Reserves & Liabilities

Question 1

Reserve standards for the different types of financial statements (4)

Answer 1

1. ) Statutory - focus is on ensuring solvency, so reserves tend to be conservative
2. ) GAAP - focus is on matching profit streams with revenue streams, with a lesser degree of conservatism (through provisions for adverse deviation)
3. ) Tax statement - IRS standards make sure profits beyond a set level are recognized, and therefore taxed immediately
4. ) Embedded value based statement - may be needed for international companies. Standards are set by the International Accounting Standards Board.

Question 2

Types of premium reserves (4)

Answer 2

1. ) Unearned premium - reserve for the premium that has been received to cover the portion of the coverage period which hasn’t yet occurred (usually a pro-rata portion of the last premium received)
2. ) Premium paid in advance - reserve for premiums paid in advanced for future coverage periods
3. ) Premium due and unpaid - an asset is created on the statement for the amount of premium that is expected to be received
4. ) Policy reserves - money set aside to account for current funding of costs over the future lifetime of a policy

Question 3

Types of policies for which policy reserves are required (2)

Answer 3

1. ) Contracts that use level premiums

2. ) Contracts where the value of the future benefits at any time exceeds the value of future net premiums

Question 4

Reasons why a deficiency reserve may be needed (3)

Answer 4

1. ) A policy is non-cancelable, so premium rates can’t be raised
2. ) Regulators are unlikely to allow the premium rates to rise to self-sufficient levels
3. ) The size of increases needed might trigger an anti-selection spiral that makes it impossible to ever break even

Question 5

Policy Reserve - Prospective Formula

Answer 5

PV of Future Claims - PV of Future Net Premiums

Question 6

Policy Reserve - Retrospective Formula

Answer 6

AV of Past Premiums - AV of Past Claims

Question 7

2 Year Full Preliminary Term Reserves (5)

Answer 7

1. ) For coverages other than LTC and return of premium contracts
2. ) Reserve for first 2 policy yrs is 0
3. ) Policy is treated as if it was issued 2 years later and policyholder is 2 years older
4. ) Method allows for reduced reserves in first 2 years to limit the surplus strain resulting from acquisition cost
5. ) Approach enables expenses to be implicitly deferred as explicit recognition of expense is not allowed under statutory accounting

Question 8

1 Year Full Preliminary Term Reserves (2)

Answer 8

1. ) For LTC coverage and return of premium contracts

2. ) 2 year FPT may be used based on situation

Question 9

Deferred Acquisition Cost (DAC) Asset

Answer 9

Explicitly delays recognition of certain expenses (acquire the business, commissions):
Retrospective:
(AV of Deferrable Expenses) - (AV of Net Expense Premiums)

Question 10

ASOP #42: Considerations for determining provider-related liabilities (3)

Answer 10

1. ) Risk-sharing and capitation arrangements - the nature of the arrangement should be considered when determining whether to establish a liability
2. ) Provider financial condition - consider whether the provider will be able to meet its obligations
3. ) Provider incentive payments - if an agreement with a provider calls for incentive payments, consider whether a liability should be held for those payments

Question 11

ASOP #42: Considerations for determining contract reserves (7)

Answer 11

1. ) Interest rates - rates should be reasonable and consistent with the purpose of the reserve
2. ) Morbidity - this assumption should reflect the underlying risk, including factors such as age, gender, durational effects, and adverse selection
3. ) Persistency - this assumption should include bot involuntary and voluntary terminations
4. ) Expenses - consider whether maintenance, acquisition, or claim expenses should be included
5. ) Trend - inflation, utilization, morbidity, and expense rates should reflect the appropriate trend
6. ) Premium rate changes - assumptions for future rate changes should reflect market conditions, regulatory restrictions, and rate guarantees
7. ) Valuation method - when the valuation method is not prescribed, the actuary should choose an appropriate method

Question 12

Active life reserves formula

Answer 12

Active life reserve
=midterminal+UPR
=mean-deferred premium reserve

midterminal=(V1+V2)/2
mean=(V1+V2+net premium)/2

Question 13

Impact of the ACA on Actuarial Liabilities (4)

Answer 13

1. ) Claim liabilities - claim payment patterns and PMPM claim cost levels will change at beginning of 2014 adding challenge to setting reserves
2. ) Contract reserves - some insurers have held this in ind to account for effect of UW wear-off. This is no longer appropriate because UW not allowed.
3. ) Due and unpaid premium asset - affected by 90-day premium grace period for people receiving subsidies
4. ) PDR - could result in need of PDR