The purpose of the General Interrogatories section of the annual statment
- Provide additional clarity to the users of the Annual Statement
- Identify areas that need further regulatory review
Two parts to the General Interrogatories
- Part 1, Common Interrogatories: general questions applicable to life, health, and P&C insurers
- Part 2: questions specific to the type of insurer (P&C)
Purpose of Part 1, Common Interrogatories
To give more details about the company’s:
- operations
- business practices
- types of internal and external controls in place
Five sections of Part 1, Common Interrogatories
- General
- Board of Directors
- Financial
- Investment
- Other
General section of Part 1
Questions about:
- Holding company relationships
- Latest regulatory financial exams
- Excessive sales commission levels
- Merger activity
- Suspension of licenses
- Foreign control
- Exemptions from required regulations
- Whether senior management is subject to a code of ethics
Possible insights from General section of Part 1
- If it has suspended licenses or does not comply with regulations, perhaps it lacks internal discipline
- If it has high commission levels, maybe it is sacrificing its commission in order to maintain or grow business.
Required disclosures in General section of Part 1
- Name and address of the independent CPA that conducts the annual audit (to ensure that there are no material errors in the financials; and that they are prepared in accordance with the accounting principles)
- Appointed Actuary (name, address, and affiliation): users can contact the Actuary regarding any questions about the SAO.
Details about latest financial exam in General section of Part 1
- Date of the latest exam
- Date through which the statements were evaluated
- Release date for the examiner’s report
- Name of department performing the exam
- Whether the insurer has complied with all adjustments and recommendations from the examination report.
Board of directors section of Part 1
Focus on the board’s role in overseeing the company’s operations; includes questions regarding:
- Role of the board in approving the purchase/sale of investments
- Does the company have a process in place to notify the board of conflicts of interest within senior management?
- Whether the permanent records of the board proceedings are retained.
Financial section of Part 1
Contains questions regarding:
- Whether the financials were developed using an accounting system other than SAP.
- Loans made to senior leadership and other stakeholders
- Assets that the insurer was obliged to transfer to another party which were not reported as liabilities
- Assessments other than guaranty fund assessments
- Amounts due from affiliates
Possible insights from Financial section of Part 1
- If the insurer has financial obligations that were not reported in the Annual Statement
- If the insurer has been providing significant financial support to its stakeholders/affiliates
Investment section of Part 1
Questions regarding:
- Assets & investment decisions
- Security lending programs and associated collateral
- Hedging programs
- Mandatory convertible stocks or bonds
- Compliance with NAIC “Purposes and Procedures Manual”
Focus is on the amount of control that the insurer has over its operations; and its compliance with the rules.
Other section of Part 1
Contains questions about payments made to:
- trade associations
- service organizations
- statistical and rating bureaus
- attorneys and others regarding legislative/regulatory matters
In particular, the insurer needs to list the names of any organizations that received over 25% of the total, so users can determine if it has a strong influence on a particular organization.
Questions in P&C Interrogatories that are relevant to actuaries
Questions about:
- Exposure to catastrophic events and excessive loss
- The process used to calculate the PML (Probable Maximum Loss)
- Level of reinsurance protection
- If there are any limiting provisions within reinsurance contracts, guaranteed policies, and retrospectively rated policies
- Any releases of liability under reinsured policies (where the company may have to reassume liability)
- Exposure to warranty business (the adequacy of the UEPR would be important)
Finite reinsurance
“reinsurance” that does not transfer underwriting or timing risk; therefore, it should be treated as deposit accounting
Purpose of questions about finite reinsurance
To identify contracts that may be improperly accounted for. It is important for the actuary to learn about these as the designation will impact the size of the reserves (if the contract is treated as reinsurance, it will reduce the loss reserves, but it will not if it is instead recorded as a deposit)
To help identify if an insurer is using finite reinsurance:
Did it cede reinsurance that:
- Resulted in an underwriting gain/loss of more than 5% of the prior surplus; or ceded premiums/loss reserves of more than 5% of surplus
- Was accounted for as reinsurance (not deposit)
- Had at least one of the following features:
+ duration of at least 2 years and non-cancelable
+ limited cancellation provision (so the ceding company is forced to enter into a new contract with the reinsurer or its affiliates)
+ aggregate stop loss coverage
+ gives either party the right to commute for a reason other than the downgrade in the credit rating of the other party
+ ability to report or pay losses less frequently than quarterly
+ delayed reimbursements to the ceding company
Second question about finite reinsurance
Has it entered into any ceded reinsurance contracts where the ceded premium is 50% or more of the gross premium, or at least 25% of the ceded premium is retroceded back to the insurer. The following are excluded from this interrogatory:
- reinsurance ceded to entities under the insurer’s control, other than captives
- reinsurance ceded to approved pooling arrangements
Reinsurance Summary Supplemental Filing
Due 3/1; required if insurer answers yes to either of the finite reinsurance interrogatories; should disclose:
- The impact to the Balance Sheet and Income Statement had the contracts been excluded
- A summary of the applicable terms of the contract that generated the affirmative response
- The reasons that management entered into the contract, including the expected financial gain
