CAS Financial Reporting

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CAS Financial Reporting
2014-04-12 20:14:52
P&C-1 Calculation
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  1. Balance sheet statement
    • presents all of a company's asset and liabilities as of a specific point in time
    • net worth (or equity, or statutory surplus) is the difference between assets and liabilities
    • actuary have in important role in valuing insurance liabilities due to inherent uncertainty
  2. Income statement
    • reveals a company’s financial results during a specific time period
    • net income = revenues - expenses
  3. Accounting concepts
    • liquidation vs going concern: investors would generally be more interested in going concern, whereas regulators may think in terms of liquidation value
    • fair value vs historical cost: trade-off between reliability of historical cost (verifiable) and accuracy of fair value approach (consistent with market value)
    • principle-based vs rule-based: rule is easier to understand and audit, principle is more adaptable to changes in business environment
  4. Factors affecting selection of expected investment return rate
    • method of valuing assets and reporting investment income
    • allocation of those assets and that income among LOBs
    • return on the assets at the balance sheet date
    • yield on assets acquired after the balance sheet date
    • capital gains and losses on assets sold after the balance sheet date
    • investment expenses, and losses from default
  5. Impact of reinsurance on financial statements
    • Income statement
    •    increase in ceded written premium
    •    decrease in net claims and LAE
    •    potential increase in commission
    • Balance sheet
    •    assets: decrease in cash, increase in recoverables
    •    equity: decrease in retained earnings
  6. Motivations for a reinsurer to commute
    • bring certainty to its results
    • capital relief
    • savings in claims adjusting and administrative costs
  7. Motivations for an insurer to commute
    • way to extinguish creditworthiness concerns about a reinsurer (get all in cash)
    • save administrative costs
    • BUT subject to risk of future adverse development, so must hold extra capital for that
  8. Factors influencing present value of liabilities
    • nominal or undiscounted value of future L&LAE
    • expected timing of the payout of the undiscounted L&LAE
    • expected investment income on assets supporting these cash flows, and income tax
    • appropriate risk load to provide for volatility
  9. Estimation of commuted value of claims
    • use duration matching to get discount rate for each period
    • calculate PV of cash flow for each period
    • calculate capital required for each period = (reserve x margin x risk cost) discounted
  10. Considerations when setting internal target capital ratio
    • nature of company: stock vs mutual (stock can raise capital quickly)
    • size of the company: small companies may have more volatile results
    • company reinsurance program: reinsurance is a form of capital 
    • investment philosophy: some investment approaches will require greater capital
    • competitive forces: a company requiring less capital has competitive advantage
  11. Components of capital available
    • total equity less AOCI
    • subordinated indebtedness and redeemable preferred shares
    • AOCI loss on available-for-sale equity/debt securities, foreign currencies
    • revaluation losses in excess of gains on own-use properties
    • consolidated non-controlling interests
  12. Examples of items excluded / requiring adjustment from capital available
    • amounts due to/from unregistered reinsurers
    • interests in non-consolidated subsidiaries and associates
    • goodwill and other intangible assets
    • self-insured retentions where no collateral has been received
  13. Components of capital required (capital charges for)
    • balance sheet assets
    • unpaid claims / unearned premiums and premium deficiencies
    • catastrophes
    • reinsurance ceded to unregistered reinsurers
    • interest rate risk
    • structured settlements, letters of credit, derivatives and other expenses
  14. Examples of interest-rate-sensitive assets
    • term deposits and other short-term securities (excluding cash)
    • bonds and debentures
    • loans / mortgages
    • preferred shares
  15. Interest rate risk margin calculation
    • A = change in value of assets 
    • B = change in value of liabilities
    • C = change in value of allowable interest rate derivatives
    • margin = A - B + C
    • keep greater value of negative change vs positive change in interest rate
  16. Structured settlements, letters of credit, derivative risk margin calculation
    • value of instrument (less collateral or guarantees) times
    • credit conversion factor (nature and maturity) times
    • capital factor (counterparty default)
  17. Goals of DCAT
    • help measure capital adequacy
    • strengthen monitoring systems
    • provide information on a continuous and timely basis
  18. Future of Financial Reporting
    • Frameworks in place to unify accounting practices
    • NAIC was established in part to unify wording across states
    • 2008 G20 summit created Financial Sector Assessment Program (FSAP), a peer review process of each country’s financial services, mainly applied to developing countries
    • NAIC’s review by the FSAP pointed weaknesses around time value of money
    • Insurance Association of Insurance Supervisors (IAIS) is developing a Common Framework for the Supervision of Internationally Active Insurance Groups (ComFrame)
    • US is not an "equivalent" country for Solvency II since it lacks a countrywide regulator
  19. Functions of the Federal Insurance Office (FIO)
    • coordinate federal efforts and develop federal policy on prudential aspects of international insurance matters
    • determine whether state insurance measures are preempted by covered agreements
    • consult with states regarding insurance matters of (inter)national importance