non-owned deposits RSA + Premiums payable non-owned deposit + Reinsurance Collateral Funds held + Letters of credit (LIMITS = 30% of ARC + AIC) ) ``` where A* = PAA LRC + GMM LRC - GMM ARC CALCULATE REDUCTION (IF > 0, Reduction to capital available, if not, reduction from capital required) THEN CALCULATE MARGIN SUBSTRACT REDUCTION TO MARGIN (MIN 0)

Answer 71

Portion of a loss that is payable by policyholder. Insurer pays and seek reimbursement through Letter of Credit.

Answer 72

+ CSM associated with title insurance contract +- Adjustments to owner-occupied property valuation - Interests / loans to subsidiaries - Unsecured unregistered reinsurance exposures - Earthquake premium reserve not used as financial resources - Insurance acquisition cash flows - AOCI on cash flow hedges - Goodwill and other assets - Deferred tax assets - Cumulative gains and losses due to change in credit risk - Defined benefit pension fund - Investments in own instruments (treasury) - Reciprocal cross holdings in common share

Answer 73

- Availability : Is capital elements fully paid & available to absorb losses ? - Permanence : Until when is the capital element available ? - Absence : Does capital element have an absence of encumbrances & mandatory servicing costs ? - Subordination : Is capital element subordinated to the rights of policyholders in an insolvency ?

Answer 74

Methods to allocate should be: - **Free from bias** Not unfairly favor one line of business - **Accurate when allocating revenue and cost** - **Consistent with other business allocation methods** - **Consistent over time** Shouldn't change frequently - **Systematic and Reasonable** Reminder : Capital allocation principles refer to the standards used to distribute the total required capital of an entity across its various segments or lines of business.

Answer 75

Standardized measure of capital adequacy MCT Ratio = (Capital Available / Capital Required) x 1,5 Requirements : - 100% by federal - 150% by OSFI (named supervisory cap)

Answer 76

A group is onerous if it is not profitable. There is no "unearned profit" to defer. Instead, the net outflow is recognized as an immediate loss in the P&L. To track this, a Loss Component is created within the Liability for Remaining Coverage (LRC). **1. Qualitative Assessment : Facts and Circumstances (ONLY FOR PAA)** - Specific group of contract - Past Losses - Aggressive UW and pricing - Unfavourable Trends **2. IF YES -> Quantitative Assessment :** Calculate difference between FCF and LRC excl LC > 0 If onerous, CSM = 0 and presence of loss component **3. IF YES -> Group is onerous** LC is released into insured service expense and amortized from the LRC over duration of contracts.

Answer 77

Determines how the CSM is released into profit or loss with effect of new contracts and interest on CSM. Formula: - Proportion of CSM released quarter = Cov Units provided / (Cov units provided + Cov units end of period) - Amortization of CSM = Proportion x Reporting opening CSM

Answer 78

Quantity of insurance contract services provided by the contracts in group. Determined by quantity of benefits provided.

Answer 79

Inception : No incurred claim, FCF + CSM During : FCF decrease, LIC increase, Paid claims increase End : LRC = 0

Answer 80

Aggregation: Portfolios into groups FCF are calculated at portfolio level and then separate into group. All others components are calculated at groups level.

Answer 81

Asset position : Expected cash inflows > Expected cash outflows Liability position : Expected cash outflows > Expected cash inflows

Answer 82

Entity obligation to: - FCF : Investigate and pay valid claims for insured event that have not yet occured Pay amounts that relate to any investments components not transferred to liability for incurred claims - CSM : Pay amounts that relate to insurance contract services not yet provided

Answer 83

LRC = Fulfillment Cash Flows + Contractual Service Margin (0 if onerous) Fulfillment Cash Flows : - Future Cash Flows (premiums and claims) - Adjustment time value - Financial risk - Risk adjustment for non-financial risk

Answer 84

LRC = LRC excl LC + LC **Initial :** ``` LRC excl LC = Premiums - Acquisition Cash Flows +/- Amounts arising from decorognition of assets and liabilities ``` **Subsequent :** ``` LRC excl LC = Premiums - Acquisition Cash Flows + Amortization - Insurance revenue - Investments components for LIC + Adjustment Financing Component + Carrying Amount at start ``` * CAN ASK TO CALCULATE THAT VALUE*

Answer 85

To find the Loss Component, you are checking if your Current Pot (LRC) is enough to cover your Future Costs (FCF). **1. Calculate Fullfilment Cash Flows** ``` FCF = Losses (Discounted) - Premium Receivable (excl unearned premium cancelled) (Discounted) + Risk Adjustment + Other Attributable Costs (Remove % of cancellation) (Discounted) + (Deferred Acq Cost (net cancel) - Deferred Acq Cost (Gross Cancel) + Future Acquisition Cost (net cancel) ``` * Risk Adjustment : Apply % on discounted losses * Deferred Acq Cost (net cancel) : Cancellation % is only apply to variable part of cost * Future Acquisition Cost (net cancel) : Cancellation % is only apply to variable part of cost **2. Calculate PAA LRC (excl LC)** ``` PAA LRC (excl LC) = Premium Received - Insurance Revenue - Deferred Acquisition Costs (Gross cancel) ``` **3. Calculate LC = FCF - LRC (excl LC)**

Answer 86

**Onerous :** It must be recognized even before coverage begins. The net loss is recognized immediately as an "Insurance Service Expense." **Not Onerous :** Only recognized when in force. Profit is deferred as a Contractual Service Margin (CSM) and recognized slowly over time. Same logic if reinsurance is entered into.

Answer 87

1. Coverage period <= 1 year 2. IF NO: Group revenue <= 1% total company 3. IF NO: PAA materially not different than GMA PAA - GMA | < (Aggregate Treshold x (Group Revenue x Group LR)) / Total 4. IF NO : Is there any significant variability in cash flow ? 5. IF NO : Eligible

Answer 88

- **MIX AND VOLUME :** Insurer's mix and volume of business when aggregating multiple lines and potentially LRC and LIC - **SIZE :** Adjustment for size relative to average insurer in the MCT (Smaller insurer are more volatile, larger spread in distribution) - **TRANSITION ADJUSTMENT :** Remove additional 10% loading on LIC factors for transition to IFRS 17

Answer 89

Use the same percentage of FCFs for the ceded Risk Adjustment as for the direct one Percentage can be modified for considerations such as : - Commissions - Expense allowance - Reinstatement premium

Answer 90

Use output from a catastrophe model tailored to an entity's book of business. Select a percentile directly from the given distribution

Answer 91

Select margin that reflects the compensation the entity requires for uncertainty related to non-financial risk *EXACTLY LIKE DEFINITION

Answer 92

Based on compensation an entity requires to meet a target return on capital Components: - Projected capital amounts - Cost of capital rates - Discount rates Advantage : Close to the definition of the RA Disadvantage : More complex because projection of capital requirements is an input to liability calculation

Answer 93

Assess probability of the adequacy of FCF. These probs are used to quantify Risk Adjustment using VAR or CTE. **Advantage :** Satisfies disclosure requirements regarding confidence level **Disadvantage :** If misrepresented, it may introduce spurious accuracy

Answer 94

- Quantile - Cost of capital - Margin - Combination of methods

Answer 95

- Quantile - Cost of capital - Catastrophe models - Proportional scaling

Answer 96

Cost of capital method with an assumption for required capital set a higher percentile. **Why different analysis ?** - Catastrophe reinsurance covers low-fre, high-sev events - Standard quantile method produce an Risk Adjustment that is too small or even 0

Answer 97

**Financial :** - Amount and timing of cash flows - Discount rate applied to cash flows - Payment pattern of cash flows **Non-Financial :** - Court Decision - Life expentancy of claimant - Quality of reinsurer

Answer 98

**Why choose above ?** Reinsurer's average rate of return is above risk free rate **Why not ?** Result should not depend on quality of reinsurer's investment strategy

Answer 99

- Commutation clause - Reinstatement clause - Forced Renewals If these features are too restrictive, the contract may fail the 10/10 test or have a low Expected Reinsurer Deficit (ERD), leading to it being classified as a financial instrument rather than reinsurance.

Answer 100

Advantage : More in line with reinsurer's view on the risk transfer and incorporate market view of the risk Disadvantage : Assumptions are market driven (may not reflect true expected loss)

Answer 101

In general pricing, parameter risk is a part of your profit margin. In reinsurance, the insurer is paying the reinsurer to take on the "parameter risk"—the danger that the claims are much worse than the current data suggests. - **Explicitly :** Giving parameters a probability distribution and incorporate this into simulation - **Implicitly :** Higher expected loss selection and volatility

Answer 102

Not included. Only cash flows between cedent / reinsurer should be considered in ERD (Expected Reinsurer Deficit) calculation.

Answer 103

Not included. Result of cedant should not be included in risk transfer analysis.

Answer 104

1. QUALITATIVE : Is transfer of risk self-evident ? -> Intuitively obvious that contracts protects cedant from future events that would adversely impact financial condition 2. QUALITATIVE : If significant loss not reasonably possible but reinsurer assumes substantially all risk (Quota share) 3. QUANTITATIVE : Calculate Expected Reinsurer Deficit = Freq x Sev as a % of premium (IF > 1%, risk) 4. QUANTITATIVE : If reinsurer has 10% chance of suffering a 10% loss, then contract is deemed to have risk transfer

Answer 105

- Significant insurance risk is assumed by reinsurer - Significant loss to reinsurer is reasonably possible

Answer 106

Intuitively obvious that contract protects cedant from future events that would adversely impact the financial condition of ceding company. Requirements : - Done at arms length - There are risk limiting clauses

Answer 107

- Use quantitative and/or qualitative approaches - Use professional judgment - Consider overall agreement (Contract, amendments, verbal, written) - Re-check risk transfer when certain conditions occurs (change in terms affect expected future cash flow)

Answer 108

Risk-limiting features: Terms set in advance. Force renewal term that profit reinsurer. Not illegal. **Risk-limiting features examples :** - Retention level high (10%) - Limit on excess of loss - Swing loss ratio - Automatically commuted unless maintenance fee - Pre-set limit **Non-limiting features examples:** - Loss paid when occur - Premium payable in quarterly installment - Reinsurer expense - Taxes

Answer 109

1. **Reinsurance risk management policy** 2. Ongoing **due diligence** performed on counterparties 3. Complete description of all **reinsurance arrangement** 4. **Stress testing** performed on reinsurance program

Answer 110

1. Reinsurance risk management policy 2. Due diligence performed on counterparties 3. Clear contract terms and conditions 4. Terms should not adversely affect ceding insurer

Answer 111

- Purpose and objectives for seeking reinsurance - Ceding limits A FRI should not cede 100%, or substantially all of its risk (like 95%). - Counterparty risk management - Concentration limits

Answer 112

Research done by company in preparation for a business transaction. - Claim payment record - Balance sheet strength - Funding sources - Management quality and governance - Expected future claims obligation - Retrocession arrangements Unregistered reinsurers present higher counterparty risk because they: - are not subject to Canadian regulatory oversight - Operate different legal/regulatory frameworks - Have greater uncertainty regarding financial strength

Answer 113

**THIRD-PARTY REINSURERS:** - FULL PAYMENT : Must provide full payment to insolvent cedant - No reduction due to insolvency - Receivables paid directly to cedant in Canada (dont go through parent or third party) **AFFILIATED REINSURER:** - Receivables paid directly to cedant in Canada Remind : An affiliated reinsurer is a company that belongs to the same corporate group or "family" as the ceding company.

Answer 114

When a foreign insurer ceded Canadian risks back to foreign insurers home office through affiliated reinsurers. (to keep asset in Canada) Reminder : Capital credit is a regulatory "reward" that allows an insurance company to hold less capital because it has successfully transferred some of its risk to a reinsurer.

Answer 115

- Operational risk - Legal risk - Counterparty risk - Liquidity risk

Answer 116

- W : Withstand catastrophic events - R : Reduce insurance risks and volatility - A : Access reinsurer's expertise - I : Increase UW capacity - S : Stabilize solvency - E : Efficient capital use

Answer 117

- Discounting : Discount paid and unpaid amounts back to original period - Substraction : Substract investment income earned during CY on supporting assets and liabilities

Answer 118

- Assist OSFI in assessing insurer safety and soundness - Assist AA and provide education - Raise confidence in AA with management, public and regulators

Answer 119

- Produce AA report - Valuation of reserve using AAP - Produce financial position report for Directors - Produce material adverse event report to CEO/CFO

Answer 120

- FCIA - 3 years experience in past 6 years with 1 year in valuation - Continuous professional development - No adverse findings with CIA disciplinary tribunal - Comply with CIA SOP

Answer 121

**Qualifications :** - Fellow - Cannot have direct financial interest in company (can be indirect) - Cannot have worked for insurer in past 3 years - Must have experience with at least 2 other related companies **Other constraints:** - Can be from same consulting firm as auditor or colleague doing financial statement - Can't be from the same firm as AA

Answer 122

Peer Reviewer vs Auditor : - Standard of Practice : CIA vs CICA - Recalculation : No vs Yes - Verification of data : No vs Yes

Answer 123

- Peer review of assumptions and methods every 3 year - Peer reviewer must be change after 2 cycles - Actuary of same firm of previous can perform peer review - A previous peer reviewer can rebecome peer reviewer after one cycle - If no material change, only review reasonableness annually

Answer 124

- Did AA use Accepted Actuarial Practice ? - Appropriateness of assumptions and methods - Consider material internal and external changes - Feedback on AA's work and document process

Answer 125

- Report with reservations : Used but not take responsability - Change in assumption or methodology affecting disclosure items - Liabilities different from those calculated by actuary - New appointment (predecessor AA's work) - Takeover of insurer with insufficient records - Report without reservations : Used and take responsability

Answer 126

- Discount Rate - Level of aggregation - Contract boundary - Risk adjustment for non-financial risk

Answer 127

- **IFRS Compliance :** Liabilities valuation complies with relevant IFRS standards - **Appropriate for Financial Statement :** AA no longer opines that liabilities make appropriate provision for all obligations. Liabilities provision is appropriate for inclusion in financial statement. - **Broader Scope :** Scope of fairly present is broader. More extensive presentation and disclosure requirements

Answer 128

**Level of aggregation :** Separate profitable vs non-profitable contract **Measurement approach :** Determine onerous vs non-onerous contract **Discounting :** Yield curve LIC 1. Do not have to discount LRC if coverage period < 1 year or if discounting not significant 2. Discount Rate is to reflect characteristics of the liability **Risk Adjustment :** Risk adjustment based on appetite and tolerance /* ALL INFO ARE FOR IFRS 17

Answer 129

Professional who will consider the work of other professional. Actions: - Notify responder that work is being used - Ask if responder is a professional - Ask if professional was appointed to do the job intented to be considered

Answer 130

Professional of whom the work is being used by enquiring professional. Actions: - Discusss any problem with work including materiality - Confirm to enquiring professional that he is a pro - Confirm he was appointed to do the work intended

Answer 131

A practical representation of relationships among entities using Financial, Economic, Mathematical and Statistical concepts.

Answer 132

Risk of drawing incorrect conclusion due to limitations or flaws of underlying model.

Answer 133

**Severity of failure :** - Financial Significance - Importance of model - Frequency of use **Likelihood of failure :** - Complexity - Expertise of user - Documents - Testing

Answer 134

- Specification : Description parts and interactions - Implementation : Systems - Limitation - Run : Input/output - Documentation

Answer 135

- Validate a model - Understand relationship between input/output - Develop sense of confort with model - Test assumptions outside expected range, singly and then in combination or with non-linear relationship

Answer 136

- Significance - Purpose - Vulnerability to error - Complexity - Expectations of user - Legislative requirements

Answer 137

- Qualification - Communication - Awareness

Answer 138

- External : Formal and Detailed (Narrow) - Internal : Depending on use (Wide) - Oral - Summary

Answer 139

**If actuary become aware of event before calculation date** *Reflect event in work* **If actuary become aware between calculation and report date** - Reveal a calculation error ? If yes, *reflect in work* - When did it occur? On or before calculation date, *reflect in work* - Make entity different ? On or before, *reflect in work* - Purpose of work ? Report as it will be as a result of event, *reflect in work* - If nothing respected, *report event but do not reflect in work* **If actuary become aware after report date** - Would event have been reflected in work if it were a subsequent event ? If yes, *no action needed* - Does event invalidate report ? If yes, *Amend report and disclose it* - If nothing respected, *report event but do not reflect in work*

Answer 140

An event of which the actuary becomes aware after the calculation date but before the corresponding report data.

Answer 141

An **omission/over-statement or understatement** will materially affect **user's decision making or expectations**.

Answer 142

- **Size** Smaller companies should have smaller standard since less capital - **Type of business** Long tail and short tail are different - **Access to capital** - **Net Retention** - **Stage of organization's life cycle** Newer should have smaller standard

Answer 143

- Sophistication of user - Importance of concept of user - Complexity of concept

Answer 144

**FCT :** Larger standard. Less rigourous. Focused on trends and big picture solvency. Used in scenario testing **Valuation :** Smaller standard. More rigourous. Even small errors can misstate the balance sheet or income statement. Used in Financial Statement

Answer 145

- Regulation : MCT Ratio, Regulatory Capital - Appraisal : Net income, Net worth - Financial Statements : Net income, Net Capital Reminder : While financial statements tell you what the company is worth on paper today (book value), an appraisal looks at the "total value," including the potential for future profits.

Answer 146

``` Net Investment Income = Insurance service result + Net Investment Result + Other Income and Expenses - Taxes (Current + Deferred) + Discontinued Operations ``` Reminder : Discontinued Operations refer to components of an insurer's business that the company has either already disposed of or has classified as "held for sale."

Answer 147

**Numerator** = 2 x (Investment Return + Share of Net Income Equity account invest) **Denominator** = Total Asset(x) + Total Asset(x-1) - Investment Return - Share of Net Income Equity account invest **Yield** = (Numerator / Denominator) x 100

Answer 148

**SAP (Statutory Accounting Principles) :** - Objective : Measure ability to pay claims - Intended User : Regulators - Asset recognition : When expense incurred - Deferred income taxes : Net - Treatment reinsurance : No **CGAAP (Canadian Generally Accepted Accounting Principles) :** - Objective : Measure earnings - Intended User : General Audience - Asset recognition : Defer matching with expense - Deferred income taxes : Gross - Treatment reinsurance : Yes

Answer 149

Fair Value : Record asset at a value that would be bought or sold for in open market Historical Cost : Record asset at the original purchase price less depreciation

Answer 150

Principle-based : Accounting concept that must be interpreted and applied. More flexible. Rule-based system : Accounting concept with strict rules that have to be followed. Easier to understand and audit.

Answer 151

**Liquidation :** Accounting concept where elements are valued on a runoff (REGULATORS) to see if insurer is able to render obligation **Going concern :** Accounting concept where elements are valued on a normal and continued basis (INVESTORS)

Answer 152

An agreement between ceding insurer and reinsurer that provides valuation, payment and complete discharge of all obligations. Close with one payment. Reinsurer gives ceded claims back to original insurer. Reason : Reinsurer insolvency, desire to finally

Answer 153

**Insurer advantages :** - Remove reinsurance credit risk - More efficient claim handling - Immediate cash flows - Decrease expense cost **Insurer disadvantages :** - Adverse development on claims - Capital requirements go up to support increased liability **Reinsurer advantages :** - Stability for long-tailed line - Decrease claims expense - Decrease UW leverage - Exit market quickly

Answer 154

The contract boundary defines the cash flows that should be included when measuring the insurance liability arising from a contract.

Answer 155

**Should be higher for :** - Risks with less info - Low freq / High sev risk - Longer duration contracts (> 1 year) - Wide loss distribution risk **Should be lower for :** - Emerging experience - Pooling similar risk - Negatively correlated risk (will offset each other)

Answer 156

- System change - Valuation assumption change - Valuation method change

Answer 157

Gives windows for insurance regulators to look into group operations but maintains the walls at the statutory legal entity level (capital cannot be shared)

Answer 158

SCR = VAR at percentile 99,5% Boundaries for regulator action: Capital Available - Liabilities - Risk margin > - Solvency capital requirement -> IF BELOW, INTERVENTION - Minimum capital requirement -> IF NOT, CANNOT OPERATE

Answer 159

- Metrics and targets for measuring progress - Alignment with business strategy - Assessment of achievability under different scenarios

Answer 160

- Regulatory and legal changes that can emerge rapidly over short time frames - New products and designs as well as industry developments

Answer 161

Summary documents that include: - Premium paid by cedant - % of risk assumed by reinsurer - Risk reinsured - Duration of coverage - Etc **Why would it not be signed ?** In the high-stakes world of reinsurance, the "effective date" often arrives before the lawyers have finished arguing over the fine print.

Answer 162

1. **Consistent with IFRS 17 ?** 2. **Consistent with AAP ?** 3. **Similar to what AA would have chosen ?** 4. **Evaluate materiality** Diff scenario vs AA's estimate and if it falls in the Materiality Standard (Net Income, Equity)

Answer 163

**1. Undiscounted cash flows** **2. Discounted cash flows** **3. Risk Adjustment for non financial risk** - Capital Held = (Unpaid Losses / (Liability/Surplus)) * % Capital for non-financial risk - COC Rate = ROE after-tax/(1-tax rate) - Investment Income on Equity - Cost of Capital = Capital Held x Cost of Capital Rate - Discount the results and sum **4. LIC = PV(Cash Flows) + Risk Adjustment**

Answer 164

Reminder : Top down approach use a yield on a reference porfolio of assets to calculate discount curve. Under the top-down method the reference portfolio must match the characteristics of the liabilities, including liquidity. - **LIC -> Illiquid** Once a claim happens, the "payout" is fixed by the accident/legal process. The policyholder cannot "cash out" their claim early or trade it. CANT USE OWN ASSET - **LRC for insurance contract issued -> Liquid** The policyholder has the "option" to take the money and leave, the liability is considered liquid. CAN USE OWN ASSET - **LRC for reinsurance contract held -> Liquid** Ceding company has the right to cancel the reinsurance treaty and receive a return of unearned premium.< CAN USE OWN ASSET

Answer 165

Entities can opt to use the PAA for **loss-occurring reinsurance contracts** where the coverage period can be easily defined as one year or less based on the contract’s effective date and expiry date. For 12-month **risk-attaching reinsurance treaties** covering underlying insurance contracts with terms of 12 months, the reinsurance coverage would usually span two loss occurrence years, assuming that underlying contracts are underwritten throughout the year.

Answer 166

Support since this is a specialty company Produce results that more closely resemble what historical data of this company has shown can happen.

Answer 167

- **Liquidity** Fixed percentage of asset reference portfolio spread over risk-free rates and an additional constant adjustment to reflect the difference between the liquidity characteristics of the insurance contract and the asset reference portfolio. - **Investment Risk** - **Timing** Assess the consistency of the timing of payments between the assets in the reference portfolio and the insurance contract liabilities - **Currency Risk** Select a reference portfolio made up of investments denominated in the same currency as the insurance contracts

Answer 168

**Advantage:** Does not require the explicit derivation of a liquidity premium **Disadvantage:** Complexity of the derivation of a reference portfolio rate and applicable adjustments.

Answer 169

**Bottom-up approach :** A liquid risk-free yield curve is adjusted to reflect the differences between the liquidity characteristics of market financial instruments and the liquidity characteristics of the insurance contracts. Discount Rate for each year = Risk-free rate + Liquidity Premium **Top-down approach :** The yield to maturity of a reference portfolio of assets is adjusted to eliminate any factors that are not relevant to insurance contracts. Discount Rate for each year = Reference portfolio - Credit Risk - Market Risk The reference portfolio must match the liquidity characteristics of insurance liabilities. **Hybrid/Combined approach :** The hybrid approach estimates the liquidity premium using a top-down approach. You then use this liquidity premium in the bottom-up approach to get the final selected discount rate.

Answer 170

**Constant yield curve method :** Using the same discount curve at the beginning and end of the period. It corresponds to the a priori assumption that the discount curve will remain the same at the end of the period. **Spot rates method :** Using an end of period discount curve that is equal to the beginning discount curve shifted by one period.

Answer 171

Locked-in yield curves refer to yield curves determined at the initial recognition of the group of contracts. Ex : Locked-in rate is the rate at the date the claim was incurred. **Locked-in yield curves would be used when:** - Entity uses PAA and there is a significant financing component

Answer 172

1. Calculate Revenue PAA Contract 2. Calculate Revenue GMA Contract 3. Calculate Revenue VFA Contract 4. Sum all revenue Equivalent of earned premium for each group You can also deduced the insurance revenue using the LRC formula. ``` LRC (end of period) = LRC (Opening) + Premium Received + Acquisition cash flows amortized - Acquisition cash flows paid - Insurance Revenue ```

Answer 173

Equivalent of incurred claims for each group ``` Insurance Service Expense = Claims Paid + Increase in LIC excl RA + Increase in RA + Acquisition Expenses Amortized - Increase in LIC excl RA related to IFE ```

Answer 174

- Reinsurance Premium - Recoverables for reinsurance - Non performance risk of reinsurer Equivalent of earned premium for reinsurance

Answer 175

``` Insurance service result = Total insurance revenue - Insurance service expenses + Net expenses from reinsurance contract held ``` The insurance service result, under IFRS 17, represents the net profit or loss from an insurer's underwriting activities.

Answer 176

Remove expense from reinsurance from insurance service result

Answer 177

LRC at initial recognition = Premium received - Acquisition Cost

Answer 178

``` LRC balance = LRC (start of period) + Premium received + Insurance Finance Expense - Acquisition CF amortized - Insurance Revenue - Investment Component for LIC ``` Where Insurance Service Expense = LRC at beginning * Discount Rate

Answer 179

- **STRENGTH :** Financial strength of the reinsurers - **HISTORY :** History of claims / coverage disputes with reinsurers - **DELAYS :** Delays in payments and concentration risk - **LENGTH :** Length of time over liabilities are expected to be settled

Answer 180

**Risk Adjustment for non financial risk :** RA adjusts PV to reflect the compensation the entity requires for bearing uncertainty about the amount and timing of *cashflows* for non-financial risks. **Risk Adjustment for reinsurance held :** RA adjusts PV to reflect the compensation an entity requires for bearing uncertainty about amount and timing of *reinsurance cashflows* for non financial risk **How the cost of reinsurance can be used to determine the risk adjustment for reinsurance contracts held ?** The risk adjustment is directly related to the cost of reinsurance as its essentially the compensation an entity requires to relieve themselves of the risk. We can select a higher percentile using different methods.

Answer 181

**Fixed :** - Accounting : Simple, single ceded prem and loss for entire portfolio - Financial Statement : Shrinks entire portfolio by a fixed scale so all ratios are staying the same - Risk : Protected proportionally, if a specific class of business sucks, u are tied at a constant rate **Variable :** - Accounting : Complex. Require policy by policy accounting. Increase the risk of error and audit burden. - Financial Statement : Net result can be pretty different from gross since % change. Safer net income but higher ceded commission - Risk : Keep the best and ceded the rest. If anti selection, reinsurer will raise prices or cancel treaty

Answer 182

``` Capital Available = Common Equity + B + C + Non Controlling Interest +/- Regulatory Adjustment ``` **Apply Limits :** - B + C < 40% * (Total - AOCI) - C < 7% * (Total - AOCI) **Common Equity Component :** - Common Share - Accumulated Other Comprehensive Income - Nuclear And Other Reserve - Retained Earnings - Other Capital - Contributed Surplus - Share Premium - Residual Interest (Non-Stock)

Answer 183

Capital Required = Insurance Risk + Credit Risk + Market Risk + Operational Risk - Diversification Credit *Be able to calculate each risk margin to get capital required

Answer 184

``` Insurance Risk = LIC margin + Unexpired coverage including catastrophes + Unregistered reinsurance + Earthquake and Nuclear Catastrophes ``` **LIC MARGIN :** ``` Margin = 1,1 * Risk Factor * (Net LIC issued excl RA - AIC held excl RA) * If no reinsurance involved, AIC held = 0 ``` **UNEXPIRE COV MARGIN :** ``` Margin = Risk Factor * max (Net Unexpired Coverage, 30% * Net Premium received in past 12 months) ``` Where ``` Unexpired Coverage = (LRC excl LC + Unamortized reinsurance commission + Unamortized insurance acquisition cash flow + Premiums receivables) * ELR + Fixed administrative costs ``` **UNREGISTERED REINSURANCE :** ``` Margin = 20% * (A* + AIC + Cash Outflows fund withheld - Receivables) where A* = ARC for reinsurance + PAA LRC + GMM LRC - GMM ARC ``` **EARTHQUAKE COMPONENT :** ``` Margin = 1,25 * (Premium Reserve + Risk Exposure - Financial Resource) where Risk Exposure = (EAST PML500^1,5 + WEST PML500^1,5)^(1/1,5) Financial Resource = Capital/Surplus + Reinsurance Coverage + Premium Reserve + Capital Market Financing ``` **NUCLEAR COMPONENT :** ``` Margin = 1,25* (Premium Received - Premium Paid - Commission) ```

Answer 185

``` Deduction for unregistered reinsurance = ( A* + AIC (Adjustments for Insurance Contracts) + Cash Outflows fund withheld ) - ( Reinsurance Receivables + Non-owned Deposits RSA + Premiums payable non-owned deposit + Reinsurance Collateral + Letters of Credit (LIMITS = 30% * (A + B)) ) where A* = PAA LRC + (GMM LRC - GMM ARC for reinsurance) + ARC for reinsurance ```

Answer 186

Means the regulator wants your RA to be X% higher than what you reported in your IFRS 17 Risk Adjustment.

Answer 187

``` Credit Risk = Balance Sheet Assets + Off-Balance Sheet Assets + Collaterals and Guarantees ``` ``` For each component, the margin = SUM (Risk Factor * Credit Conversion Factor * (Credit Equivalent Amount - Eligible Collateral)) for each asset. ```

Answer 188

``` Market Risk = Interest Rate Risk + Equity Risk + Right-of-use assets Risk (GIVEN) + Real Estate Risk + Foreign Exchange Risk + Other Market Risk (GIVEN) ``` **INTEREST RATE :** ``` Interest Rate Margin = | (Asset Duration x Rate Shock x Asset Value - Liability Duration x Rate Shock x Liability Value) | ``` *For each asset that are interest rate sensitive, multiply shock, duration and value and sum them. Same thing for liability *Rate Shock = 1,25% **EQUITY :** ``` Margin = 30% * (Common Shares + Joint Ventures + Futures + Forwards + Swaps) ``` **REAL ESTATE :** ``` Margin = Sum (Value of Property x Risk Factor) for each property ``` * Risk Factor Owner-Occupied Property = 10% * Risk Factor Investment Property = 20% **FOREIGN :** ``` Margin = 10% x max (Long Position; Short Position) ``` * Long Position = Foreign Assets - Foreign Liabilities

Answer 189

``` Operation Risk = min (30% * (Insurance Risk + Market Risk + Credit Risk); A + B) A = Risk Factor * (Insurance Risk + Market Risk + Credit Risk) + Risk Factor * Direct Written Premium + Risk Factor * Premium Ceded + Risk Factor * Premium Assumed + Risk Factor * Growth above 20% * (Direct Premium + Assumed Premium) / (1 + Growth) B = Risk Factor * Assumed WP intra-group pooling + Risk Factor * Ceded WP intra-group pooling ```

Answer 190

``` Diversification Credit = Insurance Risk + Market Risk + Credit Risk - SQT ( Insurance Risk ^2 + (Market Risk + Credit Risk)^2 + 2 * Conversion Factor * Insurance Risk * Asset Risk ) ```

Answer 191

**Scope** I have examined the policy liabilities of [Company Name] for its consolidated balance sheet as at December 31, 202X, and their changes in the consolidated statement of income for the year then ended. My examination included the insurance contract liabilities and reinsurance contract assets, including the Liability for Incurred Claims (LIC) and the Liability for Remaining Coverage (LRC). I have also examined the related **disclosures** in the notes to the financial statements. **Data and Methodology** I have relied upon data provided by the Company and have performed such tests as I considered necessary to satisfy myself as to the **accuracy and completeness** of the data used in the valuation. The valuation conforms to **accepted actuarial practice** in Canada, which includes the selection of appropriate assumptions and methods and the consideration of materiality. **Opinion** In my opinion: The data are **sufficient and reliable** for the purpose of the valuation; The methods and assumptions used are appropriate to **the circumstances** of the Company and the insurance and reinsurance contracts; and The amount of policy liabilities, as determined in accordance with International Financial Reporting Standard 17 (IFRS 17), makes appropriate provision for all **policy obligations** and is appropriate for inclusion in the **financial statements**. [Signature] [Actuary's Name], FCIA Appointed Actuary [Date of Report]

Answer 192

Increase in LIC based on interest accretion and change in discount rates

Answer 193

Insurance Service Expense + Net Expense from Reinsurance Contracts Held / Total Insurance Revenue + Allocation of reinsurance premiums This ratio measures the combined cost of claims, expenses and reinsurance expense relative to net premium earned. (Underwriting performance)

Answer 194

**Quota Share :** The % would be the same between gross and ceded, since ceded would be a % of gross cash flow **Excess of loss:** The risk adjustment % would be higher for the ceded compared to gross, since the excess of loss treaty would have higher volatility for the ceded portion

Answer 195

**For GMA** For GMA, a quantitative onerous contract test is always required. Determination of insurance revenue may need to take into account of the expected patterns of premiums, claims, and how CSM is amortized over the period. **For PAA** For PAA, the quantitative onerous contract test is only required if the qualitative test of facts and circumstances indicate that the group of contracts is likely to be onerous Determination of insurance revenue can be either based on passage of time or the expected pattern of ISE.

Answer 196

CSM for reinsurance can be positive or negative CSM for insurance can only be positive

Answer 197

``` Excess (Deficiency) = Undiscounted unpaid for AY XXXX-1 and prior for CY XXXX-1 - Undiscounted unpaid for AY XXXX-1 and prior for CY XXXX - Paid claims in CY XXXX for priors AYs ```

Answer 198

- **ROE =** Net Income / Average Equity > 5,4% to be good - **ROA =** Net Income / Average Assets > 2,6% to be good - **ROR =** (UW Income + Investment Income + Income from subs) / Gross WP > 6,2% to be good - **Net UW Leverage Ratio =** Net Premium Written / Equity < 300%

Answer 199

- Disclosure of the confidence level corresponding to the reported RA - The actuary needs a secondary method to quantify the confidence level corresponding to the RA (such as quantile method)

Answer 200

**Key principle #1** Optional to use discounting. If used, based on judgment, but applied consistently. **Key principle #2** Not be based on expected claims or release of risk adjustment Is related to the amount that can be claimed by the policyholder.

Answer 201

``` Adj Equity = Equity - Non-Controlling Interest - Catastrophes Reserve - Unregistered Reinsurance ```

Answer 202

Ratio = (Receivables Agents/Brokers + Receivables Subs/Associates) / Adjusted Equity

Answer 203

Ratio = Excess (Deficiency) / Adjusted Equity

Answer 204

**Insurance Risk:** - LIC = 1,1 * Risk Factor - Unexpired Coverage = Risk Factor - Unregistered Reins = 20% - Nuclear + Earthquake Reserve = 1,25 **Market Risk:** - Interest Rate = No risk factor - Equity = 30% - Real Estate = 10% (Owner-Occupied) / 20% (Investment Property) - Foreign Exchange = 10%

Answer 205

For an entity using PAA, an explicit RA calculation for the LRC is not required for financial reporting purposes for groups that are not deemed onerous.

Answer 206

A significant financing component is recognized because the policy premium is received by the entity more than a year prior to the service being provided. The transaction thus benefits the entity as the policyholder finances the entity's activities by the pre-payment of the premium.

Domain C Flashcards

(230 cards)