Financial "Notes"

Question 1

Notes requiring direct involvement by actuaries

Answer 1

CARD + PDR
- Change (incurred loss & LAE)
- Asbestos & environmental reserves
- Reinsurance
- Discounting
- PDR

Question 2

Notes that are relevant to actuaries

Answer 2

SHIES
- Summary of significant accounting principles
- High deductibles
- Intercompany pooling
- Events subsequent
- Structured settlements

Question 3

Note: Change

Answer 3

• Shows prior AY changes
  ○ Affects current CY U/W income
  ○ DISCLOSE change & reasons for change

Question 4

Note: Asbestos & environmental reserves

Answer 4

• Significant adverse development over several decades
• Must DISCLOSE detailed quantitative & qualitative information regarding reserves
• These reserves relate to exposures other than for policies specifically covering A&E

Question 5

Note: Reinsurance and each type of credit risk associated with reinsurance

Answer 5

• Reserve are NET of reinsurance on B/S & I/S
  ○ Reinsurance can significantly lower the B/S and affect surplus
  ○ Must understand CREDIT RISK associated with reinsurance
  § A: unsecured recoverables
  § B: disputed recoverables
  § D: uncollectible recoverables

Question 6

Questions to ask about reinsurance: unsecured recoverables

Answer 6

• Why wasn’t security provided
• Did a cat increase recoverables unexpectedly
• Are the unsecured amounts concentrated with 1 reinsurer

Question 7

Questions to ask about reinsurance: disputed recoverables

Answer 7

• What is the nature of the dispute
• Is the disputed amount material
• Is there a legal opinion on the dispute

Question 8

Questions to ask about reinsurance: uncollectible recoverables

Answer 8

• What was the reason for the uncollectible insurance
• Could other unpaid amounts become uncollectible for similar reasons

Question 9

Treatment in notes of each credit risk associated with reinsurance

Answer 9

○ A: a note is required if (unsecured amounts) / surplus > 3%
○ B: recoverable is considered to be in dispute once a formal written refusal to pay is received from the reinsurer
○ D: uncollectible amount is treated as an expense

Question 10

Note: Discounting

Answer 10

• DISCLOSE whether discounting is used for reserves
• If so, then DISCLOSE type of discounting: tabular (for WC) or non-tabular

Question 11

Note: PDR

Answer 11

• Inclusion of investment income to offset PDR is optional
• DISCLOSE amount and effective date of PDR
• If PDR is recorded as part of UEP then this Note is the only way to know if PDR exists

Question 12

Note: Summary of significant accounting principles

Answer 12

• DISCLOSE source of rules
• DISCLOSE exceptions to rules

Question 13

Note: High deductibles

Answer 13

• Insurer pays the full claim and then seeks reimbursement form the insured for the deductible
• Creates CREDIT RISK that isn’t shown on B/S
• DISCLOSE amount recorded & billed but not collected

Question 14

Note: Intercompany Pooling

Answer 14

• This is when companies in a group cede all business to lead company
  ○ Each member then assumes back a specified percentage
  ○ Note must DISCLOSE pooling arrangements
• Pooling affects: U&IE, Schedule F Parts 1 & 3
• Schedule P shows only pool member’s share of pooled results

Question 15

Note: Events Subsequent

Answer 15

Must DISCLOSE Type 1 (recognized) & Type 2 (non-recognized) subsequent events

Question 16

Note: Structured settlements

Answer 16

• Usually WC - insurer buys annuity from life insurer for structured settlement payments
  ○ DISCLOSE total amount of structured settlement payments for which insurer might be liable
  ○ If payments from a single life insurer > 1% of surplus -> DISCLOSE life insurer & amount
• Pertains to CREDIT RISK and is not shown on the B/S