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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
Learning objective 3 : Discuss the issues, outcome, rationale and implications of landmark
decisions for the insurance industry. (Range of weigth: 5-10 percent)
Knowledge statements
a. Specific landmark court decisions cited in the Readings section
b. Canadian cap for non-pecuniary general damages
1. Trilogy of Supreme Court of Canada decisions
2. Limits on damages
3. Current state of cap
4. Exceptions to cap
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Cases on Canadian Law of Insurance
CHAPTER 1
Section 4 : The Reasons for Regulating the Insurance Industry
Insurance was one of the first "regulated industries" :
(i)
Economic impact :
- among the biggest corporations in the world
- life insurance companies in Canada > concentration of financial power
(ii) Undesirable business practices :
- agents pressure sold insurance products without knowing the subtleties of the
product they were selling
- agents application errors lead to a defence of failure to make full disclosure
- insurance contracts are hard to understand for layman
- London & Lancashire Fire Inc. Co, Ltd v. Bolands, Ltd. [1924]
4 men robbery -> riot and was off cover due to riot exclusion
- All-too-frequent deliberate delay or technical or vexatious defences
- Man dies after 360 days, 12 months life insurance, Lloyd's UWs claim it was 12
lunar months
(iii) Insurer insolvencies :
- Insurance is a complex business and requires great capitalization, much more than
what early venturers had supposed
- Life insurers faced two difficulties :
(1) Policyholders represented a group as to whom the risk was constantly varying
(2) Could not assess profitability with current premium vs claim payouts
- Manage reserves
Section 5 : The Nature of the Regulation (Insurance Act)
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Agents are licensed, some vague outline of their conduct and competence is prescribed and
they are exposed to disciplinary penalties (de-licensing)
Large part of the Act codify the law concerning the form of the insurance contract and
certain dealings with it (termination) and regulate the insured's duty of disclosure.
When the Act does not regulate, fall back to old common law and freedom of parties
Third component of the Act is provisions requiring insurers to be licensed and, as a
condition to licensing, to demonstrate financial strength, to deposit a large amount with
the Superintendent of Insurance and to file voluminous financial statements
Section 6 : Government as an Insurer
i.e. Unemployment Insurance (UI), Hospital and Medical Insurance (HI), CMHC mortgages
For risks which were not being satisfactorily dealt with by the private sector.
UI : The risk is greatly affected by the existence of an insurance scheme + economy
HI : social benefits, before Gov. HI, pricing reflected industry's fear that the risk was
unpredictable and susceptible to influence by existence of insurance scheme
Section 7 : Arrangements and Activities Similar to Insurance
Legal system has to determine if a particular arrangement should be regarded as insurance
Subsection A : The Reasons for, and Consequences of, Characterization as Insurance
Business activity that amounts to insurance will be regulated by the Insurance Act with
all the implication for the entity engaged in the business activity
Characterization of the arrangement may determine the legal rights of the parties to the
arrangements
One of the basic features of the insurance relationship is the subrogation right
available to the insurer which indemnifies its insured for a loss
Subsection B : The tests to identify an insurance activity
It's harder than it looks
1. Does the activity fit a statutory definition?
2. Does the activity satisfy the classic concept of insurance? This involves asking
whether risk is shifted, whether there is a recognizable "premium", and, less
importantly, whether the arrangement involves indemnification
3. Does the activity "look like" insurance? > "educated feel"
4. Does the activity compete with existing and familiar schemes of insurance?
5. Does the agreement really just amount to a warranty of materials or workmanship?
6. Does the agreement involve the contingency of human death?
7. Does the activity offend the spirit and purpose of the legislative control of
insurance?
8. Is the activity adequately regulated without applying the system of control designed
for insurance?
"insurance" means the undertaking by one person to indemnify another person against loss
or liability for loss in respect of a certain risk or peril to which the object of the
insurance may be exposed, or to pay a sum of money or other thing of value upon the
happening of a certain event, and includes life insurance;
CHAPTER 2 - STRUCTURE OF THE INDUSTRY
Section 1 : The Insurance Industry in Canada
Subsection A : Types of Insurance Carriers
(i)
Individual underwriters (Lloyd's of London)
(ii) Joint stock companies (for profit)
(iii) Mutual insurance carriers
- mutual insurance corporations
- cash mutual insurance corporations
- mutual benefit societies
- fraternal societies
(iv) Reciprocal or inter-insurance exchanges
- no policies
- no participant can take out insurance unless he offers insurance in return
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Subsection B : The Nature of Competition in the Insurance Industry
Insurance industry exempt from anti-combines legislation (competition). Uncontrolled
price competition in the short term is not in the public's long term interest. Too
vigorous price competition in the short term results in insurers collecting less in
premiums than is necessary to meet their future liabilities. Bankruptcy of an insurer
could have catastrophic effect on its customers.
Industry cooperator to determine adequate premiums. In P&C, rating bureaus regulated
by provincial insurance Acts. Principal bureau in Canada is the Insurers Advisory
Organization (the IAO). Provincial legislation authorizes the superintendents to appoint
a statistics gathering agency (Statistical Division of the Insurance Bureau of Canada
IBC sponsored by P&C insurers). Advices, not compelled to follow.
In Life & Health, Canadian Institute of Actuaries CIA conduct industry-wide analyses of
mortality data. Canadian Life and Health Insurance Association (CLHIA) encourages
members to contribute. Rely on American data from SOA and Association of Life Insurance
Medical Directors.
Rating bureaus promulgate or fix terms and conditions of insurance contracts. Basic
policies are standardized. Standard contracts published in the Insurance Forms Manual
Services (Informco Inc. of Toronto).
In some provinces, Superintendent given limited power to control rates and unfair and
deceptive acts and practices. In all provinces, no policy can be used without approval
of the Provincial Superintendent of Insurance.
Some statistics of the industry are presented, don't think it is needed for the exam.
Subsection C : Insurance Industry Organizations
IBC was formed in 1964 and some of its objectives are :
- to provide a forum for discussion of general insurance
- to collect, collate and analyse actuarial and statistical information
- to study legislation and legislative proposals
- to engage in research and pilot programs and projects with a view to providing a high
level of service to the public
- to engage in activities to promote a better public understanding of the insurance
business
Promulgate standardized forms, fostered agreements on claims, subrogation and
overlapping cover
CLHIA was formed in 1981 by the merger of the Canadian Life Insurance Association and
the Canadian Association of Accident and Sickness Insurers. Other organizations are
active in the life and health insurance field :
- Life Underwriters Association of Canada (LUAC) training, educational, code of conduct
- Life Insurance Managers Association of Canada (LIMAC) career sales organization
- Canadian Institute of Actuaries (CIA) advance and develop actuarial science
- Life Insurance Institute of Canada (LIIC) assist the Life Office Management
Association (LOMA) in administering its programs in Canada. LOMA is USA, educational,
exchange experience and research
- Canadian Home Office Life Underwriters Association (CHOLUA)
- Canadian Life Insurance Medical Officers Association (CLIMOA). Liaison between medical
profession and insurance industry
In addition, the following organizations are active in the property and casulaty field :
- Association of Independent Insurers, provide statistical information
- Canadian Association of Insurance Women
- Canadian Association of Mutual Insurance Companies
- Canadian Boiler and Machinery Underwriters' Association, public safety
- Canadian Federation of Insurance Agents & Brokers Associations, education, administer
examinations for the licensing, liaison with government
- Canadian Federation of Insurance Claimsmen
- Canadian Independent Adjusters' Conference
- Canadian Insurance Accountants Association
- Canadian Insurance Claims Managers' Association, high standards of ethics in handling
claims
- Insurance Institute of Canada, professional educational arm for P&C industry
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Section 2 : The Nature of Insurance Regulation
Subsection A : History
Since Confederation, focussed on five areas
1. regulations designed to guarantee the financial solvency of insurers
2. attemps to promote Canadian ownership of insurers and investment by insurers in
Canada
3. creation of tax revenues
4. regulations designed to promote marketing integrity and improve the insurance
contract
5. regulations designed to promote the honesty and competence of insurance
intermediaries
Solvency
Prompted by failures of large insurers in U.S. and UK. Promoted solvency by controlling
the creation of domestic insurers and licensing foreign insurers, limiting the type of
investments insurers could make, requiring periodic filing, authority to ensure
compliance. Later, creation of rating bureaus to improve actuarial soundness of UW.
Most important function of regulation. System still not foolproof.
Canadianization
Require foreign insurers to hold significant assets in Canada. Prevented expatriation
of large amounts of investment capital. Half foreign withdrew. Canadian compagnies grew
from 12% (1868) to 63% (1993).
Government Revenue
Creation of substantial tax revenues. In 1869 and 1870, these represented 12.9% and 17%
of federal gov total revenue. Proportiond declined over time. No tension with provinces.
Regulating the Contract
Criticism of marketing practices and content of insurance policies. Ontario passed
"an act to scure uniform Conditions in Policies of Fire Insurance" in 1876. Provinces'
constitutional authority to regulate insurance contracts was affirmed by the judicial
committee in 1881. Federal attempted to deal with injustices found in life contract in
1886. All attemps by Fed. Gov. to regulate contracts were found ultra vires by the
courts (beyond the powers). Provincial acts contain few provisions which apply to all
types of insurance. Treat separately fire, life, automobile, accident and sickness...
Common law continues to apply to other type of insurance. For fire insurance, statutory
conditions exist and must be part of every contract. No variation allowed. In auto, must
use approved forms, only one set of forms approved by Superintendent. Difference in
detail resulted from piecemeal legislation.
Control over Insurance Intermediaries
In P&C, 2 provinces adopted self-regulation. Association have authority to set admission
standards, rules of conduct and discipline. In the remaining provinces, the provincial
Superintendents of Insurance are formally in charge of licensing agents and brokers but
they rely on industry to provide training.
Direct Control over Marketing Practices
Prohibitions agains unfair or deceptive acts and practices in the business of insurance.
Superintendent has power to investigate. Penalties are provided.
The Form of Insurance Regulatiom
Favour guidelines over legislation or formal regulation. Guidelines seen as more
flexible, les obstrusive and less likely to be "misinterpreted" by the courts.
Subsection B : The Constitutional Power to Regulate Insurance
Provincial Jurisdiction over Insurance Law
The authority of the provinces to legislate in relation to insurance seemed clearly
established by 1932. Federal gov. still tried to assert authority. Strong opposition
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from Ontario and Quebec. New legislation in 1932, behind the back of Canada
Superintendent. Concentrated on solvency of insurers registered under federal Acts.
In turn, provincial authorities exempted federally registered companies from provincial
prudential regulation. Initially, the two levels of gov. were concerned about different
things but they seeked the same goals ultimatly.
Subsection C : The Role of the Canadian Concil of Insurance Regulators
(formally the Association of Superintendents of Insurance of the Provinces of Canada)
Formed in 1917. Draft legislation, encourages uniform practices (industry-wide rules,
common teaching). Meet twice a year, once with industry. Concil relies heavily on the
initiative and expertise of the industry. Operates without much public scrutiny.
Section 3 : Types of Insurance
Limited and piecemeal reforms have resulted in a complex patchwork of common law and
statute. The fact that the industry and the law divide up insurance differently can lead
to problems.
Subsection A : Social and Private Insurance
Differences :
- Universal in application as opposed to risk selecting.
- Protect the public from gaming is of little significance
- No need for elaborate rules to guarantee solvency
- Since intermediaries are civil servants, different supervision
Similarities
- Protect integrity of the insurance fund and prevent double recovery
- Problem of defining what events are covered
- Difficulty in establishing fair and efficient claims process
Subsection B : Marine and Non-Marine Insurance
...don't think it's pertinent for this exam
Subsection C : Indemnity and Non-Indemnity Insurance
Glynn v. Scottish Union & National Insur. Co. Ltd. (1963) Ontario Court of Appeal
Joel Glynn and his wife injured in a motor vehicle accident as a result of negligence
by one Sutherland. Glynn obtained settlement from Sutherland (expressly including all
medical expenses). Mr Glynn then brought action against his own insurer relying on
insuring agreement in Section B. Insurer objected paying because Glynn already recovered
from Sutherland. Glynn won at trial. On appeal, the point was whether the insurer could,
through the doctrine of subrogation, claim the benefit of Sutherland's payment so as to
prevent double recovery.
Since the doctrine of subrogation applies only to contract of indemnity, the question to
be determined is whether Section B constitutes a contract of indemnity.
Contracts of life insurance as normally written are not contracts of indemnity. It does
not translate into a pecuniary loss.
To recover the insured must prove :
(1) the happening of some event by reason of which the insurer's liability arises
(2) the loss occasioned to the insured by the happening of such event
Do not confuse a valued policy with a policy that provide a fixed sum even if insured
didn't occur any pecuniary loss. The latter is not a contract of indemnity.
In this particular case, since the right to recover is depends on proof of financial
loss as well as the happening of the accident, it is a contract of indemnity.
Appeal allowed, action dismissed.
Subsecton D : Classification in the Insurance Act for the Purpose of Regulating the
Contract Between Insured and Insurer
Regal Films Corporation (1941) Ltd. v. Glens Falls Insurance Company [1946] Ontario
Court of Appeal
Issued policy labeled "inland marine policy". Regal had a fire loss. Proof of loss
was given as soon as practicable. Glens argued that policy did not come under Part IV
of the insurance act (Fire) so there was a 60 days limit on providing proof of loss.
Under Part IV there is no time limit, as soon as practicable only.
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The issue here is to find out if this policy comes under Part IV of the insurance act.
Glens contends that the policy falls under marine insurance law because of the label.
The policy at hand covered fire, lightning as primary risk and not as incidental to
other risks and so was governed by Part IV.
Appeal dismissed
Subsection E : Group and Individual Insurance
...don't think it's pertinent for this exam
Subsection F : Classes of Insurance for the Purpose of Licensing Insurers
...don't think it's pertinent for this exam
Section 3 : Subrogation and Collateral Benefits
...don't think it's pertinent for this exam
Fletcher v. Manitoba Public Insurance Corp. (1990) Supreme Court of Canada
This appeal raises questions concerning the responsability of a government insurer to
inform its customers about the types of automobile coverage open to them and the extend
of such an insurer's liability should it fail to do so.
Involved in a serious accident, person responsible had inadequate coverage. Informed
they did have UMC. MPIC administer Autopac. UMC and PL/PD are optional forms.
Fletcher sued MPIC in supreme court of Ontario because didn't inform about UMC.
At trial, Fletcher said he relied on expertise from MPIC. He asked for maximum coverage.
Employee did not offer UMC. Informed through flyer, said UMC NOT APPLIC. Misinterpreted.
Trial judge found MPIC negligent. Court of appeal of Ontario reversed the call 2-1.
The issues
-Did the Ontario Court of Appeal err in departing from the trial Judge's findings of
fact?
Yes
-Does a government-owned insurer selling compulsory insurance directly to owners of
motor vehicles have a duty to advise?
Yes duty is bond in tort
There is a duty of care in communicating information
There was reliance on MPIC
The reliance on MPIC was reasonable
The reliance was expected of MPIC customers
The scope of the duty is between private insurance agent and buyer/seller
The duty of MPIC was to inform customers of the available range of coverage.
-If duty exist, is it fulfilled
No, minimal effort were made to inform public. Communications effort were insufficient.
-If did not fulfil, is it liable?
Yes
-Did trial judge err?
No
Appeal allowed, trial order restored.
Broadhurst & Ball v. American Home Assurance Co. (1990) Ontario Court of Appeal
What is the scope of an excess insurer's obligation to provide a defence for an insured
and the allocation of defence costs among primary and excess insurers.
B&B obtained additional prof. liab. from Guardian Ins. Co. (9.5M$). He already had
500K$ from Am. Home through Law Society of Upper Canada.
An action claiming 20M$ was commenced against B&B.
Am. Home acknowledged its obligation to defend but Guardian still refused. Guardian
claimed that B&B knew about the action before subscribing policy.
The issues (3)
-trial judge err in declaring that claims is covered by Guardian at this stage
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Guardian could not offer any evidence of prior knowledge
-obligation to defend issue
omitted
-allocation of defence cost
50-50, without involment of Guardian, impractical to discuss common defence strategy
Appeal dismissed, cross-appeal allowed
Dillon v. Guardian Insurance Co. (1984) Ontario High Court
Insurer refused to settle inside policy limit when he could, insured sued him for
amount over policy limit. Insurer had to pay.
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
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Insurance Companies Act
Law paper from Government of Canada's Department of Justice. Highlights federal
legislation for insurance companies in Canada.
Directors and Officers
Manage
Establish :
audit committee
review committee
procedures to resolve conflicts of interest with monitoring committee
policy for determining policy dividends with monitoring committee
investment and lending policies
Appoint actuary
Committees of the Board
At least three directors, a majority who are not affiliated with the company
Review :
annual statement
returns
internal control procedures
investments and transactions
Meet :
auditor
actuary
chief internal auditor and management
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Annual finanical statement
two-year comparative
report of auditor on said statement
report of actuary on said statement
balance sheet
statement of income
statement of change of financial position
statement of change in shareholders' equity
generally accepted accounting principles -> Handbook of the Canadian Institute of
Chartered Accountants
Auditing
in accordance with generally accepted auditing standards -> Handbook of the CICA
use valuation of actuary for policy liabilities and increase in actuarial liabilities
Actuaries
notify Superintendent of appointment
CEO or COO may not be chief actuary unless they get approval (max 6 months)
CFO same thing unless prove can do the job and not specific time limit
notify Superintendent of revocation
resigns, ceases to be an actuary, dies, revoked
resignation date = max(written resignation sent, time specified in resignation)
statement : why he resigns or why he thinks he was revoked
replacement actuary need to obtein statement (unless no reply in 15 days)
Valuations and Reports :
policy liabilities -> generally accepted actuarial practice
Superintendent may appoint an actuary to check your numbers and the company pays him
actuary has a right to information deemed necessary
report delivered 21 days before annual meeting
report to officers if something has material adverse effects on financial condition
copy this report to directors
if no action, copy to Superintendent
no civil liability from reporting under good faith
Policy dividend
before declaration, get actuary report
Reinsurance
Governor in Council may make regulations limiting reinsurance
Superintendent may exercise discretion in application
P&C Specific
Do not enter into debt obligation or issue shares that would bring capital ratio under
prescribed percentage
No guarantee on behalf of any person to pay sum of money, unless subsidiery that will
reimburse company
Does not prevent writing insurance risk
No financial leasing of personal property in Canada
Adequacy of assets -- property and casualty companies
Assets total value (max between GAAP and market value) at least equals to :
actuarial and policy liabilities
other liabilities
unearned premiums
incurred but unpaid claims
premium income during during the preceding year
claims incurred during the prescribed period
minus reinsurance
Superintendent may direct a company to increase assets and challenge assets value
Self-dealing (Foreign company)
Conditions :
assets in trust
appoint actuary
established place of business
Actuaries of foreign company
same as canadian company
Examinations and Reports
same as canadian company
Regulation of companies, societies, foreign companies and provincial companies
SuperIntendent
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provide information to Superintendent as he require in form and time
preprare annual return as Superintendent require
105 days after end of fiscal year for reinsurer
60 days after end of fiscal year for insurer
use GAAP principles from Handbook of CICA
actuary shall prepare a report as Superintendent require
Superintendent may examine company and report to Minister
Inquiry made triennially except for fraternal benefit society (no specific)
Superintendent can access any records and require explanations
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
Section D : Professional Responsibilities of the Actuary in Financial Reporting
Learning objective 1 : Explain the responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting. (Range of weight : 812 percent)
a.
b.
c.
d.
e.
f.
g.
Statutory Actuarial Opinion
Contents of Statutory Reports of the Actuary
Standards of Practice
Educational Notes
Insurance Companies Act
Actuary and auditor relationship
Regulatory requirements
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Property Casualty Insurance Compensation Corporation (PACICC), The P&C Actuary's Role in
Solvency Monitoring by KPMG
A review by KPMG of historical developments regarding legislation, the CIA and the role of
the actuary.
PART 1 - Purpose and Scope
Purpose
Is there a relationship between the financial solidity of P&C insurers who use actuaries
and those that do not?
PACICC request for KPMG report
current Canadian regulatory requirements of the actuary directed at solvency
history of changes in actuarial requirements
effects of changes in actuarial requirements
PART 2 - Research methodology process
Four questions asked to each provinces (or info on website)
1. Is a report on dynamic capital adequacy testing (DCAT) required on an annual basis?
2. Is there a requirement for the submission of an actuarial report and opinion
statement as to the adequacy of policy liabilities with the annual return?
3. Is there a requirement to follow the minimum capital test (MCT) guidelines set out
by OSFI or similar guidelines?
4. Is actuarial external review (i.e. peer review) required for actuarial reports?
PART 3 - Financial Metrics - Federal and Provincial P&C Insurance Companies
75% of premium volume in Canada is written by federally regulated companies
BC, SK, MB have a public auto insurer
PART 4 - Introduction to the Regulation of Insurance Companies in Canada
Sharing of responsabilities
Federal
Solvency
OSFI
Act
Office of the Superintendent of Financial Institutions Act
Insurance Companies Act of Canada (ICA)
Provincial
Solvency
Superintendents
Licensing of insurance companies
Contracts
Licensing of agents, brokers, and claims adjusters
Marketing (Sales and information disclosure)
Claim settlement practices
Compulsory coverage and residual markets
Filing
Consumer protection
Collaborative Approach to Regulation
OSFI, Provincial SI, CIA, CICA, IBC -> industry
Success because of continual interaction between key parties
1980s
file annual statements
life : appoint valuation actuary (FCIA)
p&c : no such requirement
1981/1982 poor results, 3 failures (fed), 2 failures (prov)
proposals
initial and continuing capital and surplus requirements
reinsurance and writing quality business
quality and collectability of assets
adequacy of claims and other reserves
p&c actuary involment
1990s
ICA Changes
Surplus test provisions providing minimums based on written premiums and incurred
claims as well as existing margins on reserves
Regulations issued to address excessive use of reinsurance and use of unregistered
reinsurance
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Actuarial certification of UP and OC provisions by 1992 statements
Creation of the PACICC
Bill C-28
appointed actuary (AA) concept
duties beyond reserve certification
report on value of actuarial and other policy liabilities
report on financial condition of company (DCAT)
report on any matters that have material effect and require rectification
2000s
Until 2003, OSFI directed that policy liabilities didn't time value of money
Effective January 1, 2003, discounted policy liabilities
Minimum capital test (MCT) at year-end 2003
mandated external review of AA reports starting 2003
Accounting changes (October 1, 2006) - Accounting Standards Board (AcSB)
new standards to address when an entity would recognize a financial instrument on its
balance sheet and how the financial instrument would be measured once recognized.
CICA Standards section
- CICA 3855, Financial Instruments - Recognition and Measurement
- CICA 1530, Comprehensive Income
The use by actuary of portfolio-based discount rate in PV had indirect effect
PART 5 - Current Canadian Regulatory Requirements of the Actuary - Federal Regulation
Arise from
Guidelines and related advisories
Regulatory and legislative advisories
Rulings
Supervisory advisories
ICA
See ICA
Actuarial report on the financial position is more commonly known as the DCAT report
OSFI Guidelines
best or prudent practices developed with CIA, CICA, industry released in draft format
with a comment period for feedback
Guidelines highlighted
Appointed Actuary : Legal Requirements, Qualifications and External Review, E-15
August 2003, revised in November 2006
Part 1 - major responsibilities
If DCAT presented to board in second half of fiscal year, include material changes
up to 90 days before presentation
Projection period of at least 3 years
Copy of the report to OSFI within 30 days of presentation, no later than end of CY
Part 2 - actuary's qualifications
FCIA
Work in Canada for a least three of the last six years (at least one year performing
valuation of Canadian actuarial liabilities of an insurance company)
Experience with CIA's SOP, legislation and regulation
Up to date on CIA's continued education
In possession of an up-to-date AA Certificate from the CIA
Not been the subject of an adverse finding by a CIA Disciplinary Tribunal
Part 3 - external review
Appoint external reviewers
P&C expectations
1. work of AA is within range of accepted actuarial practice, consistent with OSFI
guidelines
2. review adequacy of procedures, systems and work of others relied on by AA
(include checks on data integrity and checks on procedures and methodologies
3. discuss appropriateness of assumptions and methods employed for policy
liabilities valuation
4. determine if AA report describes assumptions/methods accurately<
5. review/discuss methodology, assumptions, scenarios for future financial condition
reporting (DCAT)
Minimum Capital Test (MCT) for Federally Regulated P&C, A
May 2011
Provide capital framework
Risk-based formula for minimum capital/margin required
Defines capital/assets available to meet standard
MCT determines the minimum capital/margin required and not necessarily the optimum
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capital/margin required.
Foreign companies vest adequated assets in Canada, MCT is only a component of that
Internal Target Capital Ratio for Insurance Companies, A-4
June 2011
I.
The role of capital in OSFI's risk assessment process
II. Regulatory capital ratios
III. Establishing an internal target capital ratio
IV. Capital management policy
V.
Corrective management actions
Appendix - Determining an Internal Target Capital Ratio
Incorporate stress testing and scenarios that could adversely impact the insurer
Annual Disclosures (P&C), D-1B
December 2001, latest revision July 2010
Include IFRSs disclosures and disclosures required in OSFI annual return
For actuary working in financial reporting
Accounting for Reinsurance of Short-Term Insurance Contracts by P&C, D-7
February 1998
Conditions for reinsurance contracts to be accounted for as reinsurance
- Introduction to reinsurance of short-term insurance contracts
- Definition of insurance risk
- Indemnification of a ceding entreprise against loss or liability
- Reporting of assets, liabilities, revenues and costs
- Recognition of revenues, costs, assets and liabilities
- Disclosure
- Appendix - Definition of terms
Earthquake Exposure Sound Practices, B-9
May 1998
Estimate probable maximum loss (PML)
Use of computer based model(s) or defaut loss estimate (DLE) standards
Catastrophe modeling actuary
- Common parameters
- Insurance coverage information
- Risk characteristics
- Loss estimation factors for consideration in estiming PMLs
OSFI assess insurer's capacity and preparedness
Stress Testing, E-18
December 2009
Scenario testing and sensitivity testing
"a risk management technique used to evaluate the potential effects on an
institution's financial condition, of a set of specified changes in risk factors,
corresponding to exceptional but plausible events"
Four purposes
- Risk identification and control
- Providing a complementary risk perspective to other risk management tools
- Supporting capital management
- Improving liquidity management
Stress testing should form an integral part of institutions' internal capital
management where rigorous, forward-looking stress testing can identify severe events,
including a series of compounding events, or changes in market conditions that could
adversely impact the institution
DCAT models
Sound Reinsurance Practices and Procedures, B-3
December 2010
Reinsurance is an important risk management tool
Reduce insurance risks
Reduce volatility of financial results
Stabilize solvency
Make more efficient use of capital
Better withstand catastrophic events
Increase UW capacity
Draw on reinsurer's expertise
Expose to other risks
Operational
Legal
Counterparty
Liquidity
Memorandum for the AA's report on P&C
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Annual basis, early fall
P&C-1
P&C-2
Presentation, level of detail and nature of the discussions to be included
AAR
detailed actuarial report
opinion included in financial statement
detailed commentary
data exhibits
calculations supporting opinion
PART 6 - Current Canadian Regulatory Requirements of the Actuary - Provincial Regulation
Role
Market conduct
Consumer protection
Rate and form regulation
Provincial Insurance Oversight of Solvency
Alberta
AAR
P&C-1
MCT
DCAT
British Columbia
Financial Institutions Commission (FICOM)
MCT
P&C-1
Auditor's report
AAR
Earthquake returns and report
DCAT
Manitoba
MCT
P&C-1
New Brunswick
DCAT (case by case)
P&C-1
MCT
Nova Scotia
DCAT
MCT
Newfoundland and Labrador
AAR
P&C-1
MCT
Ontario
Financial Services Commission of Ontario (FSCO)
Same as OSFI except review procedure and filing
Summary of loss dev. FSCO 5 years vs OSFI 10 years
MCT
P&C-1
Auditor's report
AAR
Data diskette
DCAT report
Quebec
Autorité des marchés financiers (AMF)
Active supervision
Close to OSFI requirements
Saskatchewan
MCT
Summary
Harmonized requirements
Same P&C-1 reporting framework
PART 7 - The Canadian Institute of Actuaries (CIA)
History of the CIA
March 18, 1965
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Original purpose
- to advance and develop actuarial science
- to promote the application of actuarial science to human affairs
- to establish, promote and maintain high standards of competence and conduct within
the actuarial profession
Key responsabilities
- accredit actuaries in Canada
- promote the advancement of actuarial science through research
- promote continuing professional development activities and ensure that actuarial
services provided by its members meet extremely high professional standards
New governance structure on January 1, 2007
Actuarial Standards Board (ASB)
Develop, establish, maintain SOP
Accountable to the ASOC
Actuarial Standards Oversight Council (ASOC)
Comprised of experienced professionals and business people
Practice Council of the CIA
practice-related material other than SOP
educational notes, research papers, task force reports
Close work with Canadian regulators
Crawford Report
Report of the Task Force on the Future of the Canadian Institute of Actuaries in the
North American Context (December 1989)
Three recommendation relevant to PACICC
1. CIA adopt a new statement of purpose which gives precedence to service in the public
interest over self-interest of the member
9. CIA increase its support of research and development for P&C insurance, P&C SOP
12.CIA contribute to public policy in Canada
- monitor emerging issues
- participation in public policy debates
- contact with government regulators and policy makers
Evolution of CIA SOP
Review of SOP is given with date of introduction and highlights. SOP are
on the syllabus so they will be reviewed individually
PART 8 - History of P&C Insurer Insolvency in Canada
Key dates
1992 - Actuarial certification required
1999 - DCAT reports required
2003 - external review required on triennal basis
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
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A Brief Chronicle of Insurance Regulation in the United States, Parts I and II
Born at the state level because there was very little in terms of infrastructure or
resources at the federal government level.
Growing movement for federal regulation may have been more about avoiding regulation
(there was less regulation at federal level)
Insurance industry avoided the layers of federal regulation that befell the banking and
securities industries, primarily because the insurance industry had survived the Great
Depression largely intact.
Paul vs Virginia - federal is out
United States v South Eastern UW Association - federal is in (antitrust)
Led to the passing of McCarran-Ferguson Act
States retain control of insurance legislation
Three laws are specifically applicable to insurance
Sherman Act - antitrust
Clayton Act - anticompetitive practices
Federal Trade Commission Act - consumer protection
Mostly covered elsewhere
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
Learning objective 3 : Discuss the issues, outcome, rationale and implications of landmark
decisions for the insurance industry. (Range of weigth: 5-10 percent)
Knowledge statements
a. Specific landmark court decisions cited in the Readings section
b. Canadian cap for non-pecuniary general damages
1. Trilogy of Supreme Court of Canada decisions
2. Limits on damages
3. Current state of cap
4. Exceptions to cap
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Life Insurance Laws of Canada (Common Law Provinces) B.R. McDonald, 1995
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(Responsible for all cases in text)
Part A - Introduction
Chapter 1 - Historical Background
First legislation in 1865
Life insurence benefits fow wives and children, free from claims of any creditor
1872 - insurance benefit a trust, not subject to control of insured
Origin of the statutory trust in favour of preferred beneficiaries
Chapter 2 - Constitutional Aspects
The British North America Act (BNA)
July 1, 1867 - British North America Act -> Dominion of Canada
Division of powers
federal Parliament exclusive legislative authority
1. regulation of trade and commerce
2. raising of money by any mode or system of taxation
3. banking
4. bankruptcy and insolvency
5. naturalization and aliens, and
6. criminal law
*. residual power to make laws for the peace, order and good government of Canada
provincial exclusive legislative authority
1. incorporation of companies with provincial objects
2. property and civil rights in the province
3. generally all matters of merely local or private nature in the province
Privy Council Decisions
Insurance not specifically mentionned in BNA (size too small)
Lack of clear direction
Cases decided by Judicial Committee of the Privy Council in England until 1949
Supreme court of Canada created in 1949
Question is whether a particular piece of legislation contravened the powers provided
in the BNA Act.
Within the powers -> intra vires
Beyond the powers -> ultra vires
Citizens Insurance Co. v. Parsons (1881)
Ontario 1876 Fire Insurance Policy Act (contract)
Constitutional validity of this act
Argument : ultra vires because it relates to trade and commerce
Decision : act is intra vires, trade and commerce does not include power over contract
Trade and commerce more like interprovincial trade and commerce
"The Insurance Reference Case" or The Attorney-General for Canada v. The Attorney-General
for Alberta (1916)
1910 federal Insurance Act (obtain a license from federal government)
Decision : licensing provisions is ultra vires, trade and commerce does not extend over
licensing system
Impact : company can operate in multiple provinces, company still licensed federally if
it intends to carry on business in multiple provinces
New federal Insurance Act in 1917 + amended Criminal Code
Reference re Reciprocal Insurance Legislation, Attorney-General for Ontario v. Reciprocal
Insurers (1924)
Because of the amended Criminal Code of 1917
Decision : amendments to Criminal Code invalid, attempt to regulate contracts
Re the Insurance Act of Canada (1932)
Argument : foreign insurer dealing in Quebec required to comply with federal Insurance
Act. Special War Revenue Act -> tax on policyholders of foreign insurer not licensed
under federal Insurance Act
Decision : federal legislation found ultra vires, court looked at substance rather than
than the form. Attempt to meddle with the conduct of insurance business
Re Section 16 of the Special War Revenue Act (1943)
Three acts in 1932
- the Canadian and British Insurance Companies Act (CBICA)
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- the Foreign Insurance Companies Act (FICA)
- the Department of Insurance Act
Decision : Privy Council found three sections of CBICA and FICA to be ultra vires
because they attempted to regulate the business of insurance within a province
Canadian Indemnity Company, et al. v. Attorney-General of British Columbia (1977)
British Columbia 1974 create ICBC for auto insurance plan, refuse to renew licenses of
automobile insurance companies. Companies object.
Decision : Supreme Court of Canada dismissed and found that the legislation was within
powers
Federal Regulation of Insurance
Primary concern is financial soundness or solvency
1. conditions that must be satisfied for a company to enter into the business of
insurance
2. reports relating to the financial condition of the company that must be submitted
at regular intervals
3. control over the investments, calculation of asset values and policy reserves
4. protecting the interests of policyholders in the areas other than those related
to the control of insurance
Provincial Regulationn of Insurance
Regulate the insurance contract and the transaction of the business of insurance
Contract matters
1. contents of the insurance policy
2. insurable interest
3. contract taking effect
4. payment of premiums
5. duty to disclose
6. incontestability
7. reinstatement
8. designation of beneficiaries
9. insured dealing with the contract
Transaction matters
1. licensing of agents
2. unfair practices
3. claim procedures
Guidelines are a simple method to accomplish uniformity without the need for formal
legislation
Part B - Federal Legislation
Chapter 1 - Federal Legislation
Source
Office of the Superintendent of Financial Institutions Act
Insurance Companies Act
OSFI Act
Presided by Minister of Finance
Governor-in-Council appoints SFI to be head of OSFI
Administers following acts
1. Insurance Companies Act
2. Cooperative Credit Associations Act
3. Trust and Loan Companies Act
4. Bank Act
5. Investment Companies Act
Expenses of Office related to insurance act paid by insurance companies on net premiums
less policyholders dividend pro rata basis. Similar assessments against other financial
institutions.
Annual report of OSFI published in "Blue Book", contains financial data on all companies
Chapter 2 - Insurance Companies Act
Introduction
New act broadens the lending and investment powers
New powers to diversify and flexibility to raise money by issuing shares or borrowing
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Better growth and international competivenes
Expected to be revised after first 5 years, every 10 years after that.
Incorporation and Continuance
File application with OSFI
If everything is in order, letters patent to incorporate insurance company issued by the
Minister of Finance
In order to determine if letters patent should be issued, consider :
1. nature and sufficiency of the financial resources of the applicants to determine if
they will be a source of continuing financial support for the company
2. the soundness of the business plans for the future development of the company
3. the business record and expertise of the applicants
4. the character, competence and experience of those who will operate the company
5. whether the incorporation of the insurer will be in the best interests of the
financial system in Canada
6. where the proposed insurance company will be a subsidiary of a foreign insurer, the
Minister must be satisfied that Canadian insurers will be treated as favourably in the
jurisdiction in which the foreign insurer principally carries on business
Before a company can carry on the business of life insurance in Canada, SFI must issue
order approving commencement of business by the company
A stock insurance company with shareholders must have start-up capital of at least 10
millions dollars or an amount specified by the Minister if the company is a mutual
insurance company
Commencement order specify the class of insurance that company will be permitted to
insure.
SFI can amend or revoke order provided company is given opportunity to object
Chapter 4 - Foreign and Provincial Companies
Foreign Insurance Companies
Appoint natural person resident of Canada as Chief Agent + auditor + AA
Company must have assets of prescribed value vested in trust "trust deed"
Maintain adequate capital and have appropriate forms of liquidity
Provincial Insurance Companies
SFI order approving the commencement of business
order will specify the classes of insurance risk the company is permitted to insure
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 1 : Describe the historical development of insurance legislation and
regulations, including the division of responsability between federal and provincial/state
regulators. (Range of weight: 2-6 percent)
Knowledge statements
a. British North America Act
b. Privy Concil
c. Federal and provincial regulation of insurance
d. Office of the Superintendent of Financial Institutions
e. Insurance Companies Act
f. Foreign and provincial insurance companies
g. Nature of Canadian insurance industry
h. History of U.S. insurance regulation
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Foundations of US Insurance Regulation
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Protecting the pledge : the quest for cohesive U.S. insurance regulation spans three
centuries, and an end to the journey still isn't assured
Key points
reasons for regulation
regular financial reporting
solvency
consumer protection
need for uniform regulation
Paul vs. Virginia (1868)
Ruling : New York agent's business in Virginia is not interstate commerce. Policies are
local contracts. Insurance exempted from Commerce Clause of the U.S. Constitution. States
kept primary over insurance regulation.
United States vs. South-Eastern Underwriters Association (1944)
Antitrust case brought under the Sherman Act of 1890.
Ruling : Insurance is commerce and federally regulated
"a nationwide business is not deprived of its interstate character merely because it is
built upon sales contracts which are local in nature"
Threat over states regulatory power led to the McCarran-Ferguson Act which is the
foundation of the states' primary authority over insurance.
Territorial Imperatives
States claimed regulatory turf early on without federal objection
Massachussets birthplace of modern insurance regulation (1799)
First federal attempt at regulation in (1866) destroyed by Paul vs. Virginia
Tying it Together
National Association of Insurance Commissioners (NAIC) first meeting upon NY
commissioner invitation in 1871, 19 out of 31 attented. Next year 30 out of 31.
Agreed to adopt common annual statements forms, Committee on Blanks for Annual Statements
Held uniformity and reciprocity as collective ideals, elusive in practice
1910, creation by NAIC of NAIC's Securities Valuation Office
Became known as NAIC in 1936
require blanks committee to meet once a year
require valuation committee to report to NAIC once a year
seek monetary contributions
About Face
McCarran-Ferguson Act
exempt insurers from antitrust laws
cemented states as principal insurance regulators
Federal Encroachments
Federal role expanded, especially in health insurance
Federal HMO Act of 1973
Employee Retirement Income Security Act of 1974
Health Insurance Portability and Accountability Act of 1996
Medicare+Choice program
Federal regulation, how to make your view heard, how can citizens can apply pressure?
"Failed Promises" report on insolvencies in insurane industry
Report found that current system for preserving solvency is deficient
Civil Wars
Insolvencies of both P&C and Life insurers
NAIC became an large multimillion organization
NAIC efforts towards harmonization collide with the very states it's trying to knit
NAIC accreditation program, certify state based on adoption of NAIC model laws
States questionned validity of NAIC (large budget, nongovernmental body)
Insurers protested and in 1995 NAIC pulled back
The Next Big Thing
For decades Glass-Steagall Act and the Bank Holding Company Act kept insurance, banking
and securities separated.
1999 Gramm-Leach-Bliley Act enabled new kinds of cross-ownership, affiliation and
distribution
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Threatened the creation of a national association of registered agents and brokers if
states didn't met standards of uniformity and reciprocity in licensing of producers.
States complied so it didn't happen
Quest for uniformity is still a work in progress
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Public hearing on credit based insurance scores (April 30, 2009)
Jeff Kucera from Casualty Practice Council of AAA
Use of credit-based insurance scores allows the insurer to better segment insurance risks
for the purpose of charging appropriate rates.
Removal of credit based scores will not lower overall insurance premium; rather it will
redistribute the premium changes so that those risks with lower expected costs will pay
more than is actuarilly fair, while those with greater expected costs will pay less than
is actuarially fair.
Current Economic Circumstances
Crisis
Greatest impact on auto and home insurance
Definition of What Constitutes a Credit-Based Insurance Score
Greatest effect on score
number of inquiries into opening new accounts
accounts 30 days or more past due
Strong correlation between credit scores and expected costs
Statistically reliable tool for segmenting risks
Evaluation of How Insurers Use Credit-Based Insurance Scores
Directly as a rating factor "risk classification factor"
Use score to help assign risks to the appropriate tier
Used to segment risks into homogeneous groups so that appropriate premiums can be charged
Credit scores reflect significant differences in expected loss costs
Allows companies to write more risks
Discussions of How Current Economic Conditions Have Affected Policyholder Premiums Related
to Credit-Based Insurance Scores
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Insurers use insurance scores to determine appropriate rate relationships between riks
classes, not to determine overall premium need
Total premium collected by the insurance company remains the same and the integrity of
the rate relationships among risks remains intact.
Any shift in insurance scores due to the current adverse economic conditions will not
result in any long-term impact on overall premium collected
No evidence of harm on insured's premium to date
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Alberta Insurance Act, Premium Regulation
Calculation of insured premium based on grid steps.
1. Definitions
At-fault claim : a claim paid or made where insured is wholly or partially at fault
and a payment is to be made by the insurer. Doesn't count if insured
reimburse the insurer within 90 days
Driver training: completion of driving course from school licensed under Traffic Safety
certificate
Driving
: combined time person has had a valid operator's licence
experience
learner's permit doesn't count
suspension periods do not count as experience
if driving certificate -> max(2 years experience, real experience)
Highest rated : highest percentage from P = A + (A x B) formula
driver
Inexperienced : less than 8 years experience, principal driver if driving vehicle
driver
more than any other person
Occasional
: inexperienced driver
driver
Relevant date : date the basic coverage comes into effect
Relevant driver: persons determined to be the relevant driver
2. Guidelines
Superintendent issues guidelines respecting location and movements on the grid
3. Steps to determine grid premium
(a) determine relevant driver and any occasional driver
(b) locate relevant and occasional driver on the grid
(c) convert grid steps to a dollar amount
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4. Relevant and occasional drivers
(2) same number of vehicles than drivers
match each driver to a vehicle
(3) more vehicles than drivers
(a) match each driver to a vehicle
(b) rematch drivers to remaining vehicle starting with lowest percentage driver
(4) more drivers than vehicles
(a) match highest rated driver first, can't be an inexperienced driver unless he is
the principal driver of the vehicle
(b) remaining drivers must not be matched, unless they are inexperienced in which case
they are considered occasional drivers
(5) same or lower number of occasional drivers than vehicles
match each occasional to a vehicle
(6) more occasional drivers than vehicles
match each occasional to a vehicle starting with highest rated driver, only one
occasional driver per vehicle
5. Locating the correct grid step
(3) start at 0
(a) move up 5 steps for each at-fault claim during last 6 years then move down
1 step for each year of driving experience and no claim year. Max 5.
(b) no at-fault claim, move down 1 step to a maximum of 15 years of driving experience
6. Computation of grid premium
(1) driver premium
(a) determine base premium from Schedule 3
(b) base premium multiplier : P = A + (A x B)
A : Schedule 2 from grid step
B : convictions surcharge from Schedule 4
(c) base premium x multiplier
(2) grid premium for vehicle is premium in (1) + 25% of occasional driver premium
Schedule 2
Schedule 3
Schedule 4
Provided on the exam I guess
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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2600 - Ratemaking : P&C Insurance
2610 Scope
derivation of indicated rates
does not apply for public personal injury compensation plans
does not recommend selection of rates to be charged
applies to quasi-insurer
crown corporations or agencies
providers of extended warranties
self-funding mechanism such as professional association
2620 Method
the best estimate present value of cash flows relating to the revenue at the indicated
rate should equal the best estimate present value of cash flows relating to the
corresponding claim costs, plus the present value of a provision for profit, over a
specified period of time
actuary should select appropriate methods and assumptions recognizing that such elements
depend on the circumstances of the case and that a variety of actuarial methods may be
appropriate to derive an indicated rate
Data
consider availability and relevance of subject experience and related experience
Credibility
blend subject experience with related experience
Changes in circumstances
affect expected claim costs, expense costs, provision for profit
under the control of insurer
UW practice
distribution system
claims handling and case estimate setting practice
reinsurance arrangements
data processing and accounting systems
distribution or type of business written
provisions of the insurance contract(s), when not legislated
premium rates
rating variables
not under the control of insurer
legislated coverage or benefits
economic, social and legal environments
Development
consider that experience may be subject to development over time
Trend
consider that experience may be subject to trend over time
Unusual events
consider that experience may be / not be subject to catastrophes, large losses
Provision for Expenses Costs
appropriate for the period during which the rates are expected to be in effect
consider
residual market assessments
statutory assessments
policyholder dividends
reinsurance costs
expense costs may not be directly proportional to premium
one-time expense costs may need to be amortized
may be specified to actuary if its within rules
Provision for profit
rate include provision for profit
may be specified to actuary if its within rules
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Time Value of Money
investment return rate for calculating the present value of cash flows reflect expected
investment income to be earned on assets that might be acquired with the net cash flows
resulting from the revenue at the indicated rate
consider
default-free assets of appropriate duration
fixed income assets of appropriate duration
assets which are expected to be acquired
provision for profit is not independent of the selected investment return rate and its
associated uncertainty
2630 Reporting
If an external user report is required and the actuary can report without reservation,
the actuary's report should include the standard reporting language consisting of the
following scope paragraph
I have derived the indicated rate(s) in accordance with accepted actuarial practice in
Canada, on behalf of [entity commissioning the work], for the following insurance
category(ies) : [name of insurance category(ies)], to be effective Month XX, 20XX for
new business and Month XX, 20XX for renewal business.
If an external user report is required and the actuary cannot report without reservation,
the actuary should modify the standard reporting language accordingly
An additional opinion paragraph may be included to conform to the requirements of an
external user
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Changes to Automobile Insurance Regulations - Bulletin A-01/10 - Auto - P&C - Ontario
effective september 1, 2010
Ontario regulation 34/10 (new Statutory Accident Benefits Schedule)
- Capping medical/rehabilitation and assessment/examination expenses for minor injuries to
3500
- Replacing the existing pre-approved framework guideline for grade I and II whiplash
associated disorders with a new minor injury guideline for accidents occuring on or
after september 1, 2010
- Providing standard medical and rehabilitation coverage for non-catastrophic claims of
50000, with optional coverage of 100000 or 1100000
- Offering standard attendant care coverage for non-catastrophic claims of 36000, with
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optional coverage of 72000 or 1072000
- Supplying optional caregiver, housekeeping and home maintenance benefits for
non-catastrophic claimants
- Capping each assessment to 2000 - this applies for all assessments, whether they are
requested by the claimant or insurer
- providing payment for in-home assessments only to claimants who sustained more than a
minor injury
- eliminating rebuttal examinations
- offering 2500 for accounting reports to support income replacement benefits claims
- merging treatment plans and applications for approval of assessments or examinations
into one process
- providing adjusters with discretion in the use of insurer examinations
- creating a definition for "incurred expense"
- simplifying and consolidating the rules that govern claims processing
- elimination a number of approved forms
Ontatio Regulation 777/93 (Statutory Conditions - Automobile Insurance) amended by 40/10
make appraisals mandatory for property damage claims where requested by the insured
eliminating the need for the insurer's agreement
Ontario Regulation 283/95 (Disputes Between Insurers) amended by 38/10
- provide timely access to applications for benefits to claimants
- prohibiting attempts to discourage or prevent claimants from submitting applications
- prohibiting refusing applications or attempting to redirect claimants
- claimants to submit application to only one insurer
- first insurer to receive a completed application provide benefit payments without delay
Ontario Regulation 7/00 (Unfair or Deceptive Acts or Practices) amended by 37/10
insurer cannot use credit information for specific automobile insurance purposes
credit information is defined as
credit rating
credit score
credit-based insurance score
occupation
place of residence
number of dependants
education
profession
place(s) of employment
income
debts
cost of living and assets
insurer can't collect credit info before providing a quote
insurer can't differentiate using credit info
affiliated insurers that use the same distribution channel must provide lowest rate
available through the channel
Ontario Regulation 403/96 (Statutory Accident Benefits Schedule) amended 35/10
Transitional rules
Ontario Regulation 664 of R.R.O. 1990 (Automobile Insurance) amended by 36/10
- Option to purchase an endorsement that provides first-party coverage to reduce the tort
deductible for pain and suffering awards to 20000 from 30000 (and to 10000 from 15000
for Family Law Act awards).
- 500 deductible option for direct compensation - property damage claims
- prohibit use of accident occuring after september 1, 2010 if insured is less than 25% at
fault
- cap of 2500 for arbitration awards in respect of accounting reports that are prepared
for claimants or insurers regarding claims for income replacement benefits
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Financial Services Commission of Ontario
Private Passenger Automobile Filing Guidelines - Major for Proposed Revisions to
Automobile Insurance Rates and Risk Classification Systems
A. General Information
Rate and Risk Classification System Legislation
Sections 410 and 417 of the Act apply to contracts and endorsements to contracts of
automobile insurance on Ontario Automobile Policy (OAP) 1 or 2 but not to fleets.
Two type of processes for approval
-Prior approval (Private passenger automobile - PPA) subject to either
simplified filing guidelines or
major filing requirements
-File and use subject (Other than PPA) to either
major filing requirements (initial application of category)
minor filing requirements
Filing requirements
Application for approval in a form approved by SI
Guidelines are for PPA
Separate filing for each category of insurance
Separate guidelines for implementation of CLEAR vehicle rate group table
If Other than PPA is dependent, can be filed with major
SI can look at affiliates for consolidated picture
All criteria for rating must be filed
Any process or criteria for segmentation must comply with regulations
Required Rates and Risk Classification System Elements
Rates and classification needed for approval
Optional accident benefits as follows
(a) increased income replacement benefit
(b) increased death and funeral benefit
(c) increased medical, rehabilitation, and attendant care benefit
(d) increased caregiver and dependent care benefit
(e) indexation benefit
300$ deductible level for
Comprehensive
All perils
Specified perils
Direct compensation - property damage (DC-PD)
500$ deductible level for
Collision or upset
Retiree's discount on PPA (percentage of basic accident benefits)
On PPA in respect to graduated licensing system
Level One drivers are not to be rated
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Level Two drivers can be rated
Credit to a maximum of one year experience per level one or two
One year 10% reduction for drivers entering Two from One (no convictions / accidents)
Driver training discounts and credits should continue to apply
Filing Format
1.
Table of Contents
2.
Summary of Information (Appendix A)
3.a. Certificate of the Officer/Designate (Appendix B1)
3.b. Certificate of the Actuary (Appendix B2)
4.
Actuarial Support
5.
Discount/Surcharge Changes
6.
Rating Rule Changes
7.
Final Rates/Rate Level Change
8.
Dependent Categories (if applicable)
9.
Manual Pages
10. Rating Examples (Appendix C)
11. Fees Changes (Appendix D)
Approval Process
online service ARCTICS
upon receipt of online, FSCO acknowledgement letter
filing reviewed for completedness
statutory time periods governing approval run after filing is deemed complete
once approved file one copy of rating manual with FSCO within 30 days
B. Definitions
Affiliated Insurers
Subsidiary
Both subsidiaries of the same body corporate
Each insurers controlled by same person
Allocated Loss Adjustment Expenses
External expenses that can be directly charged to a particular claim including
i)
adjuster's accounts
ii) appraisal costs
iii) legal expenses
iv) all other external claims expenses
Category of Automobile Insurance
personal vehicles - private passenger automobiles
personal vehicles - motorcycles
personal vehicles - motor homes
personal vehicles - trailer and camper units
personal vehicles - off-road vehicles
personal vehicles - motorized snow vehicles
personal vehicles - historic vehicles
commercial vehicles
public vehicles - taxis and limousines
public vehicles - other than taxis and limousines
Coverage
Liability - Bodily Injury
Liability - Property Damage
Accident Benefits
Uninsured Automobile
Direct Compensation - Property Damage
Specified Perils
Comprehensive
Collision or Upset
All Perils
Underinsured Motorist (OPCF 44R)
Endorsement
Policy change form approved by SI under section 27 of Act (exclude OPCF 44R)
Expedited Approval
Approval within 30 days, applies to coverages. Exclude Facility Association contracts
Equity
Capital stock
Head office account
Contributed surplus
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Earned surplus
Required reserves
File and Use
May use filed rates and classification systems after 30 days
Applies to :
Endorsements (other than OPCF 44R on PPA)
Other than PPA
OAP 2
Fleet
Not less than 5 automobiles
Common ownership or management
At least 5 commercial vehicles, public vehicles or vehicles used for business purposes
Leased for more than 30 days to the same person
Investment Income
attributable to the investment of policyholder supplied funds and shareholder supplied
funds and surplus, including realized capital gains/loses and net of investment expenses
Prior Approval
Rates and classification systems approved before use
Applies to Facility Association on OAP 1 and 2
PPA OAP1
Rate
premium including commissions and other expenses provisions prior to dividends
Rate Differentials
Multiplicative or additive factors/rates applied to base rate
Rating Algorithm
manner to combine rates and rate differentials to arrive at premium
Rating Rule
How a risk is assigned to a rating cell
Return on Equity
UW and Investment income divided by Equity on an after-tax basis
Return on Equity (Proposed)
ROE underlying proposed rate change
Return on Equity (Target)
ROE underlying the actuarially indicated rate change
Risk Classification System
Elements used to classify risks
Territorial Base Rate
base rate
Unallocated Loss Adjustment Expenses
Claims settlement and processing costs
Staff adjusters, appraisers, lawyers, clerical support and portion of general expenses
Underwriting Profit Margin
+Direct premiums earned
-Discounted claims and adjustment expenses
-Investment income earned on cash flow
-Commissions and other acquisition expenses
-Taxes (excluding income and real estate taxes)
-General expenses (applicable to insurance operations)
/Direct premiums earned
Underwriting Profit Margin (Proposed)
UW profit margin underlying the proposed rate change
Underwriting Profit Margin (Target)
UW profit margin underlying the actuarially indicated rate change
Underwriting Rules
rules that govern the decision to accept or decline a risk, coverage, endorsement
C. Guidelines for PPA - Major filing
Section 1: Table of Contents
Section 2: Summary of Information
Key information on the nature of the filed rate level
Proposed effective dates are to check trend assumptions
45 days notice to brokers, 30 days notice to insureds
Indicated rate level change for earch must be disclosed when
changes to base rates unless it's only off-balancing
changes to differentials that result in overall rate level change
Impact are on an uncapped basis
Premiums weights based on current rate level (not proposed rate)
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For prior approved rate level changes, weights based on EOE at time of approval
Section 3: Certificates of the actuary and of the officer/designate
3.a. Certificate of the Officer/Designate
Original signed copy
VP and above
Certifies that
Filing has been prepared for the PPA category
Have knowledege of the matters that are subject of this certificate
Changes requested are in compliance with the PPA - Major filing guidelines
Information is complete and accurate
Proposed rates are just and reasonable, do not impair solvency of the Insurer, and are
not excessive in relation to the financial circumstances of the Insurer
Premiums calculated will match filled ones
Changes tested and communicated before implementation
3.b. Certificate of the Actuary
Filings that results in rate level change or previously not written category
Not required for fee changes
Certifies that
Is a FICA
Have reviewed the data underlying this rate filing for reasonableness and consistency,
and I believe the data is reliable and sufficient for the determination of the
indicated rate changes
Indicated rate changes have been calculated in accordance with Accepted Actuarial
Practice
In his opinion, the risk classification system is just and reasonable, reasonably
predictive of risk and distinguishes fairly between the classes
Section 4: Actuarial Support
Contain data and narrative description of all ratemaking steps
At a minimum, provide details for
Liability - Bodily Injury
Liability - Property Damage
Accident Benefits (by sub-coverage)
Uninsured Automobile
Direct Compensation - Property Damage
Specified Perils
Comprehensive
Collision or Upset
All Perils
Underinsured Motorist (OPCF 44R)
Even if a rate level change is not proposed for each of these coverages
Overall Rate Level Indication Support
4.a. Overall Description of the Ratemaking Methodology and Summary
Pure premium or loss ratio approach
Include most recent complete year of data available
4.b. Losses
Considered with ALAE or not
Accident year or policy year
Experience period
Respective valuation dates
Source
Use direct losses (excluding reinsurance except Risk Sharing Pool) for ratemaking
Do not include losses incurred on the Facility Association Residual Market Risk
4.b.1. Loss Development
ultimate level
minimum of 12-months interval valuation
if relying on outside date, source and why
general approach should be constant over year, if change, explain why
4.b.2. Loss trend
length of trend period depend on the term of coverage, proposed effective date and
valuation date of the loss data
general approach should be constant over year, if change, explain why
4.b.3. Treatment of Large Losses
indicate how they are handled
make sure large losses do not cause instability in the rates
4.b.4. Catastrophe (or Excess Claim) Procedure
For comprehensive, specified perils, and all perils
Include procedure to estimate the impact of such losses
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general approach should be constant over year, if change, explain why
4.b.5. Other Adjustments
data must be exhibited and labelled
4.c. Allocated Loss Adjustment Expenses (ALAE)
If ALAE are considered separately, same details as losses
4.d. Unallocated Loss Adjustment Expenses (ULAE)
Disclose judgments call
general approach should be constant over year, if change, explain why
4.e Premium
experience period
source
direct premiums (excluding reinsurance except Risk Sharing Pool)
Do not include premiums on the Facility Association Residual Market Risk
4.e.1. On-level adjustments
If using loss ratio approach, on level of current rates
EOE or parallelogram, compare results, explain significant difference
Include 5 years rate changes history in this section
4.e.2. Premium Trend
For coverages with inflation-sensitive exposure bases or change in mix of business
Outline the approach, disclose details of calculation
general approach should be constant over year, if change, explain why
4.e.3. Other Adjustments
data must be exhibited and labelled
4.f. Other Expenses
Details calculation of variable fixed expenses
Separate for Facility Association
4.f.1. Exposure Variable Expenses (Fixed)
Subject to trend
general approach should be constant over year, if change, explain why
4.f.2. Premium Variable Expenses (Variable)
general approach should be constant over year, if change, explain why
4.g. Profit Provisions
Target ROE
Derive target UW profit margin from target ROE
Take into consideration new money rates for investment returns
Disclose pay-out pattern for each coverages
Provide UW margin and ROE for proposed and indicated rate level change
general approach should be constant over year, if change, explain why
4.h. Credibility
general approach should be constant over year, if change, explain why
4.i. Other Adjustments
Quantify
Effects disclosed and supported
4.j. Summary Rate Level Indications
Weights per year of data disclosed
4.k. Territorial Indications
4.k.1. Indicated Differentials
Compare current, indicated and proposed
Include written premium and exposure distribution by coverage
general approach should be constant over year, if change, explain why
4.k.2. Off-balance
general approach should be constant over year, if change, explain why
4.k.3.Definitions
accompanied by a map
4.l. Implementation of CLEAR System Differentials
4.l.1. Overall Description for Implementing CLEAR
approach
capping procedures
list of capped vehicles by make, model year
4.l.2. Off-balance
because of the introduction of CLEAR
4.m. Classification/Limit of Liability/Deductible | Other Rate Differential Indications
4.m.1. Indicated Differentials
When using GLM, describe model, data variables and assumptions
Show the correlation of the results between variables
general approach should be constant over year, if change, explain why
4.m.2 Off-balance
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account for change in aggregate premium by using off-balance
if results in rate level change, section 4.a.-4.j. must be completed
general approach should be constant over year, if change, explain why
4.n. Rating Based on Group Membership
must be completed if using group membership
group discount based on lower loss costs due to favorable experience
4.n.1. Indicated Discounts or Rates
based on lower loss costs based on favourable experience, or risk management programs,
or identifiable characteristics of a group that would result in lower loss exposure
no specific group discount unless group is actuarially credible
4.n.2. Off-balance
same
Section 5:Discount/Surcharge changes
Justification for discount for discount may be due to lower expenses due to lower
acquisition costs or lower administrative costs or lower loss costs
Current and proposed distribution of discount provided to determine average premium
shift
Section 6: Rating Rule Changes
Required information include
(i)
description of the proposed changes
(ii) rationale for the proposed changes
(iii) rate level effects of the proposed changes
(iv) calculations that validate the rate level effect of the proposed changes based on
the expected distribution of business
6.a. Rating Rule Changes for Classification Variables
Current and proposed distribution provided to determine average premium shift
6.b. Rating Rule Changes for Discounts
Current and proposed distribution provided to determine average premium shift
Section 7: Final Rates/Rate Level Change
Current vs Proposed
To facilitate review process, all of 7.a.-7.d. must be included even though the change
may be to only one of the elements
7.a. Algorithm
+discount/surcharge
+6-month policy
+OAB calculation
7.b. Base Rates
7.c. Differentials
7.d. Discounts and Surcharges
7.e. Calculation of Final Rates
combination of proposed rate change and off-balance
7.f. Calculation of Rate Level Change
Reconcile
7.g. Dislocation and Capping Premium Increases (Rate Capping)
Disclose capping procedure
Capping at differential level is ok, capping at total premium level permitted only when
-insurance company mergers and acquisitions (plan to phase out within two-year)
-extensive risk classification system changes (two year or less from filing approval)
*no new capping considered until phase out completed
Requirements
a) provide uncapped overall rate level change along with capped
b) track all capped policies
c) annual filing to FSCO
Capping not permitted
a) Base rate changes only
b) Broker portfolio transfers or acquisitions
c) Premium decreases(negative capping)
Section 8: Other than PPA - Dependent Categories
Provide
(i)
the rate level effects of the proposed changes
(ii) the calculations that validate the rate level effect of the proposed changes
(iii) a copy of the rating rule that stipulates the linkage to the category of
automobile insurance. and
(iv) Section 10 - rating examples must be completed for the dependent category
Section 9: Manual Pages Containing revised rates and risk classification system
draft, rate pages are optional
final manual submitted 30 days after filing approval
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Section 10: Rating examples
Annual basis
If more than one rate is possible, provide lowest and highest rate
Section 11: Fee changes
Appendix D
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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R.R.O. 1990, Regulation 664 - Automobile Insurance
Defintions
Commercial vehicle (include trailer used for commercial use)
Fleet
not less than 5 vehicles
Public vehicle
transportation services to the public
Monthly Premium Payments
Not required to permit instalments unless
1. insurer insures at least 10000 PPA in Ontario in the previous year
2. contract is written on OAP 1 or 2
3. contract does not insure a commercial or public vehicle
4. contract does not insure five or more vehicle under common ownership
5. premium exceeds 300$
6. insured has not had more than one policy terminated for non-payment in last 3 years
May require insured
(a) to make initial payment equal to two months
(b) make all payment by pre-authorized payment
Maximum interest rate is 3%-1.5%-0.5 of premium for 12-6-less than 6 months contract
Exemption from Notice
Contract that insure fleet is exempt from section 236 of the Act (30 days notice of
expiry or variation
Refusal to Issue Contracts
Can't decline to issue, refuse to renew or terminate because
(a) insured by the Facility Association
(b) another insurer declined to issue or renew another contract
In declining to issue, renew or terminate a contract, insurer shall not consider
(a) existence of a physical or mental disability
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(b) number of persons, or their state of health or life expectancy
(c) occupation, profession or employment circumstances
(d) level of income
(d.1) employment history
(d.2) the fact that insured has a credit card
(d.3) credit history
(d.4) credit rating
(d.5) history of bankruptcy
(d.6) residence history
(d.7) owns a home
(d.8) gross net worth
(d.9) indebtness
(d.10)made a late premium payments on a contract that was not terminated for this reason
(e) existence or non-existence of a medical, surgical, dental or hospitalization plan
(f) existence or non-existence of an income continuation benefit plan, a sick leave plan
(g) request to purchase any optional benefit
(h) any not at fault past claim for Schedule C or SAB
(i) any not at fault past claim for loss or damage
Do not consider collision claim for liability or SAB coverage
An insurer can't terminate a contract because
(a) group marketing plan terminates
(b) insured ceases to be part of a group
Added Coverage to Offset Tort Deductibles Endorsement
Shall be offered if requested
Direct Compensation - Property Damage
Insurer entitled to indemnification from business in the care or custody of insured's car
Limited to the portion of the loss that is attributable to the fault
Entitled to indemnification from lessee (towing) if
(a) lessee is in the business of towing
(b) towing vehicle weigths more than 4500kg
Limited to the portion of the loss that is attributable to the fault
Entitled to indemnification for loss over 20000$ for portion over 20000$ for which the
the other automobile involved in the accident is at fault
Indemnification for Statutory Accident Benefits
Second party insurer must indemnify first party insurer if it insures a vehicle (car)
involved in an accident with moto, snowmobile and first party insurer contract has only
snowmobile or moto on it
Second party insurer must indemnify first party insurer if it insures a heavy commercial
vehicle involved in accident unless it's an accident with another heavy commercial
vehicle
Settlements - Statutory Accident Benefits
Disclosure notice contain
1. The insurer's offer with respect to the settlement
2. Description of benefits available
3. Statement that insured can rescind the settlement within two days of initial release
4. description of the consequences of the settlement on the benefits
i. restrictions to right to mediate, litigate, arbitrate, appeal
ii. tax implications differences
5. advise insured to seek advice
6. signature portion with acknowlegdement that the above was read and understood
Insured may still rescind settlement if insurer is not in compliance with the above
Not applicable to settlement approved by court
No mediation if the money is not returned
Money shall be held in trust if dispute arise until resolution
Dispute resolution
Mediator required within 60 days of request for mediator
Arbitrator consider following criteria in allowing expenses
1. Each party's degree of success in the outcome of the proceeding
2. Any written offers to settle made in accordance with subsection (3)
3. Whether novel issues are raised in the proceeding
4. The conduct of a party or a party's representative that tended to prolong, obstruct
or hinder the proceeding
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5. Whether any aspect of the proceeding was improper, vexatious or unnecessary
6. Insured person refused/failed to submit to an examination/provide material required
7. Same as above, different coverage
Take into account written offers to settle upon request
(a) made after conclusion of mediation / before conclusion of arbitration
(b) made in accordance with rules of practice
Have regard to the terms, the timing, the response of the offer and results of proceeding
Prescribed elements of risk
Insurer shall use
500$ deductible level for
300$ deductible level for
500$ deductible level for
classification system
Collision or upset
Comprehensive coverage
DC-PD
Application of sections 410 to 417 of the Act (Filing, Rate approval)
Does not apply to fleet
Expedited Risk Classification and Rate Approval
percentage is (proposed-current)/current
Proposed rates must
1. Relate to PPA
3. Average cumulative rate change is less than or equal to 0
4. Percentage difference by territory is within 5% of all Ontario rate change %
5. No changes to algorithm, differentials, discounts or surcharges
Classification system may not contain
(a) new element
(b) different definition or different rating rules
Prohibited Risk Classification Elements
(2) Past claims where insured is less than 25% at fault
(3) existence or non-existence of a medical, surgical, dental or hospitalization plan
(4) existence or non-existence of an income continuation benefit plan, a sick leave plan
(4.1) lapse in automobile insurance unless
(a) insured contravened during lapse
(b) lapse resulted from
(i)
failure to pay premiums
(ii) suspension as result of a conviction
(iii) an accident, if the insured did not inform the insurer
(4.2)
(1) level of income
(2) employment history
(3) occupation, profession or employment unless commercial or public vehicle
(4) the fact that insured has a credit card
(5) credit history
(6) credit rating
(7) history of bankruptcy
(8) residence history
(9) owns a home
(10) gross net worth
(11) indebtness
(12)made a late premium payments on a contract that was not terminated for this reason
(5) Group membership should not be used unless group greater than 100 non associate
members, group is
(a) trade union, professional or occupational association or an alumni association
(b) non-profit 24 months old
(c) group of employees of the same employer
(d) group of members of a credit union
(6) Purchase group (costco, greypower) is not a non-profit
(7) Credit union is a group
(8) Employees of credit union are only associate members
(9) Retiree associate member
(10) Child (-25yo) and spouses associate members
(11) Can't exclude because part of a group
(12) No change until renewal
(a) group marketing plan terminates
(b) insured cease to be a member of the group
(13) more of the same
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Group Marketing Plans
(1.1) Include
(a) name of the insurer and name of the sponsor +responsabilities
(b) name of the broker or agent
(c) effective date of the group marketing plan
(d) information with respect to fees
(e) exclusion from other group offer
(f) procedure for terminating the group marketing plan
(2) can't use marketing plan if required purchase
(3) disclose plan's provisions and financial interests of sponsor to applicant within 30d
(3.1) any payment from insurer to sponsor must be disclosed
(4) premium collecting agent
(5) all premium funds held in trust for the benefice of the insurer
(6) can't assign, pledge, mortgage insurer's funds
(7) anyway it would be voided
Public Adjusters - Statutory Accident Benefits
exempt from subsection 398 (1) of the Insurance Act
Schedule - Dispute Resolution Expenses
1. Filing fee of insured may be awarded to insured person
2. Filing fee to appeal on both side may be awarded
3.
(1) legal fees may be awarded
1. services performed before fees
2. preparation fees
3. attendance fees
4. services subsequent fees
(2) number of hour determined by arbitrator
(3) maximum $ per hour
3.1
(1) agent's fees may be awarded
1. preparation fees
2. attendance fees
3. services subsequent fees
(2) maximum $ per hour
4. disbursements fees may be awarded
1. telecommunication charges
2. typing, printing, reproducing documents
3. delivery by mail or courier
4. out-of-pocker expenses
5. taxes paid
5.
(1) witness fees may be awarded
1. attendance fees
2. expert witness attendance fees
3. report prepared by expert fees
(2) maximum amount for attendance
(3) expert witness, 200$/hour | 1600$/day
(4) preparation of expert witness 500$
(5) report of expert witness 1500$
(6) unless report for income replacement benefits 2500$
6.
(1) expenses awarded
1. travelling
2. accommodation and meals
(2) ...come on
7. claim amount may be awarded to insurer if insured person
(a) refused or failed to submit to examination
(b) refused or failed to provide any material
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Code of Conduct for Insurers' use of Credit Information
Purpose
guidelines on the use of credit information in accordance with principles of consumer
protection and applicable federal and provincial laws
Scope
Personal insurance only
1. Comply with provincial laws
2. Ensure credit information used is current and accurate
a) insurer must use up to date credit information
b) ensure accurate credit information used
re-rate when informed of correction
upon request inform the insured who is the supplier of credit information
customer is responsible for his credit file
3. Gathering prior consent to collect and use credit information (written or verbal)
a) Consent must be informed
Customers must not feel obliged to give consent
Customers understand nature and scope of request
Consent specific. Verbally, writing, e-medium (check box that defaults to no)
b) No one can give consent for another person
c) Consent retention, maintain proof of consent
d) Duration of consent, valid until business relationship ends
Key elements to be included in the consent request
i.
Authorization to collect information
ii. Nature of information sought
iii. Use made by the insurer of information
iv. Consent use period
v.
Right to withdraw and consequences
4. Keeping customers' credit information confidential and private
only persons who should have access to the information are those who require it to do
their job
5. Do not use of credit as a sole variable for refusing to issue, renew
6. Legitimate uses of credit information - pricing, UW or financing of premiums - modeling
must not be double counted in rating
make sure the following are not used as negative factor in models
i.
Inquiries about own credit information
ii. Inquiries relating to insurance
iii. Income, gender, address, ethnic group, religion, marital status, nationality
iv. Multiple lender inquiries from home mortgage within 30 days of one another (only 1)
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v.
Multiple lender inquiries from auto within 30 days of one another (only 1)
vi. Not factors expressly prohibited in provincial insurance regulations
7. Handling of Consumer Disputes
handled by insurer
8. Taking adverse action as a result of credit information
a) insurer must treat consumers fairly when they have no record of credit information or
they are unable to create a credit score
b) insurer must disclose to the consumer adverse action taken only as a result of credit
information
9. Refusal of consent
Provide customer with competitive rate but probably not best quote
10. Extraordinary life circumstances
insurer review profile, re-rated if deemed appropriate
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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The Effects of Rate Regulation on the Volatility of Auto Insurance Prices: Evidence from
Canada
An economic analysis of how regulation affects insurance prices for consumers
Vision
regulatory system that is efficient and effective, reduce insolvency, enhance confidence
greater competition and innovation
Issue
system is out of balance
Objectives
elimination of unnecessary government regulatory requirements
removal of obstacles that impede competition and innovation
streamlining of regulatory procedures
harmonization of regulatory requirements
reduction in the cost of regulatory compliance
development of a regulatory environment where industry is viable to maximize protection
P&C recognition as a distinct industry
Principles
Need for government regulation
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Solvency and Public confidence
Balance
intrusive regulation and strict reliance on market forces
Co-operation
insurers and regulators
Harmonized approach
across provinces, nations
Pragmatic solutions
rather than philosophical differences
Cost
direct and indirect
Control
responsibility of senior management and Board of Directors
Inherent limits to solvency monitoring
still fail because of unforeseen circumstances
Disclosure of information
discipline and instils public confidence
Introduction
Insurance can be an important household expenditure
Unexpected changes are unwelcome
Volatility is defined as price movement in insurance premiums
Unexplained volatility is defined as price movements not related to claim costs
Large increases generate consumer concerns
Large decreases generate solvency concerns
Rate regulation
Strict forms
Prior approval
Flex rating - expedited process available if within range
Competitive rating
File-and-use
Use-and-file
Active price regulation in Canada is recent, only Ontario until 2003
Hard market of late 1980's, Ontario Automobile Insurance Rates Control Act
Ontario - Prior approval with some flex rating
Alberta and Atlantic provinces - variation of file-and-use
BC, Manitoba and SK - government run auto insurance
Quebec - use-and-file
Only auto is regulated in Canada
The Effects of Rate Regulation
Strict price regulation of insurance does not lead to lower insurance prices, on avg
Correlation between costs and premiums close to 1 except for Ontario
Strict price regulation limit competition, reduce availability, increase volatility
Volatility could be caused by
volatility in claims-related costs
delays in rate approval
regulatory build-up (insurer hold off filing in favour of larger rate increases)
Effect of pricing lags can be illustrated by simple model where insurance losses in the
current year are a function of insurance losses in the previous year + unobservable
Lt = E[Lt-1] + et + vt
et is an error term that is uncorrelated with the expected loss such as catastrophe
vt is a systemic error generated by an exogenous source (price lags)
Insurer would set prices using data that is one period old
Pt = E[Lt-1] + E[Πut]
Πut is the expected UW profit result, without systemic error, expected to be 0
If this is not the case, pricing will be cyclical
Active price controls affect both amplitude and length of cycle.
The Empirical Model
two-step approach
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unexplained growth is not predicted by growth in claims costs, frequency or other
variables expected to contribute to the cost of insurance
residual represents unexplained volatility in the system
First step
average premiums regressed on set of explanatory variables
volatility in premiums used as proxy for volatility in insurance rates
Second steop
volatility is regressed on a regulation index and a second set of explanatory variables
Model specification
Step One
Average premium is the output
Predictors
-Average claims
-Underwriting profit margin (less assumptions than return on assets)
-Herfindahl index (measure of competition)
-Consumer price index
-Accident frequency
CPI cleaned trend effect
Step Two
Unexplained volatility is the output
Predictors
-regulation
-changes in claims costs
-changes in the competitive environment
Differences with previous analysis
Coverage tested separately
Footnote : this study does not consider the question of whether rate regulation distorts
consumer and insurer incentives for loss control and therefore increases claim costs and
average rate levels
Premium Volatility and Rate Regulation
Comparaison between Ontario and five other province (Alberta+Atlantic)
Average costs of claims and accident frequency are the primary determinants of average
insurance premiums (mostly average claims costs)
Unexplained volatility in auto insurance premiums is higher, on average, under
prior-approval rate regulation regime than in a less regulated system
Neither period nor jurisdictional effects are significant for third party liability
may reflect the convergence of tort decisions across the country
Pressure from claim costs of SAB because of no-fault system, impact of regulation
For collision and comprehensive, price mostly reflect claim costs, less impact from
regulation (comprehensive impacted by catastrophe)
Competitive environment is signification for collision, firm have greater scope for
engaging in strategic behaviour in the repair of physical damage to vehicles
Premium volatility in Ontario
Began with introduction of rate regulation in 1989
Lower curve means that changes in claims related costs largely account for changes in
average premiums
Volatility and Rate Regulation: Illinois and South Carolina
South Carolina : regulated rating
Illinois : competitive rating
Pro regulation : protect consumers from high prices and price instability
Anti regulation : distorts incentives and increases volatility without lower prices
South Carolina
prior-approval to prevent insolvency turned into consumer protection
1997 availability crisis
insurers exited the market
1999 reforms to competitive market rating
insurers entered the market
Illinois
competitive rating
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healthy market
affordable and available
less volatility
Illinois Insurance Department able to focus its resources on addressing insurance
insolvency issues and monitoring market conduct
Summary
prior-approval increases volatility
regulatory lags under prior-approval rate regulation increase magnitude and frequency
of price swings
regulation is most significant with SAB, SAB are the largest component of premium
Appendix
0 : No regulation
1 : Advisory/no file
2 : use and file
3 : file and use
4 : flex rating
5 : modified prior approval
6 : prior approval
7 : government determined rates
7 database
- all coverages
- liability
- SAB
- collision
- comprehensive
- SAB and liablity
- collision and comprehensive
No multi-collinearity problem in the data, tested with step-wise adding variables
Diagnostic Test
Hausman specification test :
determine whether random coefficients model would be more appropriate
Breusch-Pagan test :
random effects, there is no within-unit correlation
Durbin-Watson statistic :
autocorrelation
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
Learning objective 4 : Describe the litigation environment with respect to insurance.
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(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Motor Vehicle Insurance in British Columbia - At the Crossroads, Options and Choices
II. Motor vehicle injury compensation systens
A. Introduction
Full/total tort, fault based ----|---- total no-fault
Options in between with varying
selection of areas of coverage
benefit levels
delivery system options
amount of government involvement
New labels
Liability insurance (total tort, fault based)
Injury insurance (no-fault)
Combined liability and injury insurance (threshold)
B. Basic types of insurance protection
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Liability insurance protects the party held responsible for causing a crash from
personally having to pay for the resulting losses up to a set policy limit and thereby
indirectly compensates the innocent injured party
Injury insurance directly protects the injured party by covering that person's losses
up to a set policy limit regardless of who was responsible for causing the injury.
Combined liability and injury insurance covers injured parties by their own injury
insurance up to specified limits. If their damages exceed a threshold, they can seek
additional compensation from the liable party
Fault and no-fault
Even in a no-fault system, fault is used as basis for setting premiums
Criminal sanction remain in place for criminal act
Liability insurance protects most at-fault drivers from having to pay for the very
losses they caused, thus eliminating the punishment.
Loss can be covered by other safety nets (welfare)
Liability insurance - basic philosophy
Based on belief that people should compensate anyone they have wronged by paying a sum
of money equivalent to the loss they have caused.
Also called third party liability
First party is the insured
Second party is the insurer
Third party is anyone outside the contract
Became essential when people became liable beyond what they could pay
Government over time made the coverage mandatory not for those that caused injury but
because it was the only means for caring for injured people
Liability compensation in practice
BC's mandatory coverages consist of TPL and Accidents benefits (regardless of fault)
Differentiate only on the amount of damage caused, not on wrongdoers willfulness
Degree of fault determined by courts
Weakens link between wrong doing and punishment
Losses rarely go over limit, because BC's limit is high
Two cases exceptions to weak link
wrongdoer in breach of contract (intoxicated or without valid licence), subrogation
at-fault driver pay higher premiums
Tort liability process requires that two things be determined
liability
amount of loss
Tort system does not distinguish between different kinds of wrong doing
Insurer must defend, ends up in delayed compensation for past damages, adversarial
Significant process costs, lump sum payment for future cost
Lawyer contingency fee in the range of 25%-33.3% (max in BC)
Liability process thends to overcompensate people with temporary or less severe
injuries and undercompensate those with permanent and more severe injuries.
Pain and suffering damages capped by Supreme Court decision
Injury insurance - basic philosophy
injured people should be assisted and their losses compensated without regard to fault
may require legislation restricting access to legal action
injury insurance is first party compensation system
often established by government statute
not need to take legal action to get compensation
everyone is covered the same, even at-fault driver, might look unacceptable, dependents
of at-fault driver shoud not be punish, would fall to some other social system, same
cost for the society as a whole
Injury compensation in practice
Degrees of fault only used for premiums determination
Less adversarial and more certain outcome
Compensation paid quickly
Future economic are paid when required not in a lump sum
Lower process costs
Tend to overcompensate people with minor injuries and undercompensate those with
permanent and more severe ones or those with higher income. One solution is to buy
supplementary coverage
Combined injury and liability insurance - basic philosophy
rationales for having a combined system
it offers a compromise
transactions costs are reduced theoretically
limit or eliminate compensation for non-economic losses like "pain and suffering"
Combined system in practice
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threshold condition must be clearly defined
threshold can be on a descriptive basis or monetary basis
strong descriptive thresholds work well, but monetary ones alone do not
the latter tend to encourage inflation in awards
deductible (flat, franchise, diminishing) can be used
Conclusion
no one perfect system
price of maintaining an adversarial liability system is substantial premium increases
only a two pronged attack can succeed
one to reduce the current cost base
the second to shrink the additional claims trend known as social inflation
C. Product variables - coverages and benefits
Types of benefits and losses
tort part - bodily injury
no-fault part - accident benefits
Economic losses
Income support
Wage loss
income-salary current and projected
Fatality compensation
surviving spouse/dependants
Care costs
Current and estimated future costs to cover medical expenses
Expenses
Replacement services
Housekeeping and dependant care
Funerals costs
Non-economic losses
general damages, pain and suffering
D. Other product variables
Payer priority and collateral benefits
under the law of tort liability injured are not prohibited from double dipping
in injury insurance, insurer can specify if he is first or second payer (no double dip)
if second payer, insurer only pay if damages exceed first payer limit
second payer status may limit ability to control and monitor medical care
Net vs. gross wage loss
net wage is fairer
injury insurance pays 80%-90% of net
liability insurance pays 100% of gross because it's lump sum to compensate for taxes
BC's 75% of gross, max 300$ per week
Structured settlements
prevent imprudent squandering of large lump-sum awards (burden to society)
Level of injury benefits
Wellness model
return as quickly as possible to pre-injury condition
liability discourage rehabilitation because of delayed resolution and natural
inclination to focus on the loss and develop a credible case for higher award
injury benefits should be coupled with an early and focused approach to rehabilitation
and disability management
Vehicle based insurance
contract attached to vehicle
Thresholds under combined (CLII) products
Cost and sustainability of the product
Solicitor and client costs
lawyer contingency fee major cost component
Indemnity versus entitlement
income benefits to someone with no income
Interface with the social safety net
trade-off between societal fairness and individual fairness
either through auto insurance or through taxation
Public vs. private delivery mechanism
pricing cross-subsidies cannot survive in competitive environment but can in a
monopolistic market
E. Product and service evaluation framework
Introduction
Historically, insurance played three-fold role
-making risky endeavours affordable by spreading risk
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-providing economic protection
-making profits for insurers
Only first two roles apply in the context of public insurance
Most important is protection
Motor vehicle insurance provide three essential types of protection
-economic security
-economic restitution
-prevention and mitigation
These social requirements relate to six basic design expectations
-equitable and fair benefits (security-restitution)
-affordable and sustainable coverage (security-restitution-prevention)
-adequate benefits (security-restitution)
-personal responsibility (security-restitution-prevention)
-promotion of wellness (security-restitution-prevention)
-customer service oriention (security-restitution)
These attributes must manifest in public's perception of the system
Criteria that can be used to evaluate or design an insurance product
Design objectives and criteria
Equitable and fair benefits
Benefits provided only for legitimate losses and claims
Seriously injured receive priority in the allocation of benefits
Benefits are equitable and non-discriminatory
Fair levels of benefits between classes of insureds
Victims and wrongdoers are treated fairly but differently
Affordable and sustainable coverage
Forces that drive costs can be identified and addressed
Reduce the number of crashes and injuries
Costs and cost trends are predictable, monitored and manageable
Prevention is a priority as cost containment measure
External social costs imposed on society are minimized and controlled
Measures are taken to contain premium increases close to inflation
Optional, competitive products are designed and priced to retain dominant market share
Major product changes reduce the current cost of insurance
Personal responsibility
Individuals causing crashes suffer tangible consequences
Discourage frivolous or fraudulent claims
Moral values are advanced to prevent abuses
Availability of choice options should minimize social and economic costs
Rights of innocent victims and obligations of wrongdoer handled fairly
Option to select additional coverages beyond the basic
Adequate benefits
Needs met to a socially acceptable economic level
Large percentage of premiums serve to pay claims
Benefits level reflect individual losses
Benefits affected by survivor and dependants needs
Coverages and benefits are adequate and comprehensive and available
Basic product minimizes additional burden on society
Promotion of wellness
Emphasizes speedy recovery, optimum resumption of normal lifestyles
Benefits adjudication process is administered in a fair manner
Minimize antagonism, embitterment and dispute
Customer service orientation
High levels of service
Accessibility to products
Rights and process are coherent and comprehensible
Benefits are comprehensive in scope and flexible
Flexibility to match social needs
Benefits provided in a timely fashion
Adjudication and benefit delivery are fast and efficient
Balance between incremental costs and direct benefits to claimant
Dispute resolution if efficient, independent and credible
Amount of change is able to minimize transition issues, problems and costs
Value added services are available on customer choice, at a cost
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Testimony of Kevin McCarty (complainy pants)
Thesis of his testimony
Use of credit-based insurance scores disparately impacts certain classes of people
Think some criteria are not fair to use in insurance rating like credit for instance
Using race as criteria is not a sound public policy
Regulators must weigh the benefits of claims prediction with sound public policy
Florida is different
Credit report are not always accurate
Not everyone has credit
Empirical studies only shows that lower score file more claims
Methodology used to create score is opaque to customers
He sees a huge problem with the fact that the credit rating is different by race
Credit score is not a proxy for race, not a direct substitute
Florida actions
Florida opposed the use of credit score
Industry challenged with four legal claim
1. Office did not have the authority to prevent the use of credit scoring
2. Office did not have the authority to define "unfairly discriminatory"
3. Insurers did not have necessary data to demonstrate the effect of credit on minority
4. Definition of "disproportionate impact" was too vague
Judge found that the Office had Authority over 1. and 2., 3. was irrelevent and Office
is working to rectify 4.
Conclusion and 2007 FTC Report
Negative impact on protected classes outweighs enhanced accuracy
Concerned about the use of income level, occupation, education status
Not happy that the FTC report was available to industry first
State Involvement
Federal actions should not preempt state legislatures
Other states have different view, and don't really see a problem in using credit-scoring
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Newfoundland and Labrador Public Utilities Board, Homeowner's Insurance Review (IBC)
Introduction
Purpose
Assist PUB in preparing report on availability and accessibility of HO's insurance
The PUB Process
PUB process is thorough
-public hearings
-online comments
-insurers and brokers surveys
-meetings with the industry
-collaboration between stakeholders
During the process, no significant problems were reported
Consumer's Experience
Key difference in price paid by homeowners compare to other province is provincial taxes
Taxes being paid with claim settlement
Premium tax
Sales tax on tax on tax
The Value of Shopping Around
There is affordability and availability for customers that shop around
Premiums Growth Put Into Perspective
Personal property premiums have grown along with replacement costs and housing prices
Homeowners' insurance issues
The reason why there wasn't a premium shock as with auto insurance is because there is
more flexibility and less legislation on HO pricing
The availability issue was due to an insurer spreading his risks to reduce his exposure
Hard to place risks
A collaborative program was put in place by the industry for hard to place risks
Electrical wiring
Certified electrician report required to insure homes with knob and tube and aluminium
wiring
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Oil tanks
Oil tanks have to meet standards for insurance coverage
Galvanized plumbing
Some companies will insure homes with galvanize plumbing if it's only for waste lines
Student housing
Coverage available in the non-standard market
Wood stoves
Coverage is provided for homes with properly installed and maintained wood stoves
certified by an accredited inspector
Industry profitability
Most important factors for ensuring on-going availability and accessibility of insurance
Profitability of insurers
Number of insurers
Stability of the business environment
Different market/business strategies lead to different ROE needs
Governments should allow companies to determine their ROE based on their own particular
situation.
MOW analysis is flawed
Average over year instead of summing
PUB should recognize the need for catastrophic contingency component in the profit and
premium
Highly cyclical industry
IBC promote a less emotionally charged interpretation of "news" about the earnings of the
P&C industry
Return on Equity and Supply of Insurance
Sufficient returns are required to maintain insurance availability in the market
Investor Decision Tree
Industry earnings
Reinvest in
NL Property?
Outlook for sustained earnings
Claims<premiums
Regulatory risk?
Tort cost escalator?
Price constraints?
Reinvest outside
Dividends
Historical Market Issues
History of insolvencies
3 out of 10 in NL (2 were runoffs)
Market intervention and insurance cycle
1. Industry's call for government attention ignored ->
2. Hard market : premium ->
3. Consumer ->
4. Political ->
5. Backlash from the media ->
6. Competing Parties: positioning against the industry and pro-consumers to stem
political->
7. Increased regulation of price, terms and conditions ->
8. Product change ->
9. Cost pressures ->
10. Soft Market: competitive forces delay price increases ->
Back to 1.
Conclusion
NL HOs insurance market is working well
Regulatory intervention would disrupt the equilibrium
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Key Principles for the Future Direction of the Canadian Regulatory Capital Framework for
Property & Casualty Insurance
by P&C MCT Advisory Committee (January 2010)
Background
Outline ke principles for a new capital framework for Canadian P&C
Principles encourage use of improved risk-based decisions and better reflect risk profile
Objectives
Build consensus on the direction the new capital adequacy regime will take
Establish priorities and timing
Provide expert feedback on high level principles
Identify resources available to develop technical standards
Assign work to appropriate working groups (CIA)
Assess recommendations on modification to the capital framework from the technical
groups
Review and provide expert feedback on criteria developed by OSFI
Recommend elements of a new internal models capital framework to OSFI
Key principles
1. Encourage good risk management
Prudent, standards, consistent
2. Encourage capital planning and avoid pro-cyclicality
Capital buffers, sufficient capital for systemic stability
On risk measurement
3. Consider all risks
Within consolidated group, account for requirements under stress scenarios, aggregated
4. Determine assets, liabilities and the capitale requirement on a consistent basis for
risk measurement purposes
Consider off-balance sheet items
5. Be practical, yet technically sound
Standard approach to every risk
Framework with two basic component
standard approach (used by all companies)
internal models approach (approval, subject to OSFI-defined floors)
6. Reflect existing risks on going concern basis and consider winding-up and
restructuring
Two key functions of regulatory capital available
absorb losses
protects policyholders and creditors from loss in the event of liquidation
Include all commitments
Consider new business and renewals
7. Use measures that are comparable across risks and products (VAR or CTE)
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Consistency of measurement
Base on credible data
Common time horizon
Common risk measure level
Hold capital above the regulatory capital target
8. Use a Total Asset Requirement (TAR) approach
Capital and reserve on integrated basis
Comprehensive measurement process
Expected losses shoud include margins for misestimation and deterioration
On capital adequacy
9. Ensure that capital is prudent
Transparent
Regulatory capital covers catastrophe and volatility
Provide cushion against unexpected losses
10.Consider international principles and best practices
Adapted to market
On risk monitoring
11.Allow comparison of similar risks across financial institutions
12.Be transparent, validated and based on credible data
Disclose model, assumptions, inputs in details
Credible data can be audited
Consider professional standards
Data reflect company's own experience and practices
13.Use reliable processes with assumptions sustainable in times of stress
Rules for using models should be clear
Process to make sure applications are appropriate
Review process
Replicable results
Material changes to models subject to approval
14.Be part of intervention levels for supervisory action
Capital ratio level for intervention should be sufficiently high to allow supervisory
action at an early stage
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 2 : Discuss the current state of insurance regulation in Canada. (Range
of weight: 5-10 percent)
Knowledge statements
a. Motor vehicle injury compensation systems
b. Effects of rate regulation
c. Examples of Canadian automobile rate filing requirements (Ontario and Alberta)
d. Availability and affordability of personal property insurance (Newfoundland)
e. Reforms in Ontario automobile insurance
f. Use of credit scoring in ratemaking and underwriting practices
g. Market conduct
h. Brokers' disclosure responsibilities regarding conflicts of interest and fees
i. Solvency
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Registered Insurance Brokers of Ontario - Code of Conduct
Basically disclose any relationship or affiliation you have with any insurance company
7.1 Disclosure of facts indicating potential conflicts of interest
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14 (7.1) A member shall disclose in writing to a client or prospective client any conflict
of interest or potential conflict of interest of the member that is associated with a
transaction or recommendation
Guidelines
1. Any direct or indirect ownership interest or any kind in a brokerage by an insurer, or
in an insurer by a brokerage
2. Common ownership of a brokerage and insurer by a financial conglomerate or other
holding company or group of companies
3. A loan, credit facility or other financial relationship, direct or indirect
4. A financial or non-financial network affiliation
5. Exclusive contract or one market exceptions
6. Volume or mix of business requirements
7. Receipt of contingent commission
8. Sales incentives
9. Premium Financing Companies
Clarity of Disclosure
Full and overt transparency not buried in fine print details
Sample broker point of sale commission protocol
Items that must be included
1. Statement on Services Provided
2. Personal Lines Automobile and Property
show commision range by insurer
3. Commercial Lines
similar to personal lines
4. Contingent (Profit) Commission
how they are determined
5. Contingent Commission statement
6. Information on Ownership and Other Financial Links
7. Working with Insurance Companies
Commitments by Insurance companies
8
Fee Disclosure
14 (8) A member shall not stipulate, charge or accept any fee that is not fully disclosed,
or the basis for which is not fully disclosed prior to the service being rendered, or
which is so disproportionate to the service provided as to be unconscionable.
Fee above the premium may be appropriate if services rendered are greater than commission
Relevant factors that influence the amount of fair and reasonable fee
(a) Time and effort required to be spent
(b) Difficulty and importance of the matter
(c) Whether special skill or service will be required or provided
(d) Amount involved or the value of the subject matter
(e) Whether or not any remuneration will be received from another source in connection
with the same transaction and, if so, its amount
(f) Any special circumstances such as urgency or uncertainty of reward
You must always be able to justify a fee when requested
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 3 : Discuss the issues, outcome, rationale and implications of landmark
decisions for the insurance industry. (Range of weigth: 5-10 percent)
Knowledge statements
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a. Specific landmark court decisions cited in the Readings section
b. Canadian cap for non-pecuniary general damages
1. Trilogy of Supreme Court of Canada decisions
2. Limits on damages
3. Current state of cap
4. Exceptions to cap
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The Cap on non pecuniary general damages : where is it going and how does it affect
litigation?
The impact of the trilogy on the cap
Introduction
Supreme Court of Canada dismissed Leave to Appeal application in Lee v. Dawson, still not
the right time to review cap on general damages
The Trilogy
Andrews v. Grand & Toy Alberta Ltd (Mr Justice Dickson)
Teno v. Arnold (Mr Justice Spence)
Thornton v. Prince George School District No. 57
Mr. Justice Dickson concluded that time had come to stabilize and bring some consistency
to awards for non-pecuniary or general damages.
Viewed necessary for the following reasons :
1. Claim of a severely injured person for damages for non-pecuniary loss is virtually
limitless.
2. Damages for non-pecuniary losses are not really "compensatory" as no money can provide
true restitution. Make life more endurable.
3. Under the law, the plaintiff will be fully compensated for future loss of income and
future care costs whice are arguably more important for ensuring that the injured
person is well cared for in the future.
4. Exorbitant awards for general damages can lead to an excessive social burden (i.e.
unaffordable increases in insurance and social costs)
Mr. Justice Dickson established a rough upper limit of 100000$
Two observations
Cap is justified because of the assumption that pecuniary losses will be fully
compensated
If no cap, would lead to "extravagant" awards and subsequent burden on society
Mr Justice Spence
Point out awards for medical malpractice in US. Fear of high premiums.
Subsequent cases
Fenn v. City of Peterborough (1979)
Injuries greater than cases in trilogy, one year and a half after trilogy
Whether or not to exceed the 100000$ plateau
Awarded 125000$ in Ontario Supreme Court, not appealed, only appellate decision over cap
Lindal v. Lindal (1981)
Supreme Court of Canada
Under what circumstances should a trial Judge exceed the cap?
Justice Dickson (again) said that the damages were not meant to "compensate" but to make
life more endurable.
Also said that cap should be increased to reflect the effect inflation instead of the
quantum of the award itself
As of december 2006, cap is 311483
ter Neuzen v. Korn (1995)
Plaintiff infected with AIDS as a result of an artificial insemination
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Awarded 450000$ at trial
Mr Justice Sopinka stated that trilogy had imposed as a "rule of law" a legal limit
With this decision, the cap evolved from a judicial policy directive to a "rule of law"
The Decisions in Lee v. Dawson
Trial Level
Plaintiff sustained brain/facial injuries
Jury awarded 2M$
Trial judge, bound by the trilogy, reduced awards to 294600$ (indexed amount at the
time)
Court of Appeal
Ground for appeal based on equality provisions of Section 15 of the Charter
Trilogy predate Charter
Plaintiff stated that the cap discriminated against seriously injured victims because
they are not entitled to full compensation for pain and suffering
BC Court of Appeal rejected argument based on "charter values"
Argument is flawed because general damages were never meant to compensate
Additional arguments by plaintiff as to why the cap should not apply
Cap is not law
False assumptions in trilogy judgement
Cap lack logical foundation
...
Court of Appeal decided not to respond, felt that Supreme Court of Canada had to take
position
Supreme Court of Canada
Dismissed appeal, no reason
Full compensation in relation to non-pecuniary losses is meaningless, and arguably
dangerous, since such losses by their nature cannot be fully restored
Cap works because it create an economic climate where insurers continue to underwrite
P&C insurance.
It ensures, that innocent people recover full compensation for economic loss within
an economic context that has finite resources. It also supports a stable and
predictable system of law in this area which is essentially fair to most people.
Cases to which the Cap does not Apply
S.Y. v. F.G.C.
cap does not apply to claims for damages for sexual assaults
Hill v. Church of Scientology
no cap for defamation
Young v. Bella (2005)
Supreme Court comment on cap outside the personal injury context
University student paper contains section misinterpreted as self-confession of sexual
abuse of children. RCMP involved, career/reputation ruined. Reduce income-earning
capacity.
University was found to be negligent, awards 430000 for non-pecuniary damages
Appeal
Cap should not extend, no evidence that this type of case has any impact on public
purse.
"social costs" issue, as a reason for the cap, remains a paramount concern
Conclusion
Still valid 30 years later
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 3 : Discuss the issues, outcome, rationale and implications of landmark
decisions for the insurance industry. (Range of weigth: 5-10 percent)
Knowledge statements
a. Specific landmark court decisions cited in the Readings section
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b. Canadian cap for non-pecuniary general damages
1. Trilogy of Supreme Court of Canada decisions
2. Limits on damages
3. Current state of cap
4. Exceptions to cap
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Bunch of decisions by the Supreme Court that had an impact on insurance
Whiten v. Pilot Insurance Co. (2002)
Punitive damages
Judgement agains Pilot for 1M$ in punitive damages reduced by Ontario Court of Appeal to
100000$. Appeal by the plaintiff.
Fire burnt house down during winter, insurer paid living expenses at first, then stop
alleging arson even if there was no evidence of it.
Appeal allowed. Jury award within rational limits. The insurer conduct was exceptionally
reprehensible. Claim denial was designed to force an unfair settlement. An award of
punitive damages required an actionable wrong in addition to the breach sued upon.
The insurer had a distinct and separation obligation to deal with the policyholder in
good faith.
Conclusions
1) Punitive damages restricted to intentional torts or breach of duty by nature
2) Objectives are
-punishment
-deterrence of the wrongdoer and others
-denunciation
3) Primary vehicle of punishment is the criminal law
4) Jury needs more guidance to set the amount, more principled and less exhortary
approach is desirable
5) Determine the lowest award that would serve the purpose
6) Rational to use punitive damages, compensatory damages only would amount to nothing
more than a licence fee to earn greater profits
7) No cap or ratio adopted to set punitive damages
8) Quantum of award should be related to the objectives
9) Juries should receive more guidance more judges relating to their mandate
10)Punitive damages are not at large, appellant court can intervene
Requirement for "Actionable Wrong"
Defendant's conduct said to give rise to the claim is itself an "actionable wrong",
Breach of contractual duty of good faith is independent and in addition to the breach
of a contructual duty to pay the loss
It is a two-way street founded upon the principle of utmost good faith
Adequacy of Jury Charge
Jury need to be explained that
1) Punitive damages are the exception
2) Imposed only to reprehensible misconduct cases
3) Punitive damages should be proportionate to harm, degree and vulnerability
4) Regard any other fines or penalties for the same misconduct
5) Given where the misconduct would otherwise be unpunished
6) Purpose is not to compensate the plaintiff
7) Purpose is retribution, deterrence and denunciation
8) Awarded where compensatory damages are insufficient to accomplish purpose
9) No amount greater than necessary
10)Plaitiff keep punitive damages as windfall
11)Moderate awards are generally sufficient
12)If counsel can agree on a "bracket" or "range", trial judge should inform jury
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Unless punitive damages can be approached rationally, they ought not to be awarded
Insurer is entitled to investigate
Factors for Judicial Review of Punitive Damages Award
Proportionality is the key to the permissible quantum of punitives damages
1) Proportionate to the blameworthiness of the defendant's conduct
planned, deliberate, intent, persisted, conceded, cover up, aware, profited
2) Proportionate to the degree of vulnerability of the plaintiff
3) Proportionate to the harm or potential harm directed at plaintiff
4) Proportionate to the need for deterrence
5) Proportionate in taking account of other retribution, denunciation, deterrence
6) Proportionate to the advantage wrongfully gained
Conclusion
Award within rational limits
Somersall v. Scottish and York (2002) Limits agreements, Underinsured driver coverage
Insured entered into a limits agreement with other driver so he would admit fault but
insured wouldn't sue him for more than his limit. Recovering the rest from insured's
insurer underinsured driver coverage.
Limits agreement had no bearing on the right of the insured at the time of the accident.
Time of the accident is the relevant time for determination of legal entitlement.
Insurer right of subrogation did not arise until insured had been fully indemnified.
Limits agreement is no different than the passage of the limitation period against the
tort feasor.
Phrase "is legally entitled to recover" in S.E.F. no 44 is ambiguous in time.
Since the critical time is the time of the accident, plaintiff was entitled.
IBC recommend changes to S.E.F. 44 to remove "ambiguity"
Sansalone v. Wawanesa Mutual Insurance Co. (BC Court of Appeal 1998)
BC Transit Bus driver sexual acts on a minor. Do insurers have a duty to defend?
Wawanesa and Lloyd (reinsurer) denied coverage and defense.
Decision by Court, neither insurers had a duty to defend.
For there to be a duty to defend, there must at the very least be a possibility of
coverage being provided by the policy.
Nichols v. American Home Assurance Co. (1990)
Appeal by the insurer on a group policy of professional liability insurance.
Allegations of fraud against solicitor. Actions discontinued.
By policy terms duty to defend was separate from duty to indemnify.
Ontario Court of Appeal held that insurer had a duty to defend.
Insurer appealed to Supreme Court.
Supreme Court stated duty to defend is restricted to claims for damages which fall
within the scope if the policy. Fraud do not.
Mere possibility that a claim within the policy may succeed suffices for there to be a
duty to defend.
Duty to defend and liability insurance
Only damages claimed were for fraud, fraud is excluded from coverage. If there were
other allegations for negligence covered by the policy, the duty to defend would exist
Duty to defend is dependent upon the duty to indemnify and not separate coverage
Amos v. Insurance Corporation of British Columbia (1995)
Class of victims who can claim auto accident insurance benefits extended
Amos was shot by a gang of men who surrounded his car in California
Anyone that can make a connection between the use, operation or ownership
and his injuries is entitled to coverage.
of a vehicle
There are two questions for the court to consider
(1) Purpose test : Did the accident result from the ordinary activities to which
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automobiles are put?
(2) Causation test : Is there some causal relationship between injuries and the
ownership, use, operation or is the connection incidental or fortuitous?
Because the words "arising out" instead of "caused by" are used, the policy has a wider
coverage. Ontario use "caused by", so judgement do no apply there.
Judge's view, the shooting as "direct result" of the failure of the attackers to gain
entry to the vehicle.
KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada (2003)
Multirisk policies. Fire Part.
Insured made a claim for loss caused by fire under an all-risks policy.
Claim was made more than a year after fire but within a year of filing the proof of loss
Insured argued that claim fell under Part 2 of the BC Insurance Act
which has a 1 year limitation from filing the proof of loss.
Insurer insisted it was under Part 5 (Fire Part) (1 year limit from fire)
Supreme Court of Canada : Appeal allowed. Claim was not statute-barred. Multi-risk
policy do not fall under Part 5 therefore they fall under Part 2. Insured could not
agree to harsher terms than Part 2.
Unique to B.C. insurance act.
Chief Justice advise modification to BC Insurance Act to clarify multirisk policies
Fire Part contains limit for insurer to exclude fires caused by terrorism, nuclear, EQ
That is why the situation with multirisk policies must be addressed in Insurance Act
Alie v. Bertrand & Frere Construction Company Limited (2002)
Damages to foundation of homes because of defective concrete supplied by defendant
between 1986 and 1992. Foundations had to be replaced.
Insurers denied coverage
Issues
(1) Which policies are liable to respond to the losses?
(2) Are the excess insurers responsible for the payment of the insured's defense costs?
Decisions
All of the insurers that provided coverage between 1986 and 1992 were liable
Four theories used to determine when coverage was triggered are not rules
-Exposure theory
-Manifestation theory
-Injury in Fact theory
-Continuous or Triple Trigger Theory
Policy language trigger coverage
For this case, trigger when damage is suffered within policy period. Injury in fact
corresponds to that language.
McNaughton Automotive Ltd. Co-operators General Insurance Co. (2001)
Deductible, salvage and vehicle total losses
Insurer must pay actual cash value without reduction of deductible.
Actual cash value was not to be interpreted as net of the deductible.
The salvage will not vest in the insurer if the insurer applies the deductible and pays
less than actual cash value to the policyholder.
Options for insurers :
(1) Waive the deductible in case of total losses
(2) Refuse to take salvage and use salvage value less deductible to compensate
Second option could lead to more unsafe vehicle on the road because insured has the
obligation for the salvage disposal.
Transfert title instead of vesting vehicle to insurer
Class actions were dismissed in Alberta and BC.
British Columbia v. Imperial Tobacco Canada Ltd. (2005)
Tobacco Damages and Health Care Costs Recovery Act
authorize action by BC agains Tobacco industry
Industry challenged constitutional validity of the Act
BC Supreme Court concluded that the Act failed to respect territorial limits on
provincial legislative jurisdiction and thus was unconstitutional.
Act's pith and substance is "Property and Civil Rights in the Province"
Supreme Court found that the Act was valid, (extra-territorial aspects were incidental)
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The defendants might regard the Act as unjust, or the procedural rules it prescribes as
unprecedented, does not render their trial unfair.
Section (2)1 is the Keystone of the Act
The government has a direct and distinct action against a manufacturer to recover the
cost of health care benefits caused or contributed to by a tobacco related wrong.
Resurface Corp. v. Hanke (2007)
Zamboni guy that mistook gas tank for hot water tank, burned his face
Basic test for negligence remain the "but for" test
"Material contribution" only applies in exceptional cases where factors outside the
plaintiff's control make it impossible for the plaintiff to prove that the defendant's
negligence caused the injury using the "but for" test.
Foreseeability (of risk)
Causation (but for test)
The test for Causation remains the "but for" test
If "but for" chain of causation is broken require exception to "but for"
Morrow v. Zhang (2009)
Minor Injury Regulation in Alberta (MIR) to reduce costs
4000$ Cap on non-pecuniary damages for minor injuries
MIR infringed on the Charter section 1
Cross-appealed
Morrow challenged the constitutionality of the 4000$ cap
MIR Introduced a DTPR to provides for 10 to 21 treatment sessions
The onus is on the claimant to establish either a reasonable excuse for not following
the protocols, or that the injury would have resulted in serious impairment even if the
protocols had been followed
With MIR, more claimants received health services and costs per treament decreased and
claim were resolved faster
There is no broad general right to legal counsel
Does the law discriminate?
Issues : Did the trial judge err in finding that the MIR violates section 15(1) of the
Charter?
Trial judge failed to analyse insurance reforms as a complete package.
MIR is not discriminatory and does not infringe section 15 of the Charter
Conclusion
The MIR, when considered with the entire scheme of insurance reforms, does not infringe
section 7 or 15 of the Charter. While the legislation does make a distinction on the
basis of disability, it is not discriminatory. The legislation, as a whole, responds to
the needs and circumstances of those suffering minor soft issue injuries. There is no
need to consider section 1 or the appropriate remedy.
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 4 : Describe the litigation environment with respect to insurance.
(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
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Current Issues in Asbestos Litigation
American Academy of Actuaries Mass Torts Subcommittee
Purpose of the document
Provide a brief overview of asbestos litigation
Summarizes some of the available data measuring the litigation
Highlights some of the recent changes in the litigation environment
Overview
Asbestos exposure linked to medical conditions (mesothelioma)
More than 27.5 millions with significant exposure
Latency period between 10 to 50 years (expected to manifest through 2050)
Single claimant files suit against 60 or more defendants
No single database for claims
Source include the Manville Personal Injury Trust for claim filing activity and
the aggregate CY asbestos payments and liability estimates by US P&C insurers
Most comprehensive studies are done by RAND Corporation
Most of pending claims are for nonmalignant conditions
Changes occured since 2002
Resources directed to the sickest claimants, medical criteria requirements for filing
a claim, changes to Manville Trust Distribution Process (TDP)
Decrease in claim filing for less severe conditions
Additional bankruptcies at a lower annual rate
Reforms
Heightened scrutiny of potentially fraudulent claims
Available Data Sources
Manville Information
Largest US manufacturer
Trust formed to distribute assets among current and future claimants
2003 spike in claim filing is dut to effective change to the TDP
Most claims are nonmalignant
Corporate Defendant Bankruptcies
Upward pressure on claim settlements demanded from remaining solvent defendants
Experience of US Insurers/Reinsurers
31.7 billions paid, 22.7 billions held in reserves
Expenses
Litigation system has been an inefficient mechanism
Defense transaction costs account for 30% of total payments
29% goes to plaintiff attorney
41% reached claimants as net compensation
Defense costs should increase in the future
More defendants
Many defendants have abandoned settlement strategies
Newer defendants incurre significant discovery costs
Coverage disputes might increase
Recent and Proposed Changes in the Litigation Environment
Proposed Federal Legislation - S.852
Trust fund approach
No-fault trust
Claimant need to meet medical criteria for compensation
Contribution from corporate, insurers and existing trusts
If funding insufficient, claims could return to courts
Debate and Questions
How many claims will be filed?
Will medical criteria identify victims of asbestos disease?
Are the proposed awards appropriate?
Is the proposed funding adequate?
Will the allocation of funding be viable and fair?
Will the fund be operated efficiently?
Will the new statute withstand constitutional challenges?
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Will corporate defendants and their insurers/reinsurers support legislation that does
not provide finality?
State reforms
Affect tort claims process
Focus the courts' resources on the claims of the most seriously injured
Inactive dockets (preserve rights to sue for people that do not meet medical criteria)
Claimants must satisfy medical criteria -> more single-plaintiff claims
Scrutiny of Potentially Fraudulent Claims
Mass screening programs are not effective
Doctors diagnose claimant with both silicosis and asbestosis
Diagnosis manufactured for money
Lead to fewer mass settlements
Conclusions
No easy fix
Be aware of potential unintended consequences
Attachment 4
Filing in Texas increased steadily until 1997 when tort reform restricting claims from
other jurisdictions was enacted.
Whether or not new forums of choice will emerge (like Texas)
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 4 : Describe the litigation environment with respect to insurance.
(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
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ATRA Tort Reform Record
Record the accomplishments of the latest legislative year
The Rule of Joint and Several Liability
permits the plaintiff to recover damages from multiple defendants collectively, or from
each defendant individually
Rights of the client to be fully indemnified
Not fair compare to % of liability
ATRA supports replacing with the rule of proportionate liability
More moderate reforms
(1) not applicable to non-economic damages
(2) not applicable to defendant responsible for less than a certain % (such as 25%)
The Collateral Source Rule
evidence may not be admitted at trial to show that plaintiffs' losses have been
compensated from other sources, potential for double recovery
Punitive Damages
ATRA recommends four reforms
Establishing a liability "trigger" that reflects the intentional tort origins and
quasi-criminal nature of punitive damages awards - "actual malice".
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Requiring "clear and convincing evidence" to establish punitive damages liability
Requiring proportionality in punitive damages so that the punishment fits the offense
Address the problem of multiple punitive damages awards
Noneconomic Damages
Pain and suffering, emotional distress, loss of consortium or companionship
Erratic awards
ATRA believes that the broad and basically unguided discretion given juries in awarding
damages for noneconomic loss is the single greatest contributor to the inequities and
inefficiencies or the tort liability system.
Prejudment Interest
Intended effects
Compensate plaintiff fully because of lag between events and payments
Encourage early settlements
Reduce delay
Practical effects
Result in overcompensation
Hold a defendant financially responsible for delay it may not have caused
Impede settlement
At a minimum, interest rate should reflect prevailing interest rates on treasury bill
Product Liability
It fails when it does not send a clear signal to manufacturers about how to avoid
liability or hold manufacturers liable for failure to adopt a certain design or warning
even if the manufacturers neither know, nor could have anticipated the risk.
Class Action Reform
Considered a means of defendant extortion
Victims receive pennies while counsel receives millions
Attorney Retention Sunshine
Political favoritism, inside dealing, corruption
Attorney "sunshine" legislation requires legislative approval of most large contingent
fee contracts, and reasserts the legislature's oversight of "regulation through
litigation"
Appeal Bond Reform
Huge amount that impair defendant capacity while it appeals
Appeal bond waiver limits the size of an appeal bond when company act in good faith
Jury Service
Juries are not reprensative of the community
Occupational exemptions
Not enouh compensation
ATRA supports
Eliminating occupational exemptions that allow members of certain professions to
opt-out from jury service
Ensuring that only those who experience true hardship are excused from jury service
Providing jurors flexibility in scheduling their service and guaranteeing potential
jurors they will not spend more than one day at the courthouse unless they are selected
to serve on a jury panel.
Protecting employees from any adverse action in the workplace due to their responding
to a juror summons
Establishing a lengthy trial fund, financed by a nominal court filling fee, to pay
jurors who serve on long civil trials
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 4 : Describe the litigation environment with respect to insurance.
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(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
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Tort Reform Tension (2005) - Canadian Underwriter
Has the time come for amendments to Canada's legal rules?
Insurers say that reforms to key legal principles are necessary to reach the goals of
stability and predictability.
Attention to the Aussie Way
Three main areas
Establishing liability
Clarifying damages
Undertaking procedural reforms
Reflecting on Reform
What could tort reform look like in Canada and what are the chances of any changes being
enacted here?
Clear areas ripe for reform according to IBC
Joint and several liability
Collateral sources rule
Establishing net income as the basis for determining damages
Vicarious liability
Trial lawyers opinion
innocent party should get full compensation
Joint and several liability
"deep pocket' syndrome"
Insurance groups reluctant to go to court
Trial lawyers play the card to the extreme.
One way would be to have a fund like PACICC to pay for these kinds of lawsuits
Two main issues in vicarious liability today are sexual abuse claims and car leasing or
renting
IBC states that courts should order structure settlements in all cases where the
plaintiff has future care or future income losses
Insurer are concerned by class action lawsuits
Severe sanctions on frivolous lawsuits
Trial lawyer - if innocent victim doesn't get full compensation, we have just abandoned
Magna Carta and hundred of years of jurisprudence
Canada operates on the common law
Quebec operates on the civil code
Reform needs to be done on a province by province basis, and coordinated
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 4 : Describe the litigation environment with respect to insurance.
(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
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Bankruptcy Trusts, Asbestos Compensation, and the Courts
Abstract
People with asbestos injuries are increasingly receiving compensation for trusts set up
by bankrupt asbestos defendants. A recent report documents how courts handling asbestos
cases consider payments by the trust when determining compensation. Focusing on six
states, the researchers find great variation in the coordination between the trusts and
the courts, which influences both compensation and payments made by solvent defendants.
These differences are largely due to the different liability regimes across states.
Interactions Between Systems
Information Sharing
Courts require disclosure of any trust claim on file but plaintiff are seldom required
to file trust claim before trial
Setoffs
Four out of the six allow setoffs for all trust payments
Indirect Trust Claims
Typically able to recover from a trust
When liability is several, not able to recover from trust
Differences in Total Compensation to Plaintiffs
In states with joint-and-several liability, total compensation should not be affected
In several-liability states compensation could vary, defendant need to persuade the jury
to assign the same fault to the bankrupt firms to decrease compensation
Differences in Payments by Solvent Defendants
Stakes are greater for both plaintiffs and solvent defendants in states with several
liability than they are in states with joint-and-several liability
Conlusion
Data are needed on total plaintiff compensation over time to determine which outcomes
actually occur in practice.
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Section A : Regulation of Insurance and Canadian Insurance Law
Learning objective 4 : Describe the litigation environment with respect to insurance.
(Range of weight:2-6 percent)
Knowledge statements
a. Trends in tort litigation, including tort reform and class action suits
b. Mass torts (e.g., asbestos)
c. Types of litigation costs
d. Canadian litigation system vs. other systems
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U.S. Tort Cost Trends
Introduction
Quantify tort costs
Lower level of economic activity, opportunities for tort actions also decreased
Ratio of tort costs to GDP decreased since 2003 (was increasing since 1950)
Costs grew more than population
Personal vs Commercial tort costs
Personal tort costs are predominantly from automobile accidents
Increases in commercial exceeded increases in personal
Methodology and Approach
Three costs components
Benefits paid or expected to be paid to third parties ("losses")
Defense costs
Administrative expenses
Categories of tort costs
Insured costs (excluding medical malpractice)
Self-insured costs (excluding medical malpractice)
Medical malpractice costs
Line of business included
Private passenger auto liability
Homeowners multiperil
Farmowners multiperil
Commercial auto liability
Commercial multiperil
Other liability
Products liability
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
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g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Canada's Agricultural Business Risk Management Programs (Agriculture and Agri-Food Canada)
Introduction
Agricultural Policy Framework (APF)
Aims to protect producers incomes from the vagaries of weather, pests, and global
markets
Encourage risk mitigation strategies for emerging risk areas
Support growth, diversification and increased value-added activity
Two program elements making up the proposal
Insurance
Stabilization-disaster protection
Principles of new programs
Minimizing countervall risk
Minimizing distortion of producers' production and marketing decisions (including moral
hazard)
Focusing on the management of risks related to the stability of the entire farm entity
Encouraging the use of risk management practices and contributing to the use and
development of private sector risk management tools
Being relatively simple to administer and transparent for participants
Minimizing the capitalization of program benefits into farm asset values
Programs under the APF
Production Insurance
Manage the production risk
Commodity basis
Does not cover market price drops, fuel price increases or other input costs (1)
Canadian Agricultural Income Stabilization (CAIS)
Mitigate unforeseen income disruptions
Promote long-term income stability
(1) is taken into account at the farm enterprise level
Producers have an incentive to be insured under both programs because their reference
margin will be higher (Production Insurance payments treated as income toward CAIS)
Production Insurance Overview
Crop Insurance since 1960, renamed Production Insurance
Minimize income losses caused by natural hazards
Effective program reduce the need for ad hoc crop loss payments
Higher and more consistent levels of protectio than ad hoc
Quicker payments
More protection than income-based programs
10-15 years used to derive protection
Provencial government agencies act as insurer
Cost shared with the federal government, provincial governements and producers
By 2005, insurance plan using baskets of crops instead of commodity-specific
Will better complement the whole farm approach of CAIS
Additional benefits
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Quality loss protection
Reseeding and unseeded acreage benefits
Perennial plant protection
Compensation to crops and livestock caused by wildlife
How the Program Works
Production Insurance is voluntary
Once a commodity is selected, all production of that commodity must be insured
Basis of protection is production guarantee established for each commodity
Yield per unit of land or value of the asset or production
Government require periodic independent actuarial certifications
Insurance must be bought before commodity is planted or before any damage is possible
Coverage level from 50% to 90% expected yield (crops) - deductible
Premiums calculated using 15-25 years risk of crop losses
Premiums take into account producer's individual loss history
Yields transformed into a monetary value
Establishing insurable values
Forecast market price
Average of previous years' prices
"at harvest" prices
Average production costs of the most efficient producers
Replacement costs
Types of Production Insurance Plans
Based on historical (probable) yields
Payment made whenever the actual production is determined to be less than the
production guarantee
Program designs
Individual yield program
Total production of entire farm
Per field offsets
Area-based or collective protection
All producers in the area, irrespective of production
Whenever the harvested yield for the area is below the area's production guarantee
Key difference when protection is not based on yields
Coverage level is based on the long-term loss level of the commodity and the actual
production value is a function of the number of units (animals or trees)
Optional Benefits
Protection against loss of quality (loss in market value)
Unseeded acreage
excessive moisture prevents a producer from seeding a crop
Reseeding/Replanting
Incremental costs associated with having to reseed a crop after insured peril
Emergency works benefit
Mitigate further damages
Incentive to maximize crop yield
Losses to perennial plants (fruit trees)
Costs to re-establish production
OR
Net income loss while re-establishing production
Spot-loss peril
For damage that is readily discernible from other perils such as hail
Not dependent upon the farm's overall production
Cost-Sharing Arrangements
Overall 60/40 between federal government and provincial governments total contribution
Federal government contribution
60% catastrophic loss benefits
36% comprehensive production coverage
20% high cost production
Government wants to contribute more to severe but infrequent loss situations
Both governments are expected to pay in 2004 around 62% of all premiums
Both governments are responsible for administrative costs in a 60/40 split
Roles and Responsibilities
Government of Canada
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Approving provincial program proposals that are consistent with federal legislative,
regulatory, and agreement requirements
Contributing a portion of the total premium and administrative costs
Developing national standards for maximum levels of coverage and benefits levels as
well as the certification of provincial premium rate, probable yield, and insurable
value methodologies to ensure consistency and equity of federal support across
provinces
Providing a deficit financial mechanism (reinsurance) to provinces
Provincial Government
Insurer
Paying portion of premiums and administrative costs
Designing and developing insurance plans
Promoting and selling
Underwriting
Determine and collect premiums
Loss assessments
Appeal process for producers
Bearing responsibility for deficits
Canadian Producers
Pay portion of premiums
Comply with insurance contract requirements
Manage their crops in a normal manner
Suggest program revisions to administrators
Private Insurance Companies
Not involved at the moment
Program Performance Statistics
Cumulative loss-to-revenue ratio at breakeven level of 0.99
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
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-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Government Insurers Study Note
Five reasons of government participation in insurance
Filing insurance needs unmet by private insurance
Compulsory purchase of insurance
Convenience
Greater efficiency
Social purposes
Filing insurance needs unmet by private insurance
Residual market philosophy
Either because of unavailability or unaffordability
Government has the financial capacity to subsidize losses (taxes)
Crop Insurance in US and Flood insurance exists because of subsidies by government
Compulsory Purchase of Insurance
Meet social responsibilities (auto liability, workers comp)
For auto because government insurance is normally not the solution, you can use
Assigned risk plans
Reinsurance facilities
Joint underwriting associations
Convenience
Easier to set a program quickly, access to quick funding, loss mitigation
May not be justified is private sector is willing to offer insurance
Greater Efficiency
Perception, government still has to set up underwriting, claim settlement services
Costs savings claimed for government insurance programs might be overstated because
other government departments may perform services on behalf of the government insurance
entity that are usually performed by insurance companies, including appraising property,
administering claims, or making investments.
Social Purpose
May be the main reason for government programs
Can it be provided by private insurance?
Evaluation of Government Insurance Programs
Is the provision of the insurance by the government necessary or does it achieve a
social purpose that cannot be provided by private insurance?
Is it insurance or a social welfare program? Social welfare is designed to provide
benefits to qualified people based on demonstrable need for assistance without any
payment or contribution by those receiving assistance. These benefits are usually
financed by general tax resources. The public welfare programs are an example of social
welfare.
Is the program efficient, is it accepted by the public?
Terrorism Insurance Act of 2002 (TRIA)
Insurers tried to exclude terrorism risk where possible and increase premium where
exclusions where not possible
Concerns from policymakers
Creation of a federal reinsurance program (private/public)
Secretary certified an event as an act of terrorism
Event must meet criteria
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1. More than X damages
2. Dangerous to human life, property or infrastructure
3. US damages
4. By foreign terrorists (extended to include natives)
Government reimburse company after deductible
Insurers retain a portion of loss exceeding deductible
If total losses exceed X in one CY, insurers are released from paying any further
Extended through 2014
Trigger and aggregate retention increased
Two reasons why TRIA was passed
It fulfills a need unmet by private insurance
It servers a social purpose
To a lesser extend, to avoid economic disruptions
TRIA not needed anymore?
Can it be replace by catastrophe bonds?
No, market is too small
TRIA has some characteristics of government indemnity programs
Insurers do not pay premiums prior to incurring losses
TRIA criticism
Amount of time required to certify an event and distribute payment
Amount of time between payment by insurer and government reimbursement
Does not cover personal lines
Criticism mostly directed to the limitations on the coverage provided
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
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b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Why insurers fail: The dynamics of property and casualty insurance insolvency in Canada
Almost always inadequate pricing and deficient loss reserves
Main conclusions
Incidence of insolvency in the 1990s was higher than that of the 1980s, which in turn
higher than preceding decades
Inadequate pricing and deficient loss reserves are the leading causes of failure for
Canadian insurance companies
Incidence of insurer insolvency varies with industry profitability and the UW cycle
New insurers are most likely to fail than established insurers, and insurer survival
rates for new entrants tend to stabilize after a decade of operation
Introduction
PACICC founded in 1989 to prevent insurers insolvency
For this report, insolvency means
Involuntary exit from market precipitated by a winding-up order issued by authority
Insolvency risk
Assets become insufficient to meet obligations
Liquidity risk
High level of risk that assets could disappear (mostly branch companies)
A historical overview of insurer insolvency in Canada
Canadian insurers fail as a result of their operation and exposure to the Canadian
economic/underwriting environment while branch companies may fail because the home
office company in a foreign jurisdiction has failed due to the economic/underwriting
environment in a foreign jurisdiction.
Proximate causes of Involuntary exit
31% - Inadequate pricing or deficit loss reserves (DLR)
20% - Foreign parent (other)
17% - Rapid growth
9% - Foreign parent (DLR)
9% - Alleged fraud
6% - Overstated assets
3% - Reinsurance
3% - Affiliate
3% - Catastrophe losses
Literature review on firm survival
Theoretical models
None specific to insurance
Dynamic equilibrium model
Industry is composed of a continuum of firms which produce a homogeneous product.
Firms behave competitively by taking the output price (p) and input price (w) as given.
Output of a firm is a function of a productivity shock, and labour.
Fixed cost to enter the market.
Only source of uncertainty in the model is firm specific shocks.
Exit decision by a firm is determined by the firm's reservation value.
Competitive equilibrium for the industry is attained when there are no further
incentives to enter or exit the market.
Hazard model approaches
pre-entry experience has a large and persistent effects on firm survival
new entrants learn by doing, with improved results over time
firms with more experienced managers have a higher survival rate
survival rate is increasing with respect to age
Dynamic equilibrium model framwork highlights the effect that environmental factors have
on firm entry and exit.
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Hazard model framework takes a stationary equilibrium and analyzes factors that move the
market to a new equilibrium
Empirical analysis
Primary internal cause identified
Deficient loss reserves and inadequate pricing
Rapid growth (most frequently during soft market conditions with weak industry profits)
All causes related to some form of mismanagement
UK Study
Second factor
Asset risk stemming from investments adversly affected by the same occurences leading
to large claims 'double gearing'
Adverse effect of interest rates and inflation on insurance companies' performance
During rising stock markets, or inflationary periods, insurers can earn a satisfactory
overall operating profit but at the same time claims costs rise faster than
under-priced policies
Unanticipated changes in inflation and interest rate levels were not significant in US
The costs of insolvency
Costs of involuntary exit in Canada have been substantially lower than elsewhere
In the US and UK dividends from liquidated estates are used to reduce current or future
assessments needs. In comparison, PACICC is required to return liquidation dividends to
the solvent members of the industry.
Delay in assessment is a result of two factors
Court-appointed liquidator requiring time
Need for PACICC to properly identify the assessment base
External factors influencing insolvency
Potential exposures to external shocks
Domestic underwriting cycle
Increased frequency ans severity of extreme weather events
General economic and financial market volatility and international developments (shocks
to the reinsurance system, mobility of capital etc) as a result of the growing
international nature of the industry
Underwriting cycle and profitability
Poor profitability increase the risk of insolvency
1/3 of insolvencies in Canada are the result of a foreign parent failing
Catastrophe losses
Canadian exposure to large severe weather events is modest
Economic and financial market factors
Volatility increases risk of financial impairment; while a stable environment tends to
reduce risk
Solvency risk is heightened when elevated economic volatility coincides with a
softening in the underwriting cycle
Weak relationship to equity markets because heavily invested in fixed income securities
International exposures
International nature of the insurance industry benefits insurance consumers by
increasing competition, permiting greater risk diversification, and allowing access to
international sources of capital to underwrite Canadian risks
Insolvency analysis by supervisory jurisdiction
Insolvency frequency less in Canada than US
Insolvency and company characteristics
What characteristics distinguish companies that exit involuntarily from those that
survive
Governmance and internal controls
strategic risk decision by management
New entrants
Inexperience and competition from existing players
Growth
Grow rapidly in the last few years of business
Usually accompanied by deteriorating loss reserves
Enter new areas of business where they lack expertise
Firm size
Proxy for age
Cause of insolvency
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Persistent and consistent underpricing and inadequate reserving may ultimately lead to
insolvency
International comparaison of causes of insolvency
Inadequate pricing
Deficient loss reserves
Unlike other jurisdictions, failure of a foreign parent is top three in Canada
Discussion
Governance/management
Experience matters, and greater experience of senior management reduces the incidence
of insolvency
Strong internal controls and financial reporting reduce insolvency risk, as 35% of
involuntary exits demonstrated clear breakdowns in internal controls
Up to two years prior to the wind-up of a company, management in many cases undertook
strategies that could be described as "gambling for survival"
Operational risk
Concentration of risk (geographic and/or product)
Underwriting (profitability)
Adequate pricing and accurate loss reserve estimation are critical for reducing the
likelihood of involuntary exit
Rapid growth may be associated with under-pricing
Capital
In most cases, capital deteriorated in the final year of operation
In Canada, as contributors to insolvency risk, liability risks have historically been
far more important than asset risks
Macro-economic environment
Modest impact on insolvency for volatility (catalysts)
Catastrophe is not a source of insolvency in Canada (fortuitous)
Monitoring and Supervision
Financial ratios generally begin to fluctuate up to two years prior to involuntary exit
and winding-up (note: because financial risk ratios also fluctuate for companies that do
not become insolvent, supervisors need the capacity to properly identify and monitor
solvency risk)
No single indicator in itself, is a reliable predictor of insolvency
Start-up companies are at greater risk of insolvency
Supervisors need to have a good understanding of reinsurance arrangements
Companies writing in new lines of business, outside of their area of expertise, are at
greater risk
Public data availability increases market discipline and helps identify areas of
potential concern, placing pressure on companies to address problems earlier
Appendix A - Methodology
Risk map approach
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
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percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Facility Association
Goal
Ensure that automobile insurance is available for every owner and licensed driver of
motor vehicles who require it to legally operate their vehicles
Created in 1977
Non-profit
Created by industry
Role
Administer the involuntary residual market of automobile insurance on behalf of the
voluntary/private sector automobile insurance industry across Canada
Membership mandatory
Organization
Facility Association
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Residual Market
Risk Sharing Pools
Uninsured Automobile Funds
Quebec (GAA -> PRR)
Facility Association Residual Market (FARM)
Personal and commercial auto
Subject to rates, rules and classification of the Facility Association
Insured knows he is insured with FARM
Requires
1) motor vehicle that is not a Private Passenger Vehicle
2) Private Passenger Vehicle with refused by insurer
Results pooled, cost distributed to all companies based on participation ratios
Risk Sharing Pools
Allow insurer to transfer certain of their personal automobile insurance exposures to an
industry-wide pool (reinsurance mechanisms)
Invisible to consumer
Results pooled, cost distributed to all companies based on participation ratios
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The Uninsured Automobile Funds
Compensation for damages to persons who cannot obtain satisfaction for their damages
Facility Association monitor investigation, defense and final settlement of these claims
Board of Directors and membership rights
Elected
Insurers/Brokers
Responsibilities
Considering and approving suggested rate changes and rate filings
Authorizing expenses
Establishing and maintaining standards to be followed by Servicing Carriers and members
using a risk sharing pool
Appointing committees and sub-committees to assist them with specific issues
Total volume of automobile third party liability direct written premiums for the latest
CY determines the number of vote
Participation Ratios and Sharing
Five class of business that determine participation
1) Private passenger non-fleet non-pool auto
2) All auto not in 1) and not transferred to risk sharing pool
3) Risk sharing pool not in AB,NB,NS
4) Risk sharing pool in AB,NB,NS
5) Uninsured, unidentified motorist claims etc.. due from a specified insolvent insurer
Profit/loss determined separately for each AY in each jurisdiction
Risk Sharing Pools
Designed to promote stability in the market place by making it possible for companies to
accept risk for which they believe that their prices are not totally adequate
A company who does not use the pool will still be allowed his share of results
Five requirement that a risk must meet to be eligible for transfer
1) Private passenger auto
2) Residual market risk should go to FARM
3) Carry minimum TPL statutory limit at least
4) Follow classification/rating/documentation
5) Premiums charged is approved premiums for such a risk
Premium ceded net of service charges
Expense allowance returned to company for acquisition (not tax and professional fees)
Ontario Risk Sharing Pool
1993
85%, 15% retention to insurer
5% max transfer exposures
Alberta Risk Sharing Pool
Grid Pool and Non Grid Pool
2004
No limit to grid pool exposure transfered (take all comers for which no control over $)
4% for non-grid
NB RSP
First Chance
2005
Recently licensed drivers in household
8% max transfer
NS RSP
Inexperienced Driver with good record (less than 6 years exp)
2007
No limit
Conclusion
Done
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Chapter 3 - Government Pension Programs
Canadian three tiers retirement income system
-Government-administered pension programs
-Employer-sponsored plans
-Individual retirement savings
Government administered plans
-Old Age Security (OAS)
-Income-tested Guaranteed Income Supplement (GIS)
-Allowance benefits and the Canada/Quebec Pension Plan (CPP/QPP)
OAS is paid out from tax revenues
CPP/QPP funded from contributions of participants/employers
Introduction
OAS
Monthly pension
65+ meeting residency requirements
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Clawback tax introduced in 1989
GIS
Income-tested benefit
Monthly benefit over OAS
Reduced by 1 dollar for every 2 dollars of any other income received
CPP/QPP
Introduced in 1966
Earning-related plans
Retirement income, disability, death and survivor benefits
Replace 25% of income up to maximum
Aging population
Contribution rate increased
Basic exemption is now frozen at 3500
Increased averaging period for calculating average pensionable earnings from 3 to 5
1988 - Canada Pension Plan Investment Board
2000 - Bill C-23 (2002 Bill 84 in Quebec) - Same sex partner benefits
2007 - Bill C-36 Full funding, costs not passed on to future generations
Old Age Security
Combination of three programs
OAS - monthly benefits, 65+, residency requirements, subject to clawback tax
GIS - monthly benefits, income test, residence requirements
Allowance and Survivor's Allowance - monthly benefits, 60 to 64, residence/income tests
The Old Age Security Act
January 1, 1952
Universal pensions
From 70
Changes to provide GIS in 1967
Reduced to 65
Since 1972, indexed to CPI
Payment in the first month after application approval
Retroactive payments up to 12 months
Qualifications for OAS Benefits
Proof of age
Residencial qualification
Full pension
40 years in Canada after 18
Proportionate pension
10 to 40 years of residence after 18
Reside in Canada at 65
10 years required
Do not reside in Canada at 65
20 years required
Reciprocal social security agreement with Canada
Portability of OAS Benefit
Reciprocal agreements
6 months if no agreements and can resume after return to Canada (not affected if 20 y)
Universality
Until 1988 was universal
Clawback tax introduced fully by 1991
Financing
Pay-as-you-go from GOC tax revenues
~2.5% of GDP
Taxation
OAS is taxable as regular income
Clawback tax on OAS and GIS, 15% surtax for income over X
Effective july 1996, OAS paid on a net basis
Non-residents subject to the clawback based on their world-wide- income
Guaranteed Income Supplement
Available to all OAS recipients
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Reduced by 1 for any 2 of other monthly income over OAS
GIS benefits indexed quarterly with CPI
Not taxable income
Allowance and Survivor's Allowance
Between 60 and 64
Income / Residence test
Reduction
3 for every 4 of couple's income other than OAS, until = OAS pension
1 for every 4 of income
Cease in case of separation, remarriage, death
Maximum Monthly Pensions Under the Old Age Security Act
Tables with numbers
Provincial Supplements
Alberta - Alberta Seniors Benefit
British Columbia - Seniors Supplement
Manitoba - 55 PLUS program
New Brunswick - NB Low-Income Seniors' Benefit
Newfoundland and Labrador - Low-Income Seniors' Benefit
Northwest Territories - Seniors' Home Heating Subsidy and Supplementary Benefit
Nunavut - Same
Ontario - Guaranteed Annual Income System (GAINS)
Yukon - Yukon Income Supplement
Canada and Quebec Pension Plans
Partially replace employment income in case of retirement, death or disability
Came into effect in January 1, 1966
QPP applies to Canadian who work in Quebec regardless of where they live
RCMP and Forces belong to CPP
Compulsory employed and self-employed
Exceptions : casual and migratory workers, exchange teaching, employees of prov gov
Supported by contributions from employers/employees + investment earnings
Indexed annually to CPI
Replace 25%
Administered by National Revenue and Revenue for collection and HR and Social
Development and Quebec Pension Board for benefits
Contributions
Paid on earnings between YBE and YMPE, 50/50 employer/employee, 100 self-employed
YBE frozen since 1996, YMPE indexed annually
Contribution required from 18 to the date of death or 70
Qualifying Conditions
Retirement Pension
65 normal, at least worked 1 year and reached 60
Phased Retirement and the QPP
reduced salary, still pay contribution as if receiving full salary
Disability Benefits
Pension for the disabled and dependant children
Survivor's Benefits
CPP
No child
35 or more
With child or disabled
No age requirements
QPP
No age requirements but amount varies if child/disabled/age
Contribution paid during 1/3 of contributory period (no less than 3 years) or at least
10 years
Orphan's Benefit
Paid to each dependant children of a deceased Contributor (same contribution
requirements as above)
Death Benefits
Lump-sum
Same provisions as Survivor's Benefits
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Max 2500$
Determination and Payment of Benefits
Retirement Pension
Plan allows for certain periods to be dropped
While receiving CPP disability benefits
While caring for children under the age of seven
Up to 15% of contributor's months of lowest earnings prior to 65
Months included in a period of indemnity (QPP)
Periods after age 65 while contributing to CPP
Adjustment made using YMPE last 5 years average from the year which the pension
commences and the YMPE in the year in question
Apply adjustments to each months in the non drop-out period
Amount of a retirement pension is 25% of average monthly pensionable earnings
Pension index tied to CPI
Disability Benefits
Flat-rate pension plus additional pension for any eligible dependent children
75% of pension
Survivor Pension
Spouse or common-law partner and children pension
Pension to Eligible Spouse/Survivor
CPP under 65
flat-rate + 37.5% of pension
...
Pension to Dependent Children
Flat-rate
Stop at 18
CPP only
Payable if school between 18 and 25
Double pension for orphan
Lump-Sum Death Benefits
6 times pension max 2500, 2500 QPP
Benefit Amounts
Table with numbers
General Provisions
Indexing of Benefits
YMPE indexed to CPI
Income Tax
Taxable income to the beneficiary
Fully tax deductible by employers
Credit Splitting
Divised equally when marriage or common-law relationship ends even if one didn't pay
Assignment
In proportion to the period of cohabitation between two spouses or common-law partners
Reciprocal Agreements with Other Countries
Both Quebec and Federal governments
Integration with CPP/QPP Benefits
GIS reduced by pension paid by CPP/QPP (1 for 2)
Direct integration (x% minus CPP/QPP)
Indirect integration (x-y% below YMPE and x% above) - most popular
Same kind of integration for contribution
Benefits/Contributions in addition to CPP/QPP -> Stacked benefits
Funding and Future Contributions
Sustainability is a concern
Established as pay-as-you-go, reserved for 2-3 years payout
Needed more contributions
Due to
Maturation of the plans
Higher than expected disability payments
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Aging population
Slower than expected economic growth
Changes
Higher contributions
New investment policy
Creation of the Canada Pension Plan Investment Board
Manage CPP funds
Maximise returns (can invest in something else than government bonds)
Chapter 14 - Provincial Hospital and Medical Insurance Plans
Executive summary
Government involvement in health care
Legislation
Health care is of provincial jurisdiction
April 1, 1984 - Canada Health Act
Power to impose financial penalties on provinces that do not allow reasonable access
to essential health services
In 1990s, cuts from federal transfer
Provinces scaled down programs, shifted costs to employers/individuals
Programs scaled down are those that will not compromise federal funding
Canada Health Act Criteria for Federal funding
1. Public administration (non-profit)
2. Comprehensiveness (services listed)
3. Universality (all eligible residents covered)
4. Portability (one province to another, temporarily outside province)
5. Accesibility (uniform terms and conditions)
Scope of Coverage
Hospital Services
Ward level services plus
Nursing care in hospital
Drugs and antibiotics in hospital
Operating room and anesthetic facilities
Laboratory and diagnostic services in hospital
Radiotherapy and physiotherapy in hospital
Out-patient services for emergencies
Physician services
Do not cover elective services
No more hospital user fees after Canada Health Act (unless chronic care)
Medical Services
Physicians cannot charge patient above provincial rates
Quebec, physician either participating or not in provincial system
Supplementary Benefits
Dental care for children
Annual eye examinations
Prescription drugs for 65+ or social assistance
Drugs coverage (reducing costs)
Adding fees
Co-payments
Deductibles
Quebec has a universal drug plan with RAMQ
Out-of-Province Benefits
All provinces except Quebec have a reciprocal arrangement
Costs covered outside Canada up to what would be paid in Canada
Wait times
Chaoulli decision -> If wait time is too long, you can go private and it will be paid
Financing
Federal
Block transfers -> Difficult to determine how the money is being spent
Finances Armed Forces, RCMP, Native Canadians
Provincial
BC and Ont require direct cost sharing
Albertan pay premiums (until 2008)
Other provinces levy a payroll tax on employers
Additional funding from taxation of group insurance plans
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Taxation
No deduction
Taxable income if paid by employer
Tax-credit for medical expenses of more than 3% net income
Employer contribution to private plan no taxable income in Quebec
Chapter 15 - Workers' Compensation
Executive Summary
No fault insurance
Financed by contribution from employers
Include medical expenses, wage replacement benefits, rehabilitation, survivor benefits
Background
Industrialization
Replaces right of legal action against employer
Eligibility
Mandatory for most industries
Assessment Basis
Paid by employers
Either
Individual liability
Government
Public agencies
Crown corporations
Public transportation
Self-insured
Pay-as-you-go basis
Collective liability
Divided into industry classes/rate groups
% of payroll
Cover cost of
current/future benefits
expenses/obligations
funding requirement
Accountability
Experience rating programs in 10 of 13 jurisdictions
Two types*
Prospective (rate based on past experience)
Retrospective (rate adjusted after experience year)
*Quebec allows employers to create mutual groups
Benefits
Health Care
Short-Term Disability
Until return to previous occupation at full capacity
Long-Term Disability
Partial or total
Dual award system
Monthly benefit until 65
Lump-sum payment for non-economic impacts
Rehabilitation
Conselling
Job search assistance
Ergonomic modifications
Tuition
Homemaker assistance and on-the-job training
Survivor Benefits
Lump-sum for burial/transportation of body
Child allowance
Taxation
Employer contribution is tax-deductible expense
Employer contribution is not taxable benefit for employee
Payments to injured employees are not subject to tax
Chapter 16 - Employment insurance
Executive summary
Income replacement due to
Work shortages
Sickness
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Non-occupational accidents
Maternity leave
Parental leave
Adroption leave
Quebec has its own Parental Insurance Plan
History
1940 - Unemployment Insurance Act amendment to BNA Act
Federal jurisdiction
Governing Legislation
1996 - Replaced by Employment Insurance Act
Administered by HR and Social Development Canada with help from EI Commission
2008 - Creation of Canada EI Financing Board
Regular Benefits
Loss of work, through no fault of the claimant
If voluntary leave that prevent someone from losing job, benefits paid
Under work force reduction plan
Qualifying Period
Shorter of
52-week period before claim
Period since previous claim
Only insurable hours within period are used
Hours deductible depends on regional unemployment rate
Duration of Benefits
Max 45 weeks
Special Benefits
Other than loss of work
Maternity Benefits
Max 15 weeks
Required 600 hours in past 52 weeks
Parental Benefits
Max 35 weeks
yada yada 600 hours
Sickness Benefits
Max 15 weeks
Compassionate Care Benefits
Max 6 weeks
Waiting Period
2 weeks
Benefit Amount
55% average insured weekly earnings up to max
Based on 26 weeks insured earnings
Divide by greater of
Number of week worked
Divisor number depending on unemployment rate in region
Family Supplement
Additional benefits to low-income families
Working While Receiving EI Benefits
up to 50$ per week or 25% of paid benefit, whichever is higher
Contributions
Split employer/employee, employer pays 1.4 times the employee's rate
EI Premium Reduction Program
Employer plan first payer, EI second payer of disability benefits
EI premium reduced
Supplemental Plans
From employer, not deducted from EI if less than 100% earnings
Income Tax on Employment Insurance
Employer premiums is a tax deductible expense, not taxable income for employee
Premiums paid by employee give rise to tax credit, 15% federal
EI benefits are taxable benefits
Clawback measure
first-time exempted
special benefits exempted
over X, 30% of over X or total benefits paid (lesser of both)
Québec Parental Insurance Plan (QIP)
Independant
Two options
Basic Plan
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Alternative Plan
Financed by employees, employers and self-employed workers
Chapter 17 - Extended Health and Dental Care Plans
Executive Summary
Second payor of social plans
Attributes
Employee
+Dependants
Active, full-time
Dependants
Spouses, children
Deductible
per year per person
flat per year or flat per claim
varies according to coverage
Coinsurance
Provision paid by claimant (i.e. 80%/20%)
Cost Sharing
Payroll deduction
Deductible or coinsurance
Extended Health Care Plans
For services not covered by provincial plan
Second payer to the provincial medical programs
Plan segmentation
Drugs
Hospital
Medical services and supplies
Emergency out-of-province
Vision care
Prescription Drugs
"prescription drugs", insulin
Pressure on plan costs
New expensive drugs - early release from hospital
75% of EHC costs are drug related
Electronic transmission of claims
Cost increase but also more cost control opportunities
Reimbursement
Pay and submit
Pay-direct
Deferred payment (mix)
Mandatory Prescription Drug Coverage in Quebec
Provincial plan (RAMQ) required if not covered under any other plan
Private plan must at least equal public plan in terms of coverage
Hospital
Designed to cover the additional cost of semi-private or private hospital accommodation
Claimant assigns payment to the hospital and the hospital submits the claim
Hospital audits
Average length of stay decreased
Per diem rates increased
Overall cost increase
Medical Services and Supplies
Private duty nursing
Ambulance services
Paramedical practitioners
Prosthetic appliances and durable medical equipment
Accidental dental
Max per services per year / lifetime
Emergency Out-of-Province
Limited public coverage, enhanced by EHC
Vision Care
Provincial
Basic examinations and testing
Children and Old people
Hardware (glasses, contact lenses) max per period
Preferred providers to reduce costs
Managing Rising Extended Health Care Costs
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Costs increase well over CPI
Main cost drivers
Changing demographics
Government cost-shifting
Prescription drug costs - primary factor
Increasing Deductibles and Coinsurance
cover more catastrophic events
Modification to Drug Program
Generic Substitution
Limits drugs available under plan
Lowest Cost Alternatives
Limits reimbursement available under plan
Therapeutic Substitutions
within same therapeutic classification
Lifestyle Drugs
limits : smoking, sexual, fertility, anti-obesity, contraceptives
Drug Utilization Review
conducted to manage costs
Managed Care Formularies
Specific list of drugs covered
Regular review
Three-Tier Co-Payments
Employee choose between
Generic 100%
Brand name without generic 80%
Brand name with generic - equivalent to cost of generic
Health Care Spending Accounts
Fixed dollar amount
Allows more choice to the employees without requiring a major overhaul of the plan
Utilizes defined contribution concept versus the defined benefit approach
Concept is easier to administer than a complete flexible benefit plan
Better communication of the value of benefits as part of employees' total compensation
Coordination of Benefits
Spouses/Dependants
Eliminate overpayments
Maximize reimbursement
Positive Dependant Enrolment
Apply information at point-of-sale
Dental Plans (excluded from EHC)
No public programs
Largest component of an employer's total employee benefit costs
Annual fee guide to provide guidance
Categories of Dental Services
Basic services
diagnostic, preventive, restorative
Supplementary basic services
endodontics, periodontics, surgical procedures, relining, rebasing
Major services
crowns, prosthodontics
Orthodontics
Pre-Determination of Benefits
dentists can file statement for review
Alternate Benefit Clause
limit payment to the least costly alternative
Assignment of Benefits
Claimant only pay any portion not paid by plan at dentist
Electronic Data Interchange (EDI)
Main mode
Cost Management
Costs increases
Strategies "tweaking"
Decreasing coinsurance and benefits maximums, increasing deductibles
Reduce frequency of recall examination
Short-term solutions
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Income Tax on Health Plans
If plan is contributory
Premiums paid by the employee are not directly deductible from income for tax purposes
may be included in the calculation of medical expenses credit
Employer contributions can be charged as operating expense
Employer contributions not added to employee except in Quebec (can include in tax credit)
CRA permits a private health services plan to provide benefits for same-sex couple
Medical expenses tax-credit
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Guide to Compensation Plan for Property and Casualty Insurers - PACICC
Plan in effect country-wide wince 1989
1. The Plan
Designed to provide a reasonable level of recovery
Excluded insurance
Life, aircraft, credit, crop, D&O, E&O, fidelity, financial guarantee, marine
mortgage, surety and tile
Auto in Manitoba and Saskatchewan, BI in Quebec
Now assume liability for unearned premiums
Limited to 70% of maximum UP of 1000$ (700$)
2. Initiation of the Plan
non-profit
all provinces have legislation in place to insure P&C insurers participate in the plan
company cannot withdraw from plan while licensed
PACICC may not terminate its membership
deemed terminated 6 months after cancellation of its licence by jurisdiction
3. Operation of PACICC
Administered by a board elected by members (insurers)
Obligations of PACICC come into operation only upon formal winding-up order under the
the federal Winding-up and Restructuring Act.
4. Procedure in an insolvency
immediatly after winding-up order -> PACICC consult with court appointed liquidator
accounting firm that has been the auditor of the insolvent insurer is excluded
require minimal staff
pretty flexible
5. Payment of Claims
Max recovery is 250000$ (300000$ for personal property) per policy per occurence
First calculate entitlement of insured
Second determine lesser amount between PACICC max and entitlement
It is not designed to provide full protection in all cases
6. Other Arrangements as to Plan Payments
Stretch out the time over which claims will be met
7. Recovery by PACICC of Amounts Paid
any amounts paid by PACICC are recovered by PACICC before any additional payment is
received by the policyholder as to that claim (so effectively PACICC supersede insured
rights to recover over PACICC compensation unless PACICC has recovered the amount it
paid out)
PACICC is also entitled to first priority against amounts received by the insured from
third parties with respect to the loss for which PACICC provided payment
8. Assessment Process
levied against particular participating insurers licenced in participating jurisdictions
limited to the shortfall what PACICC advanced and what it recovered
special levy for quick response -> Compensation Fund 30 millions now 43 in 2009
assessment is calculted as
A = B x C / D
A:Assessment for insurer
B:Total amount assessed
C:Direct written premiums in jurisdiction by insurer
D:Total direct written premiums in jurisdiction
Relies on P&C1
Maximum annual levy is 1.5% of C
May also borrow money from Compensation Fund, repaid with interests
Levy administrative expenses
Make sure levy doesn't endanger insurer solvency, might delay payments
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9. Conclusion
It has been proved that the plan arrangements can operate effectively and efficiently in
the context of the established degree of co-operation amoung Superintendents of Insurance
, liquidators and the insurance industry in insolvencies
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Section B : Government and Industry Insurance Programs
Learning objective 1 : Describe the origin and purpose of specific government and
insurance industry programs. (Range of weight: 5-10 percent)
Knowledge statements
a. Reason for inception
b. Major historical developments
c. Philosophy of program
Learning objective 2 : Describe the operations and risk transfer process for each
government and insurance industry program listed in the introduction to Section B and
their interactions with the volountary private insurance sector. (Range of weight : 5-10
percent)
Knowledge statements
a. Funding mechanisms and sources of funding
b. Allocation/assignment of exposures and associated costs
c. Automobile residual market participation ratios
d. Eligibility provisions
e. Claim settlement and insurance coverage provisions
f. Welfare (subsidization) versus insurance principles
g. Private response to gap in government program
h. Government response to gap in private program
Learning objective 3 : Evaluate the effectiveness of a government and insurance industry
program (actual, as listed in the introduction to Section B, or hypothetical). (Range of
weight : 5-10 percent)
Knowledege statements
a. How to measure performance of programs:
-Solvency
-Efficiencies
-Stability
-Viability and long term prospects
b. How well program meets its purpose
c. Effect of external factors (e.g., economic conditions, weather, regulation, etc)
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Making Flood Insurable for Canadian Homeowners - Swiss Re
Executive Summary
Canadian can't purchase insurance for overland flood damages
Governments created financial assistance programs
Advantages over government programs
Risk based premiums and deductibles can provide incentives to encourage actions to
reduce flood risk
Faster recovery
Any proposal would need to be applied at the provincial level
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Adverse-selection is a barrier to the implementation of flood insurance
Overcome bundling with other perils
Government policies still best for risk located in areas of very high risk
Major finding
The approach best suited for Canada could be based on the approach that has been in
place in the UK. Flood insurance in Canada should cover all causes of flooding to avoid
ambiguity when flood claims and payouts are made by insureds and insurers.
Will need risk based premiums/deductibles
Small cross-subsidization may be required for economic viability
Flood insurance must not incentivize building in flood prone areas
Require a partnership between insurance industry, governments and private homeowners
Governments should increase flood risk assessment and reduce flood risk
Reduce development in flood prone area
Public relief programs should not conflict with flood insurance
3 Overview of Flood Management in Canada
Historical reliance on structural flood measures
dams, dykes, levees...
Main instruments at national level
Disaster Financial Assistance Arrangements (DFAA)
Joint Emergency Preparedness Program (JEPP)
Flood Damage Reduction Program (FDRP)
1953 - Canada Water Conservation Act
Repealed
1970 - Canada Water Act
Currently in place
Allowed for implementation of FDRP and JEPP
1970 - DFAA
In place, revised in 2008 with 15% for mitigation
disaster assistance for provinces, damages exceeding 1 CAD per capita
Expenditures per capita
Fed Share Prov Share
0 - 1
0%
100%
1 - 3
50%
50%
3 - 5
75%
25%
5 +
90%
10%
1975 - FDRP
discourage development in areas vulnerable to floods (first mapping)
not renewed, federal involvement wound-down
resource sharing, hazard maps
during reviews, in 1992-93, it was found that FDRP was very effective in steering
development from flood risk areas
1980 - JEPP
In place
Emergency planning
Assist municipalities
2008 - National Disaster Mitigation Strategy (NDMS)
fill-gap from FDRP
supports all-hazard mitigation at local, provincial level
Facing increasing costs, needed new program, DFAA was not enough alone
5 Current Flood Damage Remittance Measures for Homeowners in Canada
5.1 Government Relief
Only for uninsurable damages
Limited coverage (capped payouts, deductibles, restriction of coverage,...)
Only available to homeowners, small businesses, farms and municipal governments
Applied when widespread damages
5.2 Homeowner Insurance Coverage for Flooding
No coverage for overland flooding or groundwater
Sewer backup coverage available as an endorsement
IBC model wordings (Quebec and ROC)
5.3 Commercial Insurance Coverage for Flooding
Might be available for commercial risks as an endorsement
Bought mostly by large commercial companies
High risk customers are not offered coverage
6 Overview of International Approaches to Flood Insurance
Four categories
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Public and bundled (Spain and France)
Public and optional (US)
Private and bundled (UK and Switzerland)
Private and optional (Germany)
6.1 What is required for insurance to be in place?
Necessary conditions for a Peril to be Insured
Mutuality - large number to form risk community
Challenge for flood insurance - limited population exposed
Most important reason why this type of insurance is unavailable in some contries
Resolved with bundling
Adverse selection
Need - for insurance cover
Assessability - quantifiable risks
Might need models
Randomness - of events
Random for large events, not so random for frequent flood
Economic viability - able to turn a profit, affordable premiums
Challenge for flood insurance
Extremely large loss events
Reinsurance can play a role
Adverse selection
Similarity of threat - similar damages / risk exposure
Water damages everyone
6.1.1 Optional vs Bundled Flood Insurance Coverage
Optional - endorsement / additional premium
Problem
Adverse selection
Reduce economic viability / mutuality
Very expensive premiums
Low market penetration
Bundled - bundled with other perils
Advantages
Spread out flood risk over time, across perils and across rating areas
High market penetration
Can be made equitable by charging adequate premium reflecting risk
Might require some cross-subsidization
Every homeowners might benefit (rainfall)
6.2 US : National Flood Insurance Program (Public and Optional)
NFIP - Cooperative effort between private and public sectors
1968 into law
Three key objectives
Identification of flood hazard areas and flood risk
Mitigation of flood risk through local management of floodplain development
Spread of risk through insurance
Federal government sets premium rates, maps, construction standards
State governments oversee regulations for development in floodplain
Private insurers sell the policies but do not hold the risk
NFIP is not able to handle large loss - rates are not actuarially sound
Not able to build reserves
6.3 France (Public and Bundled)
1982 - Catastrophe Nationale
Private insurance with government backstop (Caisse Central de Reassurance -> CCR)
No risk differentiation in insurance rates, and the premium rate for natural disaster
coverage is set by the government and is consistent throughout France
Extra charge on existing premiums to finance Cat. Nat.
Heavy subsidization
Large stress on CCR
6.4 Germany (Private and Optional)
Since 1991
+ EQ and other large perils
20% market penetration for supplemental hazard (90% for standard insurance)
6.5 UK (Private and Bundled)
Part of standard or general home insurance policies
Reinsured on international market
Differentiated pricing
Government responsibilities
Maps
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Flood defense
Effective land use
6.5.1 Association of British Insurers (ABI) Statement of Principles
Where coverage is offered (1 in 75 years flood) is defined
6.6 Conclusion
Canadian model should map UK implementation
Specific reasons include
Bundled approach to flood insurance, reduce adverse selection
Exclude very high risk
Risk based premiums
Partnership between governments, insurers, individuals
Defined responsibilities
Involvement of individuals (deductible, mitigation)
It is a private insurance program supported by government flood risk reduction actions
7 Flood Insurance for Canada
Private insurance can be more effective and equitable than government programs
7.1 Government Relief vs Insurance
Government Relief
Reinforce vulnerabilities
Provides little incentive for those who receive it to reduce risky behaviour
Individual bears no direct costs for remittances
Highly politicized and inefficient
7.2 Policy Holders Expect to be Insured for Flood
70% think they are
7.3 Insurance Coverage is a Business Opportunity for Insurers
Increase customer satisfaction and confidence in the industry
Remove ambiguity in the coverage
Growth in a mature market
8 A Proposed Solution for Flood Insurance in Canada
8.1 Types of Flood to be Covered
All types
8.2 Moral Hazard and Risk Based Pricing
8.2.1 Moral Hazard
Reduced with risk based pricing
8.2.2 Risk Based Pricing
Necessary for
Economic viability
A little cross-subsidization required
+risk based deductibles to lower premiums
8.3 Coverage should be Extended to as Many Low Risk Customers as Possible
Bundling
Ensure
Mutuality
Economic viability
8.4 Eligible Homeowners
Exclude high risk properties
1. It could serve as a disincentive for development/location in high flood risk areas
2. It could reduce the burden on the insurance community after a large flood event
3. It could help to ensure that insurance coverage for low risk property affordable
8.5 A Partnership Approach
Between industry, governments and homeowners
8.5.1 The Role of the Insurance Industry
Provide insurance (pricing, deductible)
Communicate with clients (mitigation, aware of coverage)
Monitor risks
8.5.2 The Role of the Governments
Flood hazard identification
Reduce flood risk
Increase public awareness
Ensure public disaster relief programs do not conflict with the flood insurance program
8.5.2.1 Flood Insurance Rates Should Not Be Regulated
Nuff said
8.5.3 The Role of Homeowners
implement appropriate flood damage mitigation measures
8.6 First Steps for Implementation
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Dialogue
IBC
Support existing efforts, not replace current land use planning
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Understanding BCAR For P&C Insurers - A.M. Best
BCAR gives an opinion on insurer financial strengh and ability to meet obligations
Structural Overview : BCAR
BCAR = Adjusted Surplus / Net Required Capital
Adjusted Surplus Components
Reported Surplus
Equity Adjustments
Unearned Premiums
Assets
Loss Reserves
Reinsurance
Debt Adjustments
Surplus Notes
Debt Service Requirements
Other Adjustments
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Potential Catastrophe Losses
Future Operating Losses
Net Required Capital (NRC) Components
(B1) Fixed-Income Securities
(B2) Equity Securities
(B3) Interest Rate
(B4) Credit
(B5) Loss and Loss-Adjustment-Expense Reserves
(B6) Net Written Premium
(B7) Off Balance Sheet
Covariance (Removed from sum)
NRC = sqrt[ B1² + B2² + B3² + ( 0.5 * B4 )² + ( 0.5 x B4 + B5 )² + B6² ] + B7
BCAR includes stress-testing scenarios like
Above-normal catastrophes
Decline in equity markets
Rise in interest rates
Overview of BCAR
Total investment risk (B1-B2-B3) applies capital charges based on risk of default,
illiquidity and market-value declines. Higher charges are ascribed to investment
holdings, real estate, junk bonds and nonaffiliated common stocks.
Credit risk category (B4) applies charges to different receivable balances. Charges might
be modified to take into account any collateral offsets, quality of reinsurers and
dependance on reinsurance program. Also include charges for agent balances.
Underwriting risk (largest risk category, almost 2/3) include B5 and B6. Might include
an additional charge for "excessive" growth or credit for well-diversified mix of
business.
Business risk component (B7) generate minimal required capital (~1%).
Since it is unlikely for all components to develop adversly at the sime, a covariance
component is used to adjust NRC (deduct covariance component).
Model can be adjusted to take into account
Rate changes
Underwriting cycle
Changing reinsurance product
Dependence on reinsurance
Interpretive Guidance
Basis of risk measurement is expected policyholder deficit.
Expected Policyholder Deficit
Calibrate to specific level of insolvency risk (probability + severity of ruin)
Expected Policyholder Deficit = Expected Deficit / Expected Loss Amount
The larger the EPD, the lower the BCAR
Integration of BCAR In The Rating Process
Unique considerations
Operating performance
Business profile
Treatment of Key Risk Components
Investment Risk (B1/B2)
Nonaffiliated Bonds : No risk charges for US government bonds.
Common Stocks : Assumes 15% reduction in the market value.
Preferred Stocks : Nonaffiliated preferred stock portfolio treated like bonds.
Real Estate and Other Investments : 10% risk charges for occupied property
20% risk charges for investment property
20% baseline factor to Schedule BA assets
( Other long-term invested assets )
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Cash : 0.3% risk charge
Investment in P&C Insurers : 100% risk charges for those not consolidated (sister
companies, international operations, run-offs)
For equity investments, might be reduced if assets can
be transferred on a short notice
Investment in Life/Health : Required capital of a domestic affiliate is charged to the
Insurers
parent. Excess of subsidiary's adjusted surplus over
required capital accrue to parent.
Special Purpose : The required capital to support underlying assets and liabilities
Subsidiaries
of affiliate is charged to parent (i.e. affiliate holds real estate,
there would be a 20% risk charges to the parent)
Investment in Non-insurance : Less risk charges if public since more liquid asset.
Affiliates
If large portion is owned, might be less liquid since
requires approval for selling.
Charge is full statutory carrying value (100% capital)
Assets are not available to support P&C operations.
Intercompany Loans : Credit given to borrower directly removed from lender's surplus
Derivative Asset : 100% risk charge to the asset value reported in NAIC statement
Securities Lending Reinvested Collateral : 10% risk charge
Catastrophe-Exposed Investments : 100% risk charge
Asset Concentration Adjustment : Double asset risk charge for single, investment
holdings greater than 10% or surplus.
Doubled risk charge rate apply to amount above 10%
of surplus while the regular baseline rate apply to
amount within 10% of surplus.
Spread of Risk Factor : Relating to diversification, size factor, as much as 50%
Adjustment
High Investment Leverage : If common stocks investment are more than 50% or 100% surplus
than the baseline risk charge is increased from 15% to 20%
or 30%, respectively.
Interest Rate Risk (B3)
High level of exposure to short-term cash needs are most exposed to interest rate risk.
120 basis points stress test.
Use of gross PML to liquid assets percentage.
Minimum 10%.
Assets sales should be distributed evenly across portfolio of liquid assets so only this<
percentage is applied to the gross depreciation to derive the capital charge.
B3 Risk Charge = min ( 10% , PML / Liquid assets ) x market value depreciation*
*(using 120 basis point)
Credit Risk (B4)
Affiliated Reinsurance : Baseline charge of 10%
Nonaffiliated Reinsurance : Base 10%, as low as 2% for A++ rated and as high as 100% for
suspect reinsurers.
Reinsurance Dependence : additional increases the overall credit risk charge for
recoverable balances.
Use of recoverable-to-surplus test.
Credit Enhancements to : Increased credit or dispute risk exposure. If an unaffiliated
Reinsurance Recoverables third party is involved to insure collectibility of
File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt
recoverables, might reduce risk charge.
Pools and Associations : 10% Baseline to balances. 0% for risk-free servicing carrier.
Agents' Balances and : 5% Baseline for agents' balances in course of collection.
Other Receivables
10% for accrued retrospective balances
5% baseline for other receivables
Loss and Loss-Adjustment Expense Reserve Risk (B5)
Reserve Equity : On a line-by-line basis, carried loss reserves adjusted to discounted
Adjustments
ultimate reserves using two modification factors, reserve deficiency
factor and discount factor. 5% discount rate.
Reserve Capitale : Based on risk inherent in each line of business, scaled by the size
Factors
of the company and volatility of case-incurred loss development.
Retroactive Reinsurance : Remove time-value of money gain.
Growth Charge : for "excessive" growth. Use growth factor based on exposure as it is
a better proxy for growth since it excludes rate changes.
Diversification Credit : final required capital charge multiplied by a factor of
( 0.70 + 0.30 x % reserves in the largest line of business )
Credit capped at
5% / 0-10 millions
10% / 10-20 millions
15% / 20-50 millions
Net Premiums Written Risk (B6)
Company premium capital factors per line of business, profitability, size of the company
= Baseline Capital Factor x Company Size Factor x Company Profit Factor
Once it's summed over all line of business, apply Growth and Diversifaction factors to
the total
Growth Charge : Same as reserves
Diversification Credit : final required capital charge multiplied by a factor of
( 0.70 + 0.30 x % premiums in the largest line of business )
Credit capped at
5% / 0-10 millions
10% / 10-20 millions
15% / 20-50 millions
Business Risk (B7)
1% capital charge to several off-balance sheet items
Adjusted Surplus (APHS)
Unearned Premium Equity : Increases reported surplus to include an estimated asset for
deferred acquisition costs similar to that reflected in GAAP.
Can compare growing company with mature company.
If combine ratio is over 100%, no equity in UE premiums.
Loss Reserve Equity : Difference between AM Best ultimate reserves and carried reserves
Fixed-Income Assets :
Debt and Surplus Notes :
Occurence of a Catastrophe : Instantaneous impact
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Terrorism : Terrorism charge
Stress Test Adjustments : Reduce surplus
Two-Company illustration (A and B)
Conclusion
It's only a tool.
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Draft: Understanding BCAR for Canadian Property/Casualty Insurers
Balance sheet strength
Foundation of policyholder security
Measures the exposure of a company's surplus to its operating and financial practices
Underwriting leverage
Generated from
Current premiums writtings
Reinsurance recoverables
Loss reserves
Financial leverage
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Created through debt or debt-like instruments
Asset leverage
Measures the exposure of a company's surplus to investment, interest rate and credit
risks
BCAR establishes a guideline for risk-adjusted capital to support a rating
Overview of BCAR
In contrast of MCT, a significant portion of capital is required to support future
premium risk
Investment Risk
Fixed-income securities
Equities
Interest rate
Credit Risk
Receivable balances
Underwriting Risk
Loss and loss-adjustment expense reserves
Net premiums written
Business risk component (B7)
Basically, it contains the same thing as the US paper, more summarized.
The lower the BCAR value, worst.
BCAR lower because
Higher capital requirements associated with higher underwriting leverage
Greater indicated reserve deficiencies
Unstable or unprofitable business
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
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d.
e.
f.
g.
h.
U.S. SAP
Difference between U.S. GAAP and SAP
IFRS
Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
A.M. Best rating system and BCAR
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Catastrophe Analysis In A.M. Best Ratings
Catastrophes are primary treat to insurer financial strength
Significant, rapid, unexpected impact
Subsequent event
Insured values increase
Catastrophe Risk Management: Models and More
Variability in model output
Quality of data
Assumptions
Keys to Strong Catastrophe Risk Management
Data Quality
Monitoring Exposure
Controls
If a company only use lowest-case loss estimates, it will be penalized in its rating
Ability to avoid a material loss to capital and respond to any significant capital
deterioration will impact rating.
Catastrophe Risk : Treatment in BCAR
Model options selected to produce PML for BCAR
Demand surge
Storm surge
Fire following earthquakes
Secondary uncertainty
near-term event
Source of catastrophe risk required for BCAR
Property structure and content
Additional expenses
Business interruption
Flood
Auto/Motor physical damage
Workers' comp
Energy
Ocean and inland marine
Crop
Natural Catastrophe Stress Test
After event still exposed to catastrophes
Stress Test Methodology
1) Afer-tax net PML is removed from surplus
(including retention, co-participation and reinstatement premiums)
2) Reinsurance recoverables increased by 40% of the difference between gross and net
pretax loss and LAE (retention and co-participation) of the first event
3) 40% of the difference between gross and net pretax loss and LAE
(retention and co-participation) of first event is added to existing
reserves
4) After-tax net PML for additional event is deducted from risk adjusted surplus.
5) PML for second event is the same as the first if storm or 1-in-100 for EQ
Capital Adequacy Levels
Stress-tested BCAR can fall to a maximum of 30 points below guidelines
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Conclusion
Tailored BCAR for each entity's financial condition after a catastrophe
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
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Study Note on the Actuarial Evaluation of Premium Liabilities
I. Introduction
Opinion on adequacy of the policy liabilities
No papers on the subject
Provide framework for the evaluation of the premium liabilities
II. Definition
Premium liabilities
cost of running off the unexpired portion of contracts
CIA
Premium liabilities represent all the anticipated net costs to discharge the insurance
company's obligations with respect to its insurance policies and reinsurance contracts
except its claim liabilities.
Composed of
Unearned Premiums
Premium Deficiency
Deferred Policy Acquisition Expenses (DPAE)
Provision for Retro-Rated Policies
Earned But Not Recorded Premiums (EBNR)
Audit Premiums
Premium Development on Reinsurance Assumed
Ceded Reinsurance Retro-Rated Contracts (Swing Rated, Sliding Scale)
Provision for Contingent Commissions
Unearned Reinsurance Commissions
In practice, grouped
Future claims and adjustment expenses on inforce policies
Administrative costs of servicing the inforce policies (maintenance costs)
Anticipated premium adjustments
Anticipated reinsurance expense (or commission) adjustments
Largest component of premium liabilites
Future claims and adjustments expenses or if large quota share -> unearned reins. comm.
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Provision for premium liabilities is not shown explicitly on the balance sheet
Premium liabilities are the net total of UE premium, DPAE, and other related assets
and liabilities on the balance sheet
Equity in the UE premiums (EQUP) is defined as the expected profits on the unexpired
policies
III. Deferred Policy Acquisition Expenses (DPAE or DPAC)
UE premium provides for liabilities for future event.
If not enough UE premium to cover future event, premium deficiency exists.
DPAE is an asset which amortizes the prepaid expenses over the policy period, provided
there is enough equity in the UE premiums.
In practice DPAE is approximated
The actuary's role is to determine if the equity in the UE premium is sufficient to cover
the calculated DPAE.
DPAE cannot exceed EQUP.
IV. Other Components
Those which relate to commission adjustments
Contingent commissions (agreement over multiple years) - Liability
Unearned commission on the ceded premiums (large quota share treaties) - Liability
Those which relate to premium adjustments
provision for Retro-Rated Policies - Asset or Liability
earned but not recorded premiums (EBNR), usually small, arise from reinsurance assumed
business - Liability
audit premium - Liability
premium development on reinsurance assumed - Asset
retro-rated reinsurance ceded - Asset or Liability
V. CIA Recommendations and Regulatory Requirements
A. DPAE Asset
Alberta is different
B. Investment Income
recognition of the time value of money by CIA, not OSFI
C. Other Liabilities Versus Premium Liabilities
OSFI different than CIA
D. All Lines Combined Versus By Line Equity
For regulatory - all lines combined
Long-tail line penalized by By Line approach
E. Subsequent Events
Each event has to be analyzed separately
First step is to classify
Does it provide information about the entity as it was?
Does it retroactively make the entity different?
Does it make the entity different after the calculation date?
One criteria remains, the potential size of the claims resulting from the event must
exceed the materiality level.
"A difference is material if it is significant to the user of the financial statement"
VI. An Illustrative Example
Revisit example, most questions will probably be computational
Premium deficiency must be booked if the DPAE is reduced to zero and the EQUP
remains negative.
This section will most likely be referenced when doing actual computation
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
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of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
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Canadian Concil of Insurance Regulators - Annual Statement Instructions P&C-1 2012
Section I - Introduction
Designed to monitor the financial condition and operating results
Incorporation (federal or provincial) + obtain licence in province/territory
Accounting Principles - Annual and Interim Returns
AcSB adopted IFRS as CGAAP for PAEs (P&C are PAEs)
Consolidated Financial Statements
Require consolidated reporting except for life company subsidiaries (equity method)
Statutory Authority
Jurisdiction has own statutes
Guidelines and Bulletins
Listed in Section V
Foreign Branches (P&C-2)
Separate set of instructions
Language Preference
Both languages
Section III - Definitions
Acquisition Expenses
Include commissions, taxes, operating expenses to acquire new or renewal business
Ancillary Operations
Any function that provide support to the insurance or investment operations
Associate
Subsidiaries of the same parent/control group or one exerts significant influence over
the other.
Claims ratio
claims incurred (+ adjustment expenses) / net premiums earned
Claims ratio - By Year of Accident
using accident year data
Claims ratio - By Year of Account
using calendar year data
Contingent Commission
commission not exclusively attributable to premium volume (non-deferrable)
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Control
power to govern the financial and operating policies
Counselling Fees
Fees paid for investment advice
Deferred Commissions
commission on direct and assumed premiums for period beyond current year end
must not be reduced by ue commissions arising from ceded business
by class of insurance
Experience Rating Refunds
retrospective rating refund (favourable underwriting results)
Financing Reinsurance
primary purpose of reinsurance agreement is not transfer of insurance risk
IBNR (Incurred But Not Reported)
Additional claim reserves
IFRS
International Financial Reporting Standards (as per Part I of CICA Handbook)
In Arrears (Receivables)
balances not settled in accordance with terms of contract
for premiums receivable from agents or policyholders, 60 days after due
Insurer
insurer, reinsurer, mutual, captive, reciprocals, in Quebec certain professional corp
Investment Grade
Refer to 30.71
Investment Properties
land/building other than for use in insurance operations
Joint Venture
two or more parties undertake an economic activity together subject to joint control
Mid Terminal Reserves
policy reserves required to cover Accident and Sickness insurance policy benefits
Net Retention
Insurers
maximum amount of net insurance coverage retained in reporting period (net of reins)
Reinsurers
maximum amount of coverage accepted in reporting period
Policy Limit
Insurers
insurance coverage maximum per risk
Reinsurers
n/a
Policy Dividends
amounts paid to participating policyholders
Premium Deficiency
exist when UE premiums not sufficient to cover future expected liabilities from the same
risk that generated the UE premiums
Rating Refunds
Experience Rating Refunds
Registered and Unregistered Insurer
relevant in determining whether credit can be taken for reinsurance placed
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Federally Regulated Insurers only
Registered Reinsurer
(a) federally regulated domestic
(b) foreign company that has reinsured in Canada
(c) provincially regulated insurer that is not an unregistered reinsurer
(d) ICBC (BC)
(e) MPIC (Manitoba)
(f) Export Development Canada
Unregistered Reinsurer
(a) incorporated outside Canada, reinsure outside Canada
(b) not authorized by Superintendent (registered federal/outside Canada)
(c) not approved by Superintendent (registered provincially)
A company is given credit for unregistered reinsurance where assets of unregistered
reinsurer are located in Canada and subject to claim under a valid interest
Provincially Incorporated Insurers
Registered insurers
licensed in that jurisdiction, certain will accept if licensed in other jurisdiction
Unregistered insurers
not licensed and not federally registered
ICBC
licensed or registered in Canada
Insurers in Quebec only
approved in Quebec or another province, or subject to federal regulation
Registered reinsurer
assumed by an insurer constituted in Quebec, another province, or in Canada and
licensed. For foreign, branch maintains assets which guarantee the fulfillment of its
obligations.
Regulator
Agency responsible for control and regulation of insurance industry in jurisdiction
"Primary Regulator" is regulator in jurisdiction under which insurer
(a) obtained its order to carry on business
(b) was incorporated
Retrospective Rating Credits
Experience Rating Refunds
Salvage and Subrogation Recoverable
Salvage - residual value of property after paid claim
Subrogation - assumption by insurer of insured's legal right to collect damages
Structure Settlements
Refer to Section IV
Subsidiary
Entity controlled by another entity (parent)
Substantial Investment
For federally registered insurers
more than 10% voting rights
more than 25% ownership
To increase position, must control entity (more than 50% voting rights) except as
permitted under subsection 495(5) of ICA.
Unearned Commissions
Commission revenue on ceded premiums related to period beyond the current year end
must not be reduced by deferred commissions arising from direct and assumed business
by class of insurance
Unrecognized (Assets and Liabilities)
off-balance sheet
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Unregistered Insurer (Company)
Refer to Registered Insurer
Unregistered Reinsurer
Refer to Registered and Unregistered Insurers
Section IV - Special Topics
Facility, Facility Association, Risk Sharing Pool and PRR
Premiums, commissions and losses transferred treated as negative direct business
If not accepted (premiums/commissions) by Facility or PRR at closing date, direct
Premiums, commissions and losses shared (industry) treated as direct business
Adjustments
(i)
Provision for UE premiums at year-end for PRR transferred/accepted as at nov 30
(ii) Provision for loss incurred in the last month of statement year for PRR policies
(iii) Receivable from PRR for losses paid on policies transferred to PRR
(iv) Facility, estimate of premiums written, losses paid after closing date of
Facility.
Page 60.30
Letters of Credit/Deposits of Reinsurers
Letters of Credit
Recognition to reduce capital otherwise required if held in Canada
Deposits of Reinsurers
Also used to reduce capital otherwise required if materially reinsurer credit risk
Records in Canada
Complete and accurate
Located in Canadian HQ office
General accounting books
General Ledger
Cash receipts and disbursements books
General Journal
Subsidiary Ledgers such as :
Agents' balances or premiums receivable
Reinsurance Register (when applicable)
Securities Ledger
Make sure enough assets available in Canada for foreign reinsurers
Credit still given if transaction reported in Canadian return
(a letter from the Canadian chief agent to the effect)
Computer generated information problems
(i)
premium written by provincial location of property
(ii) losses paid and unpaid by provincial location
(iii) losses by year-of-loss to provide a means to check reserve adequacy
(iv) premiums in-force by term and date of expiry to check unearned premiums
Computer information must produce audit trail
Self-Insured Retention
Portion of loss payable by the policyholder
When insurer has to pay entire claim to third party, SIR page 20.20 line 28 as
Provisions and Other liabilities with equivalent amount recoverable reported as an
Other recoverable on page 20.10 line 37
Any SIR included on line 28 must be reported on page 50.50, line 50
For Statutory test, must be collectible
Regulator may require collateral (letters of credit) subject to 0.5% capital charge
Capital requirement must be reported on page 30.70 line 28
Appropriate reserves for SIR account
Structured Settlements
Third party make regular payments to a claimant of a P&C insurer
Usually annuity (tax free payment for claimant)
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Type 1
a) annuity, insurer is owner, all payments to claimant, irrevocable
b) no benefit possible for insurer
c) insurer is released by claimant
d) insurer still liable if annuity provider fails to make payments
Insurer is only exposed to credit risk from annuity provider
Type 2
a) annuity, commutable, assignable, transferable
b) legal release from claimant not obtained
Annuity becomes a financial asset - at cost
Financial liability on balance sheet (claimant) - as other claim liabilities
For both type, insurer should disclose in the notes the terms and conditions, credit
risk and fair value of the annuities
Section V - Jurisdictional Requirements
Newfoundland & Labrador
Prince Edward Island
Nova Scotia
New Brunswick
Quebec
Ontario
Manitoba
Saskatchewan
Alberta
British Columbia
Yukon
Northwest Territories
Nunavut
Federal
MCT ratio at least 150% on a post-dividends declared basis
Section VI - Detailed Instructions
Page 10.40 - Other Information
Consolidated
Change of more than 10% voting rights or control change
Page 10.41 - Other Information (Continued)
Consolidated
Highest policy limit
Catastrophe program in place for the upcoming year
Page 10.42 - Other Information (Continued)
Pledged assets affects the realization of assets for the benefit of policyholders
Page 10.60 - Summary of Selected Financial Data for Five Years
No requirement to restate preceding years
Adjusted Equity (line 4) = Equity (20.20 line 49)
- Non-controlling interests (20.20 line 48) under IFRS
- Capital required for
(a) Catastrophes (30.70 line 24) and
(b) Reinsurance Ceded to Unregistered Insurer (30.70 line 26)
Claims Ratio by Year of Accident
Incurred claims (minus Investment Income from UCAE and IBNR)
File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt
Net earned premiums are used
Expenses Ratio (from page 20.30 divided by net earned premiums)
+ Gross Commissions
- Ceded Commissions
+ Taxes
+ Other Acquisition Expenses
+ General Expenses
Net Investment Income from Insurance Operations
Lesser of
Net Investment Income from Insurance Operations (Page 20.30 line 39)
or
[(
+ Avg net unpaid claims and adjustment expenses
+ Avg net unearned premiums
+ Avg unearned commissions
+ Avg premium deficiency
- Avg deferred policy acquisition expenses
- Avg receivables from agents and brokers, policyholders and instalment premiums
)
x Investment Yield (line 46)
Net Investment Income - other
Total Net Investment Income (Page 20.30 line 39) minus Net Investment Income from
Insurance Operations (previous)
Investment Yield
2 x Investment income (Page 20.30 line 39) x 100
/
(
+ Cash, Investment income due and accrued, total investments at year start
+ Cash, Investment income due and accrued, total investments at year end 20.10 1,2,19
- Investment income (20.30 39)
)
Return on Equity
2 x Net income after tax (20.30 89) x 100
/
(
+ Equity at year start
+ Equity at year end 20.20 line 49
Agents and Brokers balances and amounts due from Subsidiaries and Associates
Claims Development as a Percentage of Adjusted Equity
Page 20.10 - Assets
Cash and Cash Equivalents
Investments: -Short Term Investments
Mature in one year or less
Investments: -Bonds and Dedentures
Investments: -Mortgage Loans
Investments: -Preferred Shares
Investments: -Common Shares
Investments: -Investment Properties
Investments: -Other Loans and Invested Assets
Broker loans included here
Receivables
Net of allowance for doubtful accounts
Reveivables: - Instalment Premiums
Payable over several periods in accordance to term not payment method
Recoverables from Reinsurers: -Unearned Premiums
Reinsurer's portion of unearned premiums
Recoverables from Reinsurers: -Unpaid Claims and Adjustment Expenses
Discounted basis if required
Salvage and Subrogation due to reinsurers reduce recoverables from reinsurers
Other Recoverables on Unpaid Claims
Salvage and Subrogation (gross) if material and only if specific contractual third
party obligations
Also Self-Insured Retention recoverable
Property and Equipment
Own Use
Deferred Policy Acquisition Expenses
Not here if non-cancellable accident and sickness policies
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Other Assets
Not reported above
Page 20.20 - Liabilities and Equity
Unpaid Claims and Adjustment Expenses
gross, discounted if required
Provisions and Other Liabilities
Shares issued and paid
preferred shares treated as equity
Page 20.30 - Statement of Income
Service Charges
to policyholders
Other net premiums earned
policyholders dividends and experience rating refunds
Net Claims and Adjustment Expenses
Amound paid to government for health care cost recovery reported as claims
Taxes
Regulatory assessments are not taxes, they are General Expenses
Premium Deficiency Adjustments
Adjustment to premium deficiency liability (increase is an expense), decrease in ()
Share of Net Income (Loss) of Subsidiaries, Associates and Joint Ventures
Pro rata using equity method
Gains (Losses) from Fluctuations in Foreign Exchange Rates
Other Revenues
Interest on financing activities
Mutual insurer - refunds to members
Investment income from PRR, Facility
Page 20.40 - Statement of Retained Earnings
Line 4
Transitional adjustments
Reserves
Insurers issuing nuclear risk, additional provision of 100% net premiums written,
less commissions. Reversable after 20 years.
Page 20.42 - Comprehensive Income (Loss) and Accumulated Other Comprehensive Income/Loss
General instructions - All amounts reported on an after tax basis
Comprehensive Income/Loss : Share of Other Comprehensive Income of Subsidiaries,
Associates & Joint Ventures
Equity method
Accumulated Other Comprehensive Income/Loss : Share of Other Comprehensive Income of
Subsidiaries, Associates & Joint Ventures
Page 20.52 - Statement of Cash Flows
Included via pdf in excel
Page 20.54 - Statement of Changes in Equity
IFRS, IAS-1, Presentation considerations
Page 20.70 - Auditor Reports
Cover page 20.10 to 20.60 + MCT
Page 20.80 - Appointed Actuary's Report
Page 30.70 and 30.71 - Minimum Capital Test (MCT)
MCT Guideline
Page 30.70 - Minimum Capital Test
MCT must be calculated on a consolidated basis
Capital Available: Total Equity less Accumulated Other Comprehensive Income
Add : Subordinated Indebtedness and Redeemable Preferred Shares
Add : Accumulated Other Comprehensive Income (Loss) on Available for Sale Equity
Securities
Add : Accumulated Other Comprehensive Income (Loss) on Available for Sale Debt
Securities
Add : Accumulated Other Comprehensive (Loss) on Foreign Currency (Net of Hedging
Activities)
Add : Share of Other Comprehensive Income of Non-Qualifying Subsidiaries, Associates &
Joint Ventures
Add : Revaluation Losses in Excess of Gains on Own Use Properties (IFRS)
Less : Accumulated net After-Tax Fair Value Gains (Losses) arising from changes in the
company's Own Credit Risk
Less : Unrealized Fair Value Gains (Losses) from Own Use Properties at IFRS Conversion
can only be change by sale of Own Use Properties
Less : Shadow Accounting Impact (IFRS)
Less : Assets with a Capital Requirement of 100%
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Add/Less : IFRS Conversion Phase in
Minimum Capital Required
Balance Sheet Assets
Unearned Premiums/Unpaid Claims/Premium Deficiencies
Catastrophes
Reinsurance Ceded to Unregistered Insurers
Structured Settlements, Letters of Credit, Derivatives and Other Exposures
Minimum Gross Capital Level
Page 30.71 - Capital Required for Balance Sheet Assets
Investments: Term Deposits, Bonds and Debentures; Commercial Paper; and Preferred Shares
Loans (at amortized cost)
Adjustment to reflect difference between amortized cost and Balance Sheet value of
Loans
Investment Properties
Interests in Subsidiaries, Associates & Joint Ventures
Equity method (more than 10% voting rights)
Other Investments
Derivatives, recognized letters of credit and guarantees
Other non-financial investments including, but not limited to, precious metals, coins
and art
Equity investments in joint ventures where ownership is less than or equal to 10%
Receivables
Agents, Brokers, Policyholders, Associates, Joint Ventures, Non-qualifying Subsidiaries
and Other Receivables: Instalment Premiums (not yet due)
Recoverables from Reinsurers - Unregistered
Own Use Properties (valued using cost model)
Adjustment to reflect difference between cost model and Balance Sheet value Own use
Properties
Deferred Policy Acquisition Expenses : Commissions
Greater of
Commissions less unearned commissions
35% of commissions
0
Other Assets - Other Assets (net of Goodwill, Other Intangible Assets and Computer
Software), including Equipment
35% of the lesser of
Other Assets (net of Goodwill, Other Intangible Assets and Computer Software),
including Equipment
1% Total Assets
Any excess over 1% of Total Assets is Assets with a Capital Requirement of 100%
Total
Page 30.73 - Capital Required for Balance Sheet Assets based on External Credit Ratings
Page 40.07 to 40.80 - Investment Exhibits (General Comments)
Subsidiaries, Associates & Joint Ventures
Reported on page 50.40
Foreign Currency
Canadian dollars, exchange rate in effect at the reporting date
Page 40.07 - Summary of Investments
Held for Trading
Available for Sale
Including items measured at Amortized Cost
Hedges
For cash flow hedge, report item in column Amortized Cost
FV Option/Investment Properties Fair Value
Held for Trading (Fair Value option)
Amortized Cost
Held to Maturity and Cash Flow Hedges
For Investment Properties
IFRS Guidance - If using cost method, use Balance Sheet Column
Realized Gains (Losses)
Pre-tax
Income excluding FV Option (of Held for Trading)
Pre-tax income
Unrealized Gain/Loss From FV Option
Pre-tax from FV Option (of Held for Trading)
Aggregate Holdings
Short Term Investments, Bonds and Debentures
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Mature in one year or less
Mortgage Loans
Net of loan impairment
Preferred Shares
Treated as debt
Investment Properties
Other Loans and Invested Assets
Total Investments
Out of Canada
Basically anything physically out of Canada or where a third party is out of Canada
Foreign Pay Securities
Individual Holdings
Largest and 2nd Largest Exposure to an Entitity or Connected Group
Not government grade investment
Largest and 2nd Largest Exposure to a Pooled Holding
Securitized Assets (mutual funds, segregated funds, MBS securities)
Pages 60.10 to 60.30 - Premiums and Claims
Auto private passenger is not to include the Facility Association Residual Market
Page 60.10
Out of Canada Liabilities
include portion of unearned premiums
Page 60.20
Number of Policies in Force
Number of policies where coverage is provided by Class
Number of Direct Claims
Occured and reported + occured previous year and reported this year
Unearned Premiums from a Portfolio Transfer
Net Premiums Earned
Page 60.21 - Claims Incurred - Undiscounted
(before taking into account time value of money or actuarial margins)
Page 60.21 - Discounted Amounts and Foreign Exchange
Page 60.21 - Gains & Losses on Investments
Page 60.30 - Claims and Adjustment Expenses - Paid, Current Year and Unpaid, Current and
Prior Year
Classes of insurance must not be grouped
Amounts include both internal and external claims adjustment expenses
Based on historical experience and other factors
Provision must be included for IBNR
Out of Canada Liabilities
include out of Canada portion of unpaid claims and adjustment expenses
Column 5 and 6
Must include gross amount of salvage and subrogation estimated to be recoverable from
third parties
Actuarially determined Salvage and Subrogation should be netted against gross unpaid
claims and IBNR
Reinsurance ceded
Salvage and Subrogation - summary
See VI-49 for example
Net provision at prior year end
Net amount paid during the year for claims of prior years
Investment Income on Unpaid Claims of Prior Years
+ Avg for the year net unpaid claims and adjustment expenses for prior years*
x Investment Yield
*(Net provision at prior year end + Net provision for claim prior years) / 2
If (A+B+C+D-E-F) > Average Total Investments
where
A = Avg net unpaid claims and adjustment expenses for the year
B = Avg net unearned premiums for the year
C = Avg unearned commissions for the year
D = Avg premium deficiency for the year
E = Avg deferred policy acquisition expenses for the year
F = Avg reveivables from agents and brokers, policyholders and instalments premiums
for the year
then, Investment Yield should first be multiplied by
Average Total Investments
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/
(A+B+C+D-E-F)
Net Provision at period end for claims of prior years
Margin or (Deficiency)
Page 60.40 - Net Claims and Adjustment Expenses-Run-off (undiscounted basis)
Not required for Quebec incorporated that transact only in Quebec
Page 60.41 - Net Claims and Adjustment Expenses-Run-Off - Discounted
Same thing, discounted
Investment Income from Unpaid Claims & Adjustment Expenses (including IBNR)
Avg net unpaid claims and adjustment expenses (including IBNR)
x
Investment Yield selected for particular calendar year
Page 60.50 - Direct Adjustment Expenses
Internal Adjustment Expenses
Direct paid
External Adjustment Expenses
Allocated to a claim file
Unpaid Adjustment Expenses
Page 67.10 to 67.31 - Provincial and Territorial Exhibits
Page 67.10 - Provincial and Territorial Exhibit of Premiums Written
Licensed (Y/N)
Dividends - Direct
Direct incurred basis
Page 70.10 - Premiums and Claims - Reinsurance Ceded
Page 70.21 - Summary of Reinsurance
Page 70.38 - Reinsurance Ceded to Unregistered Insurers
10% Margin on unearned premiums and outstanding losses recoverables
Payable to assuming insurer
Non-owned deposits held as security from assuming insurer
For federally regulated insurers
For provincially incorporated insurers where Reinsurance Security Agreement (RSA)
regime does not apply
Letters of credit (LOCs) held as security from assuming insurer
Subject to capital charge
Page 80.10 - Commissions
Non-deferrable commissions are those that are not recoverable
Page 80.20 - Expenses - Insurance Operations
Internal Adjustment Expenses
Page 92.10 to 95.20 - Non-consolidated Financial Statements and Schedules
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
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Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Educational Note : Implications of CICA Accounting Standards 3855 and 1530
Memorandum
New standards to address when an entity would recognize a financial instrument on its
balance sheet and how the financial instrument would be measured once recognized.
Insurance contracts are not directly impacted.
However, the use of a portfolio-based discount rate in the determination of the actuarial
present value of the policy liabilities results in an indirect impact.
In current form, Capital Tests would mainly be affected by
Adjustment for excess of market value over current book value (only 50% pre-CICA 3855)
Capital required for assets
Capital required for unearned premiums and unpaid claims
Given inherent variability of the market yields, Capital Tests volatility will increase
Introduction
Focus
Measure financial instrument
How the associate changes are recognized in financial statements
Management may seek actuarial's advice on categorizing assets
Implications mainly for Canadian because of the discounting of policy liabilities
"The expected investment return rate for calculation of the present value of cash flow is
that to be earned on the assets which support the policy liabilities"
A change in measurement of assets affect measure of investment return rate and hence, has
an impact on the net present value calculation of policy liabilities.
CIA "The book value of an asset may be the market value, the amortized value, or such
other value consistent with Canadian generally accepted accounting principles"
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Background
Section 3855 - Financial Instruments - Recognition and Measurement
This section describes when to recognize a financial instrument on the balance sheet and
at what amount and specifies how to present related gains and losses.
Section 1530 - Comprehensive Income
This section specifies the new requirements for temporary presentation of certain gains
and losses outside of net income.
Financial Instrument - "a contract that creates a financial asset for one party and a
financial liability or equity for the other party" Financial means "contract will settle
for cash (or an equity instrument if it is an asset) either directly or indirectly"
Insurance contracts are currently excluded from new CICA
Implications for P&C Actuaries
Actuarial Considerations for Asset Classification
Further examples assume investment in debt securities only
Total impact will depend on
Mix of invested assets
Level of duration matching between invested assets and policy liabilities
Relative quantum of each
Held-to-maturity Investments
Amortized cost basis ("effective interest method")
Except case of impairment, net income net affected
Important consideration
Consequence for tainting the held-to-maturity asset category by selling to much
All held-to-maturity assets must be reclassified as available-for sale for 2 years min
Could results in a discontinuity in investment income
Reduce flexibility in managing portfolio for rebalancing or strategic benefit
Make sure you have enough cash so you don't have to liquidate held-to-maturity
Examples
Market Rates Increase / Decrease
Held-to-Maturity debt securities
Assets
Liabilities
Total
___________________________________________________________________________________
Invested Assets Values
No effect
Discount Rate for Actuarial Liabilities
No effect
Actuarial Liabilities
No effect
___________________________________________________________________________________
Net Income
No effect
No effect
No effect
Other Comprehensive Income
No effect
No effect
No effect
___________________________________________________________________________________
Equity
No effect
No effect
No effect
Available-for-sale
Carried on balance sheet at fair value
Regular investment income from these assets (dividends, coupons) as well as change in
the amortized cost and realized gains and losses are booked to net income.
Change in the difference between the fair value and the amortized cost will be reported
as other comprehensive income (this can be thought of as booking changes in unrealized
gains/losses to other comprehensive income) Segregate volatility outside net income
More volatility
Increases/Decreases in policy liabilities flow through net income
Examples
Market Rates Increase
Available-for-sale debt securities
Assets
Liabilities
Total
___________________________________________________________________________________
Invested Assets Values
Down
Discount Rate for Actuarial Liabilities
Up
Actuarial Liabilities
Down
___________________________________________________________________________________
Net Income
No effect
Up
Up
Other Comprehensive Income
Down
No effect
Down
___________________________________________________________________________________
Equity
Down
Up
Depends
Market Rates Decrease
Available-for-sale debt securities
Assets
Liabilities
Total
___________________________________________________________________________________
Invested Assets Values
Up
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Discount Rate for Actuarial Liabilities
Down
Actuarial Liabilities
Up
___________________________________________________________________________________
Net Income
No effect
Down
Down
Other Comprehensive Income
Up
No effect
Up
___________________________________________________________________________________
Equity
Up
Down
Depends
Held-for-trading including Fair Value Option
Marked to fair value, gains and losses recognized immediately in net income
Greater volatility
Examples
Market Rates Increase
Held-for-trading debt securities
Assets
Liabilities
Total
___________________________________________________________________________________
Invested Assets Values
Down
Discount Rate for Actuarial Liabilities
Up
Actuarial Liabilities
Down
___________________________________________________________________________________
Net Income
Down
Up
Depends
Other Comprehensive Income
No effect
No effect
No effect
___________________________________________________________________________________
Equity
Down
Up
Depends
Market Rates Decrease
Held-for-trading debt securities
Assets
Liabilities
Total
___________________________________________________________________________________
Invested Assets Values
Up
Discount Rate for Actuarial Liabilities
Down
Actuarial Liabilities
Up
___________________________________________________________________________________
Net Income
Up
Down
Depends
Other Comprehensive Income
No effect
No effect
No effect
___________________________________________________________________________________
Equity
Up
Down
Depends
Asset Liability Mismatch
Asset classification may also create an income statement mismatch
Valuation of Policy Liabilities
Selection of Discount Rate
Use of portfolio yield (IRR) to discount liabilities
IRR produces the book value at a future date when applied to cash flows of assets
MfAD (margin), PfAD (provision) would likely increase due to volatility
Volatility Considerations
More margins
Future Income Tax
Tax timing differences
Other Issues
If discount rate decrease, check DPAC since premium liability would be increased
Dynamic Capital Adequacy Testing (DCAT)
Adjust models
Detailed Discussion of CICA 3855 and 1530
Changes apply to all entities (public, private, and government)
General Description
CICA 3855, Financial Instruments - Recognition and Measurement
When, What, How
What amount
Historical cost
Current cost (reproduction cost and replacement cost)
Net realizable value
Value in use
Fair value (most relevant
Deprival value
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Fair value reflects market risk preferences and amount-timing-uncertaingty expectations
Fair value when active market exists
IFRS four level measurement hierarchy
Estimates of fair value
Level 1 - Market prices
Level 2 - Valuation models/techniques with market inputs
Substitutes for fair value
Level 3 - current cost with possibility of substituting historical cost
Level 4 - Valuation models/techniques with entity inputs
CICA 1530, Comprehensive Income
Other comprehensive income - temporary presentation outside of net income
Comprehensive income = net income and other comprehensive income
Application of Sections CICA 3855 and 1530
Rarely possible to reclassify instruments
For the purposes of recognizing gains and losses, a financial instrument is derecognized
when it is removed from the balance sheet
Categories of Financial Instruments
Loans-and-Receivables
Non-derivative
Other than debt securities and held-for-trading/available-for-sale
Recognized in net income when derecognized, impairment, forex
Held-to-maturity
Non-derivative
Fixed or determinable payments and maturity
Other than held-for-trading/available-for-sale/loans/receivables
Ability to hold to maturity
If significant sales, reclassify all as available-for-sale 2 years min
Available-for-sale
Non-derivative
All other
Gains and losses unrealized goes to other comprehensive income
Segregation of income
Held-for-trading
Near term
Derivative except effective hedging instrument
Fair value have to be reliably measurable
The only type that use other comprehensive income is Available-for-sale
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
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(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Standards of Practice - General Standards CIA/CICA Joint Policy Statement 1620-1630
1620 - Auditor's Consideration of An Actuary's Work
Cooperate
1630 - CIA/CICA Joint Policy Statement
Purpose and Application
Discuss communications between actuaries and auditor involved in financial statements
How they are to interact
How responsibilities disclosed to readers of said financial statements
Applies when amount in financial statements determined with an actuary
Not applicable to auditor's actuary or external review actuary
Responsibilities with respect to financial statements
Management is responsible for financial statements
Auditor responsible to express opinion on fairness of statements
Considering the responding professional's work
Establish understanding of the work to be carried out considering
a) appointment to do the work
b) followed standards of his profession
c) appropriateness of findings and opinion
Communication between the two professionals
Timely basis
Seek right to communicate with each other
Disclose any relevant information to the other professional
Enquiring professional would
a) inform of intended consideration
b) request confirmation of engagement
c) request credentials
d) request confirmation that work will be carried out following professional standards
e) make aware of needs
i)
materiality level
ii) subsequent events
iii) timing
iv) any questions
Responding professional would provide written response that would
a) Confirm availability
b) Confirm engagement
c) Confirm credentials
d) Confirm qualifications
e) Confirm he is following professional standards
f) Confirm awareness
g) Discuss timing problems
The responding professional's findings
Written response after completion would
a) Identify purpose of work
b) Identify financial statements to which it relates
c) Identify relationship with entity
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d) Confirm awareness of consideration in this Statement
e) Include copy of report when appropriate
Disclosure of Respective Responsibilities to the Readers of Financial Statements
If required, add to financial statements
Standards of Practice - Practice-Specific Standards for Insurers Section 2200-2500
2200 - Valuation of Policy Liabilities : P&C Insurance
Claim liabilities
Present value at balance sheet date incurred before that date
Consists of
Case estimates
Provision for reported claims
Provision for IBNR
Need not be calculated separately (some method only calculate combined amounts)
Actuary consider several methods
Actuary consider circumstances in selecting assumptions
Internal Changes
U/W practice
Claim handling (case estimate practice)
Reinsurance
Data processing
Accounting
External Changes
Judicial, regulatory, and legislative environment
Residual insurers, like Facility
Premium Liabilities
Present value at balance sheet date incurred after that date
Present Values
Discount using rate earned on assets supporting policy liabilities
It also depends on yield on assets acquired after the balance sheet date
Margin for Adverse Deviations
For an assumption within range low to high for assumption
High margin if unstable dering experience period or otherwise undermine confidence
Selected margin should vary between premium and claim liabilities, LOB, AY, PY
Assumptions subject to margin
Claims development
Recovery from reinsurance ceded
Investment return rates
Actuary would not usually include margin for other assumptions
Exception
Salvage and Subrogation : presented as an asset separate from claim liabilities
Amounts of high and low margins
Claims developement
% of claim liabilities exclusing provision for adverse deviations
Low - 2.5% | High - 15% (20% according to CIA Discount)
Recovery from reinsurance ceded
% of amount deducted on account of reinsurance ceded without PfAD
Low - 0.0% | High - 15%
Investment return rates
Deduction from expected return rate per year
Low - 50 basis points (25 according to CIA Discount) | High - 200 basis points
Above high appropriate for unusually high uncertainty (transition to new insurance cov)
Considerations
Generate lack of confidence result of instability
Select and evaluate for each assumptions
Insurer practices (guidelines for case estimates)
Data, stability of frequency and severity
Reinsurance, coverage disputes
Investments, matching of assets and liabilities
External environment, regulatory change
2400 - The appointed actuary
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Scope
Do not apply to non appointed actuary unless he has access to information and protection
the same has an appointed actuary
Information needed
Records, accounts, documents, oral briefings
Report on matters requiring rectification
Threaten insurer's financial condition
Investigate and report to senior management
Send copy of report to directors
Specify deadline for rectification
If no action by deadline, report to insurer's regulator
Quaterly review woudl be minimum
Report to the directors
Investigate and report yearly financial position and financial condition, and
Allocation of income to policyholder dividend
Communication with the auditor
desirable when rectification or unfavourable report
2500 - Dynamic Capital Adequacy Testing
DCAT Report
Annual
Various scenarios
Method
Recent and current financial position
at least three years
Dynamic capital adequacy testing
Purpose is to identify plausible threat to capital, actions which lessen likelihood
and actions that mitigate
Defensive
Satisfactory financial condition
Able to meet all future obligations under all plausible adverse scenarios
Meets MCT requirement under base scenario
Forecast period
Begins at most recent fiscal year-end balance sheet date
2 years typical for P&C
Scenarios
Base
+Plausible adverse
Inforce policies + policies assumed to be sold
Base Scenario
Realistic set of assumptions
Consistent with business plan
Plausible adverse scenarios
Scenario testing to determine sensitivity
Minimum of three plausible adverse scenarios
P&C
Frequency/Severity
Pricing
Misestimation of policy liabilities
Inflation
Interest rate
Premium volume
Expense
Reinsurance
Deterioration of asset values (C-1 risk)
Government and political action
Off balance sheet
May be useful to stress test capital adequacy of insurer to determine if material risk
Integrated scenarios
Combine
Ripple effects
Include both regulatory action and policyholder action
Also include expected response to adversity
Effectiveness of information systems
Promptness and willingness to make difficult decisions
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External environment
Scope of the investigation and report
contains key assumptions
identify actions
Revaluation of the policy liabilities
end of forecast period may be a suitable compromise
Interim investigation
Material adverse change (change in business plan, failure to meet MCT)
Reporting
Discuss with management before directors
Opinion
Signed by actuary
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
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g. Regulatory requirements
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Disclosure Requirement IFRS 4 - Insurance Contracts for P&C Insurers
Memorandum
Guidance on disclosures for IFRS 4
Introduction
Two primary implications
Classification of insurance contracts
Enhanced disclosures in financial statements
Specific objectives of this paper
Identify the disclosures
Analyse the considerations of the disclosures requirements
Provide guidance
Disclosure Requirements
Disclose accounting policies
Contract classification
Insurance
Financial
Disclose breakdown of policy liabilities
Disclose process used to determine assumptions
Methods used to compute actuarial projection
Disclose the effect of changes in assumptions
Identification of change
Rationale for change
Effect of change
Observed trends
Disclose reconciliations of changes in insurance liabilities, reinsurance assets, DPAC
Movement in claim liabilities from prior year-end
Gross-Ceded-Net basis
Disclose risk management objectives, policies, processes
Disclose sensitivity
Disclose concentrations on insurance risk
Disclose actual claims compared to previous estimates
Disclose credit/liquidity/market risk
Appendix
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
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g.
h.
i.
j.
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MCT
MSA ratios
A.M. Best rating system and BCAR
Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Discounting - P&C Insurance Financial Reporting
Memorandum
Provide explicit guidance for two areas
Selection of a discount rate for the estimation of ceded liabilities
Discounting of future costs associated with premium liabilities
Introduction
Common practice
Evaluate policy liabilities on an undiscounted basis
Consider time value of money
Add a provision for adverse deviations (PfAD)
PV - present value
APV - present value with PfAD
Discounting three fundamental elements
selection of payment patterns
selection of discount rates
application of margins for adverse deviations
Applies to gross-ceded-net
Net = Gross - Ceded
Two estimed directly, other one computed, to select the two consider
Data availability
Cashflow volatility
Reinsurance program
Discount rate (is it different for each item?)
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Terminology
MfAD - margin in assumptions
PfAD - margin in results, resulting from the application of MfAD
Payment pattern
Cash Flow Associated with Claim Liabilities
First step is to estimate present value of payments
Payment pattern for gross-ceded-net should be same in reinsurance is quota-share
Can be derived directly from development factors if using paid development approach
Cash Flow Associated with Premium Liabilities
Select payment patterns for
Future claims and claims adjustment expenses (consistent with claims pattern)
Servicing or maintenance expenses
Future reinsurance costs
Consider
Timing of payment of reinsurance premiums
Earning period of the unexpired portion of in-force policies
Discount Rate
Expected investment return rate for calculation of the present value of cash flow is that
to be earned on the assets which support the policy liabilities. It depends on
the method of valuing assets and reporting investment income
the allocation of those assets and that income among lines of business
the return on the assets at the balance sheet date
the yield on assets acquired after the balance sheet date
the capital gains and losses on assets sold after the balance sheet date
investment expenses, and losses from default (C-1 risk)
Need not verify ownership at balance sheet date, but check quality
Portfolio Yield Rate
IRR that produce book value at a future date of the corresponding assets
Selection of Discount Rate for Estimation of Net Present Value
Portfolio yield rate used
Reinvestment Risks and Liquidation of Assets
Investment Expenses
Reduce the discount rate
Selection of Discount Rate for Estimation of Ceded Present Value
Not supported by company's investments
Appropriate selection
Portfolio yield rate
Risk-free rate
Discount rate used by assuming company (cessions to an affiliated company)
Selection of Discount Rate for Estimation of Gross Present Value
If using same discount rate for net and ceded, the gross use same
If not, then may not equal
Application of Margins
General
MfAD
Investment return rates
Compute before application of other provision (with the difference between two
discount rate)
Claims
Gross
Ceded
Net
liabilities
APV = Gross PV + PfAD Claims Dev (g) + PfAD Inv return (g)
APV = Ceded PV + PfAD Claims Dev (c) + PfAD Inv return (c) - PfAD Reins rec
APV = Net PV
+ PfAD Claims Dev (n) + PfAD Inv return (n) + PfAD Reins rec
Premium Liabilities
For servicing expenses and future reinsurance costs, it is reasonable in most cases to
assume that the undiscounted value of these items is equal to the APV
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Materiality
Apply to all actuarial work
"material" means whether or not it matters to the user of the information
when related to financial information, arises in
context of inclusion
context of refinement
context of disclosure
materiality is defined as an omission, understatement, or overstatement is material if
the actuary expects it materially to affect either the user's decision making or the
user's reasonable expectations
ensure that the work does not mislead the intended users should consider
intended users
their knowledge
their situations
unless there are good reasons, an actuary would generally select one materiality level
for a particular actuarial task or assignment
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generally no significant change to materiality level from year to year
examples of materiality level
for regulatory or solvency issues, typically related to statutory surplus or the
solvency benchmark ratio
for appraisal work, generally related to net worth, net income, or earnings per share
for DCAT work, expected to be less rigorous than for valuation work
for general purpose financial statement work, generally related both to net income and
net capital (or net surplus)
materiality level is also expected to vary according to
size of entity
entity's access to capital
stage of organizational life cycle
type of business
net retention
financial strengh
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Evaluation of the runoff of claim liabilities when the liabilities are discounted in
accordance with accepted actuarial practice
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Guidance provide may be appropriate for valuation of runoff of other liaibilities
including self-insured retention
Basic Approaches to the Evaluation of Runoff of Claim Liabilities
Undiscounted basis
runoff (or calendar year emergence), generally computed in two ways
a) emergence in t with respect to AY t-1 and prior
= (Ult. amounts estimated at t-1) - (Ult. amounts estimated at t)
b) emergence in t with respect to AY t-1 and prior
= (Claim liabilities at t-1) - (Paid during t) - (Claim liabilities at t)
Discounted basis
a) not readily adjusted to encompass the effect of the time value of money and PfAD
b) modify
discount the amounts in the 2nd and 3rd terms to time t-1
or
substract a term for the portion of the investment income earned during CY t on
assets supporting the liabilities (add back to equation)
Accident Year Runoff Model
See model for example
Allocation of Investment Income Between Liabilities and Surplus
Investment income attributable to policy liabilities can be obtained by multiplying the
selected yield rate by the average of the starting and ending values of
+ net unpaid claims
+ net unearned premium
- gross DPAC
+ premium deficiency
+ unearned commissions
- agents, brokers and policyholders receivables
- installment premiums
A simple approach to calculate the investment income attributable to assets backing the
net unpaid claims is to multiply the investment yield by the mean net claim liabilities
Investable assets are considered to be equal to the net unearned premium plus the premium
deficiency provisions and unearned commissions, reduced by gross DPAC, agents, brokers
and policyholders' receivables and installment premiums
Make sure to review exhibits as they contain valuable information
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
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(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Consideration of Future Income Taxes in the Valuation of Policy Liabilities
Income tax is unlikely to be a significant consideration for the valuation of P&C company
Asset for Future Income Taxes Related to Policy Liabilities
income tax deduction in respect of an insurer's claim liabilities is 95% of the lesser of
reported reserve - amount of net claim liabilities carried by the insurer
claim liability - net claim liabilities actuarially determined (discounted, + PfAD)
asset represents the prepayment of tax as a result of the liability deducted for tax
purposes being less than the amount reported on the balance sheet
Effect of Discounting the Asset for Future Income Taxes
the following discussion is limited to Future Income Taxes on directly related to claim
liabilities
Estimated Effect of Discounting the Asset for Future Income Taxes
=
( + Reported Reserver
- 95% of min between
Reported Reserve and
Claim Liability
)
x Future Income Taxe Rate
x (1 - Present Value Factor)
Present Value Factor includes the effect of PfAD for investment return rate
Approximate as (Discounted Estimate Excluding PfAD + PfAD Inv. return)
/ Undiscounted Estimate
Review example in the text
Asset for Future Income Taxes would be higher if Reported Reserve were higher than Claim
Liability
Other Assets for Future Income Taxes or Liabilities
Not in the scope of this paper if not related to policy liabilities
Make sure to review example in the text as they provide important information about
techniques and formulas
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Section C : Financial Reporting and Solvency
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Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
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Rating Agencies
Introduction
NAIC Statement of Actuarial Opinion requires the Appointed Actuary to consider the ratings
of reinsurers when evaluating uncollectible reinsurance recoverables
Section 1 explains how rating agencies help policyholders and agents by assessing the
financial strength of insurers and their ability to pay claims years in the future. Rating
agencies can influence the capital structure, reinsurance arrangements, and business
volume of their insurer clients
Section 2 explains the rating process: review of public data by ratings analysts,
interactive meetings where insurer's managers portray themselves in favorable hues while
providing hard data for the analyst's report, and decisions by the ratings committee.
Rating agencies balance objective, quantitative data that is consistent across insurers
and qualitative information that reflects unique attributes. The agencies combine research
by ratings analysts with the experience of ratings committeess.
Section 3 explains why ratings are vital for many P&C insurers : professional valuations
of financial strength are efficient, many outside parties rely on the ratings, and few
insurers are still unrated. High ratings are important requirements for reinsurance,
surety, structured settlements, Homeowners, and some specialty lines. Many parties to
insurance transactions, such as banks providing mortgages, property owners hiring building
contractors, courts directing structured settlements, and clients of foreign reinsurers
demand products from highly rated insurers
Section 5 examines salient attributes of rating agency capital standards
Section 1 : Rating agencies provide material benefits to insurance policyholders
if interest rates rise 200 basis point
rating agency does not evaluate the insurer as quickly as investors do, and it may wait
to downgrade the insurer to see if interest rates turn down.
Section 2 : Rating process combines quantitative data with qualitative valuations
They evaluate the integrity of their clients
An interactive rating has five steps
1. Background research by the ratings analyst and submission of proprietary data by the
insurer
2. Interactive meetings between ratings analysts and senior managers of the insurer
3. Preparation of ratings proposal by lead analyst and submission of additional data by
the insurer
4. Decision by the ratings committee after presentation by the lead analyst
5. Publication of rating on public web sites and provision of analysis to fee-paying
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subscribers
Agencies usually use a top-down approach, starting with economic and industry forecasts
and proceeding to the insurer's position among its peer.
Initial ratings may be private or public; subsequent ratings are generally public
Section 3 : Ratings are Essential for Many P&C Insurers
Almost all are rated
Three reasons
i)
agents are wary of unrated insurers, since they might be financially distressed
ii) third-parties rely on outside assessements of insurer solvency
iii) rating agencies are efficient at assessing financial strength
Treaty might contain a downgrade clause (downgrade triggerm another exam I think)
Section 5 : Rating agency capital requirements
Distinctive attributes of rating agency models
AM Best use expected policyholder deficit to calibrate risk
Moody's and Fitch's use of stochastic cash flows to model economic capital
S&P emphasis on principles-based models and ERM practices
Best's Capital Adequacy Ration
See BCAR texts
Stochastic Cash Flow Capital Models
The models form distributions of each risk and simulate repeatedly from them
Cash flows are projected until all current liabilities are settled
Required capital is set by a value at risk or tail value at risk measure (Expected VAR
in the tail)
Cash flow simulation are of two forms depending on treatment of negative cash balances at
intermediate dates
Strict version - require liquidation of assets if no other cash is available
Liberal version - assumes insurer borrows funds at short-term rates to satisfy sudden
cash needs
Black box to insurer
Principles based systems
It focused on evaluating insurer's enterprise risk management systems and internal
capital models
Insurer knows best what are is capital needs
Appendix A : Financial Strength Ratings vs Bond Ratings
Best's divides insurers
Secure : B+ and more
Vulnerable : B and less
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt
b.
c.
d.
e.
f.
g.
h.
i.
j.
Page 124 of 164
Valuation of assets and liabilities
Reinsurance accounting issues including calculation of reinsurance penalties
Calculation of excess (deficiency) ratio of net claim liabilities
Calculation of change in surplus
Calculation of net income and comprehensive income
MCT
MSA ratios
A.M. Best rating system and BCAR
Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Financial Reporting Through the Lens of a P&C Actuary
Part 1 Introduction
Chapter 1 Financial Reporting in the P&C Insurance Industry
Importance and Objectives of Financial Reporting
Overview of the bases of financial reporting (Statutory, GAAP, IFRS, TAX, CANADIAN)
SAP - accounting principles or practices prescribed or permitted by state
GAAP - match revenues and expenses
Starting point of for taxable income is SAP income
CICA defines CGAAP
IFRS are established IASB
Chapter 2 Relevance of Financial Reporting to the Actuary
Importance and Objectives of Financial Reporting
Also important for actuaries who
Work with regulators to monitor the financial health of insurance companies
Pricing and designing insurance products, including development of profit margins
Determining capital requirements to support the various risks of an insurer
Evaluating risk transfer of reinsurance contracts
Assessing reserver adequacy for non-reinsurance entities, such as organizations that
self-insure or retain a portion of their property/casualty insurance exposures
Preparing tax returns
Appraising and valuing insurance companies in merger and acquisitions
Chapther 3 Overview of this publication
Roadmap
Annual Statements Referenced Throughout the Publication
Background on Fictionous Insurance Company
Part 2 Overview of Basic Accounting Concepts
Introduction to part 2
Chapter 4 Primary Financial Statements
Balance Sheet
presents all of a company's assets and liabilities as of a specific point in time
Income Statement
reveals a company's financial results during a specific time period
revenues and expenses difference is referred to as net income/loss
Statement of Capital and Surplus
reflects certain changes in surplus that are not recorded in the income statement and
reconciles the beginning surplus to the ending surplus for the reporting period
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Cash flow statement
Timing of the receipt or payment of cash
Presents all operations strictly from a cash perspective
Associated revenu is generally recognized at the time the good or service is provided
Actuaries are not generally involved in this statement
Notes to financial statements
Include quantitative and qualitative disclosures regarding the significant accounts
presented in the financial statements
Chapter 5 Key Accounting Concepts
Liquidation vs going concern
Fair value vs historical cost
Recording an asset or liability at fair value means recording it at a value that it
would be bought or sold for in the open market, while recording at historical cost
means valuing it at the original purchase price less depreciation
Principle-based vs rule-based
Principle based is more adaptable to changes in the business environment
Rules are more strict
Part 7 Canadian-Specific Reporting
Chapter 27 - Overview of financial reporting in Canada
Overview
Office of the Superintendent of financial institutions (OSFI)
Canadian Institute of Chartered Accountants (CICA)
CASB adopted IFRS for PAE (insurance companies are publicly accountable entity)
Two key differences for foreign branches
1. The assets of foreign branches are required to be under the control of either the
Minister of Finance of Canada or the branches' Chief Agent in Canada. The amount
of assets under the control of the Minister of Finance is determined by the
branch test of adequacy of assets. Assets that are under the control of the
Minister of Finance are to be placed in trust.
2. There is no share capital account, as the entity is operating as a branch of its
parent therefore, there is a head office account instead
Canadian Institute of Actuaries
SOP by ASB published by CIA are binding
Educational notes are not binding
Differences between statutory and financial/regulatory reporting frameworks in Canada
Canada focus on consistency of published statement
US focus on solvency
Chapter 28 - Canadian Annual Statement
Overview
Preparation of Key Schedules
General Information
Consolidated financial statements
Statutory compliance : MCT
Investments
Miscellaneous assets and liabilities : other receivables and interests in joint venture
Premiums, claims and adjustment expenses
Provincial and territorial summaries
Reinsurance ceded
Commissions and expenses
Out of Canada exhibits
Non-consolidated financial statements and exhibits
For completeness, require report of the appointed actuary
Balance sheet
1. Claims liabilities
a. Direct unpaid claims and adjustment expenses
b. Assumed unpaid claims and adjustment expenses
c. Ceded unpaid claims and adjustment expenses
d. Other amounts to recover
2. Premium liabilities
a. Gross unearned premiums
b. Net unearned premiums
c. Premium deficiency reserves
d. Other net liabilities
e. Deferred policy acquisition expenses
f. Unearned commissions
In Canada, the claims and premium liabilities are reported on the balance sheet on
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a gross basis (asset is recorded for recoverables)
Liabilities are discounted and included PfAD
Check out the example on page 259, overall yield is calculated using the product of
modified duration and market value as weights
Actuary would reduce the rate for investment expenses
Discount rate = market yield - investment expenses
Income Statement
Net income = revenues - expenses - income taxes
Statement of retained earnings
Reserves
Statement of Comprehensive Income and Accumulated Comprehensive Income
Statement of Cash Flows
Statement of Changes in Equity
Notes to Financial Statements
Impact of Reinsurance, Including Commutations
See page 264 Table 83 and page 265 Table 84 and page 266 Table 85
Commutation of Claims
One party is relieved of its obligations in respect of the claim in exchange for a cash
payment
See calculation example on apge 268 Table 86
Premium Liabilities
See example page 269 Table 87 and page 271 Table 88
Chapter 29 Financial Health of P&C Insurance companies in Canada
Risk-based capital adequacy framework
MCT/BAAT
In setting its internal target capital ratio, actuary should consider
Nature of company : public vs mutual, stock can raise capital, mutual more capital
Size of company : small hold more capital because of inherent volatility
Company reinsurance program : reduce volatility
Investment philosophy : more equities, no matching assets-liabilities, more capitale
Competitive forces
Minimum Capital Test
Compare capital available to capital required
Capital Available
Total equity less AOCI
Subordinated indebtness and redeemable preferred shares
AOCI (loss) on :
Available-for-sale equity securities
Available-for-sale debt securities
Foreign currency (net of hedging)
Share of AOCI on non-qualifying subsidiaries, associates, and joint ventures
Revaluation losses in excess of gains on own-use properties
Consolidated non-controlling interests
Capital Required
Sum of 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 exposures
Interest Rate Risk
Interest rate risk margin A - B + C where
A. Estimated change in value of the interest-sensitive asset portfolio for an interest
rate change of X%
B. Estimated change in the value of the interest-sensitive liabilities for an interest
rate change of X%
C. Estimated change in the value of the allowable interest rate derivatives for an
interest rate change of X%
Same calculation is done for an interest rate change of -X%. The risk margin is the
greater of the two results. Duration * Delta change * Fair value
Structured Settlements, letters of Credit, Derivatives, and other exposures
Capital Required =
Value of the instrument less collateral or guarantees
* Credit conversion factor (reflects the nature and maturity of the instrument)
* Capital factor (to reflect counterparty default risk)
Foreign Companies
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BAAT
Dynamic Capital Adequacy Testing
DCAT
Industry Research
Market-Security Analysis and Research, Inc. MSA
Part 8 The Future of SAP
Chapter 30 The Future of Financial Reporting and Solvency Monitoring of Insurance
Companies
The NAIC and the financial sector assessment program
Peer review - Financial Sector Assessment Program (FSAP)
Comframe, Solvency II Equivalence, and the Federal Insurance Office
Common Framework for internationally active insurers
The Future
More calculations from actuaries
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
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MSA Report on P&C, Canada, 2012
Section 3 - Detailed Exhibit Explanations
Conventions
Multi-year averages are always weigthed
Combined Ratios 100 - 100*(U/W Income)/NPE
Glossary of Terms and Acronyms
BAAT - Branch Adequacy of Assets Test
BV,MV - Book value, market value
CAGR - Compound Annual Growth Rate - Value at Y5 = Value at Y1 x (1+CAGR)^4
Adjusted Equity (Equity)
total equity - capital required for catastrophes and reinsurance ceded to unregistered
insurers
Exhibit 1 - Key Company Information
Exhibit 2 - Key Financial Indicators
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These are the 10 regulatory solvency tests that are used by OSFI
MCT,BAAT - primary regulatory solvency tests applied by most Canadian regulators
The MCT and BAAT are Risk-based Capital Tests (RBC)
MCT = (Total Capital Available)/(Minimum Capital Required)
BAAT = (Total Net Assets Available)/(Margin Required)
OSFI requires a bare minimum of 150%
Return on Equity (ROE)
Measures an insurer's net income as a percentage of equity
Important to look for sustainability rather than occasional high returns
ROE's may be high due to low equity. Check other equity tests.
Minimum of 5.4%
Return on Revenue
Measures the sum of underwriting income, investment income (excluding gains) and income
from subsidiaries as a percentage of gross written premiums
Minimum of 6.2%
Return on Assets after Tax
Net after tax income as a percentage of average beginning and end of year assets
Minimum of 2.6%
Insurance Return on Net Premium Earned
Measures the core earnings capacity of an insurer based on its underwriting income as
well as investment income (excluding capital gains) attributable to underwriting related
activity as a percentage of its net premiums earned.
Minimum of 4%
Liabilities as a percentage of Liquid Assets
Measures the insurer's liquidity. The higher the ratio, the greater the liabilities
relative to the assets available to back them
Balance sheet values are used
Maximum 105%
Net Loss Reserves to Equity
Maximum 200%
One-Year Development to Equity
Measures an insurer's one-year development margin (or deficiency) on unpaid claims,
relative to equity
Investment income / discounting is incorporated into the one-year developement measure
Minimum of -10%
Overall Net Leverage
Net written premiums plus net liabilities to equity
Maximum of 500%
These are MSA's supplementary ratios
Adjusted Investment Yield (including realized capital gains)
Measures income and capital gains relative to deployed assets
= 2 x (Net Investment Income + Other Comprehensive Income)
/
(Beginning of Year plus End of Year Invested Assets - Net Investment Income - OCI)
Change in Net Premiums Written
Year over year % change in net premiums written
Change in Gross Premiums Written
Year over year % change in gross premiums written
Change in Equity
Year over year % change in equity. While usually positive, dramatic increases in equity
may be indicative of instability
Accumulated Other Comprehensive Income to Equity
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AOCI is a capital element relating to unrealized (mark to market) capital gains or
losses on available for sale securities. This ratio measures AOCI's proportion in
relation to overall capital
Reinsurance Recoverables to Equity
Recoverables from reinsurers on unpaid claims and unearned premiums as a percentage of
equity. This is a gross measure, thus it is not offset by "payables to reinsurers"
Ratio also takes recoverables due to salvage and subrogation into account
Net Underwriting Leverage Ratio
Ratio of net premiums written to equity
Very high leverage ratios (over 300%) may indicate capital strain and vulnerability
Two-year Combined Ratio
Company's combined ratio over the preceding 24 months
Overall Diversification Score (1-100)
Measures how closely the insurer tracks the overall Canadian market both in terms of
geographic and line-of-business (LOB) spread.
Is the product of the 'Line of Business Diversification Score' and 'Geographic
Diversification Score'. Each of which has a range of 1-10.
Excess of 65 is great
Excludes ICBC
Low Score doesn't mean nothing else than focused company
See printed copy of Unica Annual Return
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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OSFI - Earthquake Exposure Sound Practices
1. Purpose and Scope
Insurers must effectively measure, monitor and limit their exposures in accordance with a
prudent risk appetite and risk tolerance.
2. Key Principles
1. Earthquake Exposure Risk Management - Insurers should have a sound and comprehensive
earthquake exposure risk management policy that is subject to oversight by the Board
of Directors and is implemented by senior management.
Policies & Procedures
Should include
risk appetite and risk tolerance for EQ insurance
data management practices
exposure aggregation monitoring and reporting
appropriate understanding, selection and use of EQ models, including considerations
for model limitations, uncertainties and non-modelled classes of business
identification and estimation of relevant PML factors
nature and adequacy of financial resources available in relation to the PML
contingency plans to ensure adequate claim handling resources and continued efficient
operations
consideration of potential increases in claim and operating costs following a major
loss event
Board of Directors and Senior Management
Board - oversee
Senior management - implements
2. Earthquake Exposure Data - Earthquake exposure date needs to be appropriatly captured
and regularly tested for consistency, accuracy and completeness
Data Integrity
consistent, accurate and complete data
quality control process
scoring data quality at the time of underwriting
conducting remediation of sources providing inadequate data
developing and implementing safeguards to prevent data collectors from miscoding
business
investing in technology to improve data quality
Data verification
overall data quality of a portfolio/group of risks may be the most appropriate approach
when the (re)insurer has limited access to the underlying policy processing system
Data limitation
3. Earthquake models - Earthquake models, should be used with a sound knowledge of their
underlying assumptions and methodologies, as well as with a high degree of caution
that reflects the significant uncertainty in such estimates
Models further enhance their value as a risk management tool when they are also used to
monitor earthquake exposure accumulations and to assist un underwriting decisions
4. PML Estimates - PML estimates should properly reflect the total expected ultimate cost
to the insurer, including considerations for data quality, non-modelled exposures,
model uncertainty and exposures to multiple regions
5. Financial Resources and Contingency Plans - Insurers need to ensure that they have an
adequate level of financial resources and appropriate contingency plans to
successfully manage through a major earthquake
3. Regulatory Reporting
file an Earthquake Exposure Data form
4. Guideline Administration
Supervisory Information
OSFI expects the insurer's annual DCAT will consider an EQ event
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 2 : Calculate MCT and use MCT and DCAT to evaluate the health of an
insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. MCT formulae
b. Definition of the components of the MCT
c. DCAT
i.
Purpose
ii. Statement of opinion
iii. Plausible scenarios and ripple effects
iv. Management actions
d. Stress testing
e. Target capital ratios
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
d. Effect of reinsurance on MCT
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Minimum Capital Test (MCT) For Federally Regulated P&C Insurance Companies
This guideline outlines the capital framework, using a risk-based formula for minimum
capital/margin required, and defines the capital/assets that are available to meet the
minimum standard.
Chapter 1 Overview and General Requirements
1.1 Overview
1.1.1. Risk-based capital adequacy framework
Assesses the risks associated with
assets
policy liabilities
catastrophes
reinsurance
interest rates
foreign exchange rates
structured settlements
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letters of credit
derivatives
other exposures
Capital used is on a consolidated basis
The nature of the subsidiary's business determines if it should be consolidated and not
where the subsidiary conducts its business. All other interests in subsidiaries are
considered "non-qualifying" for capital purposes and are excluded from capital
available and capital required calculations.
1.2 General requirements
1.2.1 MCT Supervisory target for federally regulated P&C insurers
MCT ratio = capital available / capital required
Required target is 100%
Supervisory target is 150%
Insurer are encouraged to aim for a higher internal target
Risks not explicitly addressed in MCT
Systems
Data
Strategic
Management
Fraud
Legal
Other operational and business risks
Inform OSFI immediatly if insurer anticipate falling below their internal target
1.2.2. Audit requirement
Annual audit of the MCT or BAAT is required
Separate
Filed at the same time as the audit report
Chapter 2 Definition of Capital
2.1 Summary of capital components
Three primary considerations
i)
capital permanence
ii) capital being free of mandatory fixed charges against earnings
iii) capital subordinated legal position to the rights of policyholders and other
creditors of the institution
Capital available is restricted to the following
1. Equity
shares treated as equity under CGAAP (see 2 below)
contributed surplus
retained earnings
reserves
general and contingency reserves
accumulated net after-tax unrealized gains (losses) on available-for-sale equity
securities
accumulated net after-tax unrealized gains (losses) on available-for-sale debt
securities
accumulated net after-tax foreign currency gains (losses), net of hedging activities
accumulated net after-tax unrealized gains (losses) on share of other comprehensive
income on non-qualifying subsidiaries, associates and joint ventures
2. Preferred shares and subordinated indebtedness whose redemption is subject to
regulatory approval :
subordinated in legal position (pref shares treated as debt)
P&C Companies Borrowing Regulations limit a P&C insurer's debt obligations to 2% of
its total assets
3. Non-controlling interests
Generally be permitted to include in capital available, non-controlling interests in
operating consolidated subsidiaries, provided capital in subsidiary is not excessive
in relation to the amount necessary to carry on the subsidiary's business
2.2. Deductions/Adjustments
Following amounts are deducted from/adjusted within the total of capital available
Amounts receivable and recoverable from unregistered reinsurers to the extend that they
are not covered by deposits or letters of credit held as security from assuming
reinsurers
Interests in non-qualifying subsidiaries and associates
Interests in joint ventures with more than a 10% ownership interest
Loans to non-qualifying subsidiaries, associates and joint ventures with more than a
10% ownership interest considered as capital
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Deferred policy acquisition expenses (DPAE) that are not eligible for either the 0%
capital factor or the 35% capital factor.
Adjustment to own-use property valuations
Subtract unrealized fair value gains (losses) reflected in retained earnings at
conversion to the IFRS. The amount at conversion is an on-going deduction to capital
available and can only be changed as result of a sale of own-use properties (owned
at the time of IFRS conversion) and the resulting realization of actual gains
(losses); and
Add accumulated net after tax revaluation losses in excess of gains that are reflected
in retained earnings for accounting purposes
Net after-tax impact of shadow accounting if a P&C insurer has elected to use the
shadow accounting option within IFRS
Deferred tax assets that are not eligible for the 0% capital factor
Goodwill and other intangible assets
Other assets, in excess of 1% of total assets
Accumulated net after-tax fair value gains (losses) arising from changes in a P&C
insurer's own credit risk for the insurer's financial liabilities that are classified
as held for trading
Self-insured retentions, included in other recoverables on unpaid claims, where OSFI
requires acceptable collateral to ensure collectibility of recoverables, and no
collateral has been received
IFRS phase-in adjustment:
The phase-in period for regulatory capital purposes begins at the date of conversion
to IFRS and must be completed by the quarter ending on or after December 31, 2012.
Phase-in is made on a straight-line basis.
No capital factor is applied to items that are deducted from capital available
2.3 Capital treatment for interests in and loans to subsidiaries, associates and joint
ventures
Equity method of accounting
2.3.1 Consolidated subsidiaries (e.g. P&C insurance and ancillary businesses such as
agencies, brokerages and mutual funds)
Fully consolidated
Assets/Liabilities subject to capital factors and liability margins on parent's MCT
2.3.2 Non-qualifying subsidiaries
Excluded from capital available
Loans considered as capital for subsidiaries excluded from parent's capital
Loans not considered as capital for subsidiaries subject to 35% capital factor
Receivables from non-qualifying subsidiaries attract capital factor of 4% or 8%
2.3.3 Associates
Associate if
both are subsidiaries of the same enterprise
same investor holds 20% or more of voting power in each investment
one enterprise exerts significant influence over the other
insurance broker is economically dependent
Interests in associates are excluded from capital available
Loans considered as capital for associates excluded from parent's capital
Loans not considered as capital for associates subject to 35% capital factor
Receivables from associates attract capital factor of 4% or 8%
2.3.4 Joint ventures with less than or equal to 10% ownership interest
Investment is included in capital available (same factor as common shares)
2.3.5 Joint ventures with more than a 10% ownership interest
Interests in joint ventures are excluded from capital available
Loans considered as capital for joint ventures excluded from parent's capital
Loans not considered as capital for joint ventures subject to 35% capital factor
Receivables from joint ventures attract capital factor of 4% or 8%
2.3.6 Summary of exposures
Exposures a P&C insurer might have with non-qualifying subsidiaries, associates and
joint ventures
Exposures
Capital treament
Common or preferred shares (non-qualifying
Excluded from capital available
subsidiaries and associates) including
share of accumulated earnings/losses less
dividends received based on equity accounting
Ownership interests (>10% joint venture)
Excluded from capital available
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Ownership interests (<= 10% joint venture)
Included in capital available with a
capital factor of 15% applied to the
ownership interest
Loans or other debt instruments (bonds,
debentures, mortgages, etc.) considered as
capital
Excluded from capital available
Loans or other debt instruments (bonds,
debentures, mortgages, etc.) not considered
as capital
Included in capital available with a
capital factor of 35%
Receivables
Included in capital available with a
capital factor of 4% or 8% depending on
how long the balances are oustanding
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Chapter 3. Asset Risks
3.1 Description of asset risk
1) Potential losses resulting from asset default and the related loss of income
2) Loss of market value of equities and the related reduction in income
3.2 Government grade obligations
i)
From Federal
ii) From provincial/territorial or its agents
iii) From municipality or school corporation
iv) From central government of a foreign country where security is rated AAA
3.3 Use of ratings
P&C insurers may recognize credit ratings from the following rating agencies for MCT
purposes
DBRS
Moody's Investors Service
Standard and Poor's (S&P)
Fitch Rating Services
A P&C insurer must choose the rating agencies it intends to rely on and then use their
ratings for MCT purposes consistently for each type of asset or obligation.
No cherry picking
Chapter 4. Policy Liability Risks
4.1 Description of risks for policy liabilities
Divided into four parts
i)
Variation in claims provisions (unpaid claims)
ii) Possible inadequacy of provisions for unearned premiums
iii) Possible inadequacy of provisions for premium deficiencies
iv) Occurence of catastrophes (EQ and other)
4.2 Margins for unearned premiums, unpaid claims and premium deficiencies
From a regulatory perspective, these margins are included to take into account possible
abnormal negative variations in the amounts calculated by actuaries, given the fact that
the margins added by actuaries in their valuations are primarily intended to cover
expected variations
4.2.1 Margins on unpaid claims and unearned premiums
Margins on unearned premiums are applied to the net amount of risk
Unearned premiums margins are applied to the greater of the net unearned premiums or
50% of the net written premiums in the last 12 months
Margins on unpaid claims are applied to the net amount of risk less PfAD
Margins are as follows
Class of Insurance
Margins on UEP Margins on UPC
Personal & commercial property
8%
5%
Auto - liability & personal accident
8%
10%
Auto - other
8%
5%
Liability
8%
15%
Mortgage
Appendix 4-A
15%
Accident and sickness
Appendix 4-B
Appendix 4-B
All others
8%
15%
4.2.2 Margins on premiums deficiencies
8% applies to premium deficiencies
4.3 Minimum gross capital level
P&C insurers are required to calculate their margins for unearned premiums, unpaid
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claims and premium deficiencies as if none of the liabilities had been ceded (i.e. on a
gross basis) and multiply the resulting gross margins by 25%. The gross margin for
unpaid claims is calculated after deducting the PfAD. The greater of 25% of the gross
margins and the P&C insurer's net margins must be reported as the capital required for
unearned premiums/unpaid claims/premium deficiencies.
4.4 Risk mitigation and risk transfer - reinsurance
4.4.1 General
4.4.2 Registered reinsurers
Capital factor applied to recoverables
Balance Sheet Asset
Non-Associated Associated
Insurance receivables
0.5%
0%
Unearned premiums recoverable
0.5%
0%
Unpaid claims recoverable
2%
0%
4.4.3 Unregistered reinsurers
4.4.3.1 Deduction from capital available
4.4.3.2 Margin required
The margin required for unregistered reinsurance is calculated in the unregistered
reinsurance exhibit
The margin is 10% of "Unearned premiums ceded to assuming insurer" and "Outstanding
losses recoverable from assuming insurer". Can be reduced to 0 with LOC
4.4.3.3 Collateral
Can't take credit from
Obligations of the reinsurer itself, its parent, or one of its subsidiairies or
associates
LOC are direct substitute subject to 0.5% capital factor
See Example 4-1 on page 27,28
4.4.3.4 Letters of credit
Limit on the use of LOC is 30% of "Unearned premiums ceded to assuming insurer" and
"Outstanding losses recoverable from assuming insurer". Applied in the aggregate.
4.4.3.5 Non-owned deposits from reinsurers
Non-owned deposits held on behalf of unregistred - valued at market value
4.5 Self-insured retention
Collateral may be required when it is deemed that there is an excessive concentration
of SIRs owed by any one debtor
LOC for SIRs are considered a direct credit substitute and are subject to a 0.5% capital
factor
4.6 Catastrophes
4.7 Mortgage insurance
4.8 Accident and sickness business
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
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Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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OSFI - Memorandum for AA's report on P&C Insurance Business
1. Introduction
Describes requirements of AAR
2. Note on regulatory requirements
2.1 Application of Professional Standards to the AAR and Valuation
must be in accordance with generally accepted actuarial practice, subject to any
additional requirements of the Superintendent.
2.2 Differences (if any) Between Actuary's Valuations and Corresponding Annual Return
Liabilities
include a discussion of the reasons
balance sheet values should be greater than evaluation values
2.3 Filling of Reports
P&C-1 should contain a properly signed copy of the AAR
2.4 Persons Signing the Appointed Actuary's Report
Appointed Actuary, FCIA
3. Special Line of Business Considerations
3.1 Marine Insurance
included within the scope of the AAR
3.2 Title Insurance
Premiums earned at issue, unearned premium reservers are not usually required.
Accident date fo all claims is the issue date
3.3 Accident and Sickness Insurance
This memorandum does deal with this valuation
4. Format of the AAR
4.1 Report Outline
Introduction
Opinion
Supplementary Information Supporting Opinion
Executive Summary
Description of Company
Data
Claims Liabilities
Premium Liabilities
Other Liabilities
Compliance
Unpaid Claims and Loss Ratio Analysis Exhibit
Exhibits and Appendices
4.2 Table of Contents
included
5. Contents of the AAR
5.1 Introduction
identify company, scope
5.2 Expression of Opinion
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use the prescribed opinion
State separatly the carried and valuation liability figures
5.3 Supplementary Information Supporting the Opinion
understand how the Actuary's figures are derived
5.4 Executive Summary
comment on the comparison of the actual experience with the expected experience
reference any significant changes (methods / assumptions)
5.5 Description of Company
5.5.1 Ownership and Management
brief history
5.5.2 Business
a brief description of the lines/classes of business
5.5.3 Reinsurance
5.5.3a Reinsurance Arrangement
describe
5.5.3b Reinsurance ceded
Existence of any of the following situations and the actions taken should be described
a dispute has arisen with a reinsurer
a reinsurance collectible is significantly overdue
the reinsurer has a history of not settling accounts promptly
the reinsurer is known to have been the subject of regulatory restrictions in its
home jurisdiction
the reinsurer has a poor credit rating
5.5.3c Financial Reinsurance Agreements
where there is not significant insurance risk transfer
5.5.4 Materiality Standards
must be reported in the AAR
5.6 Data
5.7 Claims Liabilities
5.7.1 Undiscounted Claims Liabilities
must contain details of the derivation of the gross, ceded, and net provisions
In determining the provision for each actuarial line of business, take into account
any significant trends in the severity and frequency of claims
any important changes in the coverage of the policies
the changes in the cost of reinsurance and/or in reinsurance arrangements
any changes in the lags in the reporting of claims and in the payment of claims
changes to the loss reserving practices and
the effects of regulatory changes
5.7.2 Claims Expenses
Normally split between internal and external
Describe methods and changes in methods from prior AAR
5.7.3 Comparison of Actual Experience with Expected Experience in Prior Year-End
Valuations
to assess the effect of changes
undiscounted basis
10 years
gross and net
5.7.4 Discounted Claims Liabilities
5.8 Premium Liabilities
by line of business
expected to comment on the following
expected losses, loss expenses and servicing costs on the policies in force
anticipated broker/agent commission
expected adjustments (plus or minus) to swing rated policies
expected changes to premiums as a result of audits, late reporting or endorsements
expected commission adjustements on policies with variable commissions
5.9 Other Liabilities/Other Assets
Comment on SIR plans
6. Specific Disclosure Requirements
6.1 Dynamic Capital Adequacy Testing (DCAT)
data on which the DCAT reports were signed by the Actuary
data on which the DCAT reports were presented
to whom the DCAT reports were presented
whether the reports were presented in person or only in written form and
date used as the start of the projection period in the DCAT reports
6.2 New Appointment
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date of appointment
date of resignation of the previous Actuary
date on which OSFI was notified of the appointment
confirmation of communication with the previous Actuary, as required by legislation
list of the Actuary's qualifications, keeping in mind, but not limited to, the CIA's
Rules of Professional Conduct
6.3 Annual Required Reporting to the Board or Audit Committee
6.4 Continuing Professional Development Requirements
AA is in compliance
6.5 Disclosure of Compensation
7. Review Procedures
7.1 OSFI's Review Procedure
7.2 Peer Review Program
requires the work of the Actuary to be externally peer reviewed
For each Peer Review Report filed, AAR must provide the following information
(a) Work received (AAR/DCAT)
(b) Accounting period for work reviewed
(c) Peer review date
(d) Peer reviewer
(e) Date submitted to OSFI
(f) Date submitted to Audit Committee or Chief Agent
(g) Whether the Peer Review Report was issued before or after the audit opinion was
released
(h) Key findings or recommendations
(i) Status of findings and recommendations
(j) Year of next review for items identified in (a)
(k) Next peer reviewer (if known)
7.3 Filing Directions
deadline 60 days after the end of the fiscal year
8. Unpaid Claims and Loss Ratio Analysis Exhibit
8.1 Introduction
8.2 Data
9. Appendix I - Expression of Opinion
10. Appendix II - Unpaid Claims and Loss Ratio Analysis Exhibit
11. Appendix III - Annual Return Lines of Business
12. Appendix IV - Unpaid Claims and Loss Ratio Analysis Exhibit
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Section C : Financial Reporting and Solvency
Learning objective 2 : Calculate MCT and use MCT and DCAT to evaluate the health of an
insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. MCT formulae
b. Definition of the components of the MCT
c. DCAT
i.
Purpose
ii. Statement of opinion
iii. Plausible scenarios and ripple effects
iv. Management actions
d. Stress testing
e. Target capital ratios
Section D : Professional Responsibilities of the Actuary in Financial Reporting
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(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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CIA - Dynamic Capital Adequacy Testing
1. Introduction
DCAT has the following key elements
Development of a base scenario
Analysis of the impact of adverse scenarios
Identification and analysis of the effectiveness of various strategies to mitigate risks
A report on the results of the analysis and recommendations to the insurer's management
and the Board of Directors or Chief Agent
An opinion signed by the actuary and included in the report on the financial condition
of the insurer
2. Method
Process include
reviewing the recent and current financial position of the insurer
running a base scenario and several adverse scenarios
reporting the results of the analysis including details on at least three adverse
scenarios
It is the specific degree and timing of capital depletion that indicate the risks to
which the insurer is particularly sensitive
Approach
review of operations
development and modeling of the base scenario
assessment of the risk categories and identification
selection of plausible adverse scenarios (at least three)
identification of possible management actions and the impact
identification of possible regulatory actions
Recent and Current Financial Position
review three years of operations
Forecast Period
begins at the most recent available fiscal year-end balance sheet date
typical forecast period for a typical property and casualty insurer would be three years
Materiality Standard
less rigourous than that used for valuation of the insurer's policy liabilities
Base Scenario
realistic set of assumptions
consistent with the insurer's business plan
Plausible Adverse Scenarios
Any modeled scenario that causes the insurer to fall below the minimum regulatory
capital during forecast period would be subject to further examination and reporting
The prerequisite for a satisfactory opinion is that the insurer will be able to meet
its future obligations under all plausible adverse scenarios
Ripple Effects
A ripple effect is an event or incident that occurs when an adverse scenario triggers a
change in one or more interdependent assumptions or risk factors. Ripple effects
include :
adjustments to assumptions used in the base scenario which may no longer be
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appropriate in the adverse scenario being tested
the insurer's expected response to adversity
policyholder actions
regulatory actions, especially in adverse scenario where the insurer fails to meet the
minimum regulatory capital requirement
rating agency actions, especially in adverse scenarios that result in significant
changes in capital or surplus
likelihood of changes in planned capital injections or distributions
An example of extraordinary management action would be discontinuing the sale of a line
of business where such discontinuance is not part of the business plan. On the other
hand, changing a dividend scale or increasing property and casualty rate levels would
not normally be considered to be extraordinary management actions
Integrated Scenarios
two or more adverse scenarios are combined
3. Modeling
Basic Requirements of the Model
model reproduces key elements and pages from the financial statements, such as
balance sheet
assets (investments, reinsurance recoverables where appropriate and other assets)
liabilities (policy liabilities, other liabilities, debt)
retained earnings/surplus
income statement
revenues/premium income
policy benefits/claims
expenses
income taxes
preferred share dividends
investment income
applicable regulatory measure of capital adequacy
statement of income = cash flows + change in balance sheet items
Model Validation in a Static Environment - Base Scenario
Reasonableness in a Changing Environment - Adverse Scenarios
Stochastic vs. Deterministic Approach
Stochastc : statistical loss distribution
Deterministic : selected judgementally
Combination : both
Modeling of Ripple Effects
automatically generated by the model
manually created by the actuary by modifying the appropriate assumptions
Organizational Considerations
model results would be aggregated at the legal entity level
Assumptions at high level for
economic parameters
demographic parameters
in order to derive model segment, consider
Management - business is subdivided into units and cost structures
Product - similar characteristics
Investment - asset categories
4. Reporting
primary purpose of the report is to communicate
the significant risks to which the insurer is exposed
possible actions that could be taken to reduce or eliminate the exposure to those risks
Outline
1. Executive Summary
2. DCAT Opinion
3. Introduction - purpose and basis
4. Capital Adequacy Measurement
5. Background Discussion
6. Base Scenario
7. Adverse Scenarios
8. Conclusions and Recommendations
9. Appendices
Appendix B - Discussion and Analysis of P&C Insurer Risk Categories
1. Claim Frequency and Severity Risk
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Future claims costs and loss ratios can differ significantly from the base scenario due
Single catastrophic event
Single large claim
Multiple catastrophic events
Multiple large claims
Other frequency and severity
Social Inflation
Possible ripple effects
insolvency of one or more reinsurers
loss of reinsurance coverage
increases in reinsurance rates
post-event inflation
forced sale or liquidation of assets
increased PACICC assessments
rating agency downgrade
Possible management actions
reviewing reinsurance coverage
implementing rate increase
restricting writing in hazard prone areas
reviewing the target mix
reviewing the type of products
selling or reinvesting assets
2. Policy Liabilities
Examples of adverse scenarios
Selection of inadequate LDF
Class actions and other mass torts
Change in mix of business
Claims paid faster than assumed
Actual rate of return on investments supporting liabilities significantly lower
Possible ripple effects
Effect on actuarial PV for scenarios affecting undiscounted policy liabilities
Increases in ultimate claim costs and claim expenses for runoff or future business
Forced sale or liquidation of assets
Rating agency downgrade
Possible management actions
Settling claims faster
Reviewing guidelines
Implementing rate increases
Reviewing the target mix
3. Inflation Risk
Changes in inflation may be due to
A significant, rapid and sustained increase in the general rate of inflation
A significant temporary increase in the cost of labour and materials following a
catastrophe or other major event
A severe recession in the economy
Possible ripple effects
A rapid and sustained increase in market interests rates
Increase in operating expenses
Increase in reinsurance rates on current swing-rated contracts and on future contracts
Possible management actions
Reviewing reinsurance coverage
Implementing rate increases
Reviewing the target mix
Reviewing the type of products offered
Selling or reinvesting assets
Adjusting the insurance to value or cost calculator
4. Premium Risk
Premium volume significantly lower than the base scenario
Events resulting in a significant reduction in premium volume
Entry of a new and stron competitor
Increased competitiveness in a market
Loss of a key distributor
Loss of a key client
Action by any influential entity
Inability to implement planned premium rate increases
Noncompetitive premium rates
Ripple effects
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An increase in loss ratio
An increase in the fixed expense ratio
An increase for certain types of expenses
A shift in portfolio mix
An increase in reinsurance costs
Forced sale or liquidation of assets
Management actions
Reducing personnel
Identifying other distributors
Implementing rate changes
Changing reinsurance coverage
Underwriting actions
Changing the target mix
Adjusting the investment portfolio
Premium volume significantly higher than the base scenario
Withdrawal or failure of major competitors
Appointment of a key distributor
Unexpected new business from a large client
Any action by any influential entity
Unexpected success
Premium rates set too low
Ripple effects
Higher loss ratio
Shift in portfolio mix
Higher expenses
Increased PACICC and pool assessments
Increased reinsurance costs
Management Actions
Implementing rate changes
Underwriting actions
Reviewing the distribution channels
Reducing certain types of expenses
Using reinsurance to mitigate capital strain
5. Reinsurance Risk
Examples
Reinsurer insolvency
An increase in reinsurance rates or a reduction in reinsurance commission
Reduction in capacity
Disputes over policy conditions
Ripple effects
increase in reinsurance rates
reduced availability of reinsurance
Possible management actions
Changing the reinsurance structure
Diversifying participants on the reinsurance program
Retaining a greater proportion of business
Changing reinsurers
Reducing primary policy limits
6. Investment Risk
May come from
Significant change in the yield curve
Increase in the default rate on debt securities
Decrease in the returns and/or value of real estate
Decrease in the returns and/or value of subsidiary
Decrease in the returns and/or value of equities
Significant change in foreign exchange rates
Decrease in the returns and/or value of other major asset categories
Ripple Effects
Forced sale or liquidation of assets
Significant positive or negative cash flows
Negative change on derivative positions
Default by counter-party on derivatives
Rating agency downgrade
Liquidity crisis
Increase in the frequency or severity of claims due to economic condition
Change in discount rate
Management actions
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selling or reinvesting assets
changing the investment strategy
repositioning derivative tools
reducing the amount of business underwritten
implementing rate increases
reducing costs
7. Government and Political Risk
Adverse Scenarios that insurer may be sensitive to
Rate freeze or rollback of rates
Change to regulations regarding use of rating variables
Change to legislation that prescribes levels of insurance coverage
Increase in taxation rates
Nationalization or privatization
Change to legislation that creates or restricts distribution channels
Change in regulatory solvency standards
Political instability
Ripple effects
Deterioration of loss ratios
Increased litigation costs
Reduced availability of insurance to the public
Increased volume of industry pools resulting in increased assessments
Increased regulatory monitoring, or filing of rates
Forced sale or liquidation of assets
Problems with reinsurance coverage
Increased policy liabilities
Increased reinsurance rates
Management actions
Reducing the volume of business
Creating or expanding a separate company
Reviewing the target mix
Reviewing reinsurance coverage
8. Off-Balance Sheet Risk
Examples
Structured settlement
Contingent liabilities or losses
Letters of credit and pledged assets
Capital maintenance agreements
Derivative instruments
Pension Underfunding
Ripple Effects
Forced sale or liquidation of assets
Significant positive or negative cash flows
Management actions
Changing the pension plan from a defined benefit to a defined contribution
Selling or reinvesting assets
Changing the reinsurance strategy
Repositioning of derivative tools
Reducing costs through layoffs
9. Related Company Risk
Examples
A reduction in reliance on the parent company for financial support
An increase in the provision of financial support to the parent
High level of dependency on group operational resources
Rating agency downgrade reflecting difficult financial conditions at the group level
Ripple effects
Management focus on group rather than company priorities
Need to provide for service disruptions
Regulator action to protect local policyholders
Management action
Finding alternative sources of funds for operation support
Adjusting premium volumes mix of business
Reviewing reinsurance coverage purchased to mitigate capital strain
Reviewing the target mix by line of business or jurisdiction
Reviewing type of products offered
Selling or reinvesting assets
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Section C : Financial Reporting and Solvency
Learning objective 2 : Calculate MCT and use MCT and DCAT to evaluate the health of an
insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. MCT formulae
b. Definition of the components of the MCT
c. DCAT
i.
Purpose
ii. Statement of opinion
iii. Plausible scenarios and ripple effects
iv. Management actions
d. Stress testing
e. Target capital ratios
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OSFI - Stress Testing
A. Stress Testing Defined
Stress testing is a risk management technique used to evaluate the potential effects on
an institution's financial condition, of a set of specified changes in risl factors,
corresponding to exceptional but plausible events. Stress testing includes scenario
testing (long term) and sensitivity testing (short term)
B. Purposes of Stress Testing
An institution's stress testing program should serve the following purposes
i.
Risk identification
ii. Providing a complementary risk perspective to other risk management tools
iii. Supporting capital management
iv. Improving liquidity management
C. Role of the Board and Senior Management
D. General Considerations for Stress Testing Programs
Stress testing programs should take account of views from across the organisation and
should cover a range of perspectives and techniques
Institutions should have written policies and procedures governing the stress testing
program. The operation of the program should be appropriately documented.
An institution should have a suitably robust infrastructure in place, which is
sufficiently flexible to accommodate different and possibly changing stress tests at
an appropriate level of granularity.
An institution should regularly maintain and update its stress testing framework. The
effectiveness of the stress testing program, as well as the robustness of individual
components, should be assessed regularly and independently.
E. Methodology and Scenario Selection
Stress tests should cover a range of risks and business areas, as well as at the
institution-wide level. An institution should be able to integrate effectively, in a
meaningful fashion, across the range of its stress testing activities to deliver a
complete picture of institution-wide risk.
Where relevant and material, such risks may include
credit risk, including counterparty and reinsurance risk
market risk
general market
specific
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cash flow mismatch
interest rate
foreign exchange
commodity
insurance risk
mortality
morbidity
claim frequency and severity
persistency and lapse risk
liquidity risk
operational and legal risk
concentration risk
contagion risk
risk to reputation
securitization risk
new business risk
regulatory risk
inflation risk
Typical measures used are
asset and liability values
level of impaired assets and write-offs
accounting profit and loss
economic profit and loss
required and available regulatory capital
economic capital
liquidity and funding gaps
Stress testing programs should apply across business and product lines and cover a range
of scenarios, including non-historical scenarios, and aim to take into account systemwide interactions and feedback effects (e.g. second order and macroeconomic effects)
Stress tests should feature a range of severities, including events capable of generating
the most damage, whether through size of loss of through loss of reputation. A stress
testing program should also determine what scenarios could challenge the viability of
the institution (reverse stress tests). Such tests may be useful in uncovering hidden
risks and interactions among risks.
F. Specific Areas of Focus
Risk Mitigation
contingency plans
Securitization and Warehousing Risks
emerge when an institution is unable to access the securitization or other markets due
to either institution specific or market stresses
Risk to Reputation
assess the impact of risks to reputation on other risk types
Counterparty Credit Risk
Risk Concentrations
Risk concentrations may arise along different dimensions
single name concentrations
concentrations in regions or industries
concentrations in single risk factors
concentrations in indirect exposures via posted collateral or hedge positions
concentrations in off-balance sheet exposure, contingent exposure or non-contractual
obligations by reputational reasons
G. Supervisory Considerations
For insurers, one example of stress testing is Dynamic Capital Adequacy Testing (DCAT)
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Section C : Financial Reporting and Solvency
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insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. MCT formulae
b. Definition of the components of the MCT
c. DCAT
i.
Purpose
ii. Statement of opinion
iii. Plausible scenarios and ripple effects
iv. Management actions
d. Stress testing
e. Target capital ratios
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OSFI - Internal Target Capital Ratio for Insurance Companies
1. The Role of Capital in OSFI's Risk Assessment Process
While regulatory capital test results are important, other assessment criteria include
quality of capital
adequacy of capital to support the insurer's risk profile and business plan
sustainability of earnings
ability to access capital at reasonable rates to meet projected needs
Senior Management's and the Board of Directors roles and effectiveness with respect to
the insurer's capital management processes
The quality or strength of the insurer's capital management policy, including its
capital management processes
Consideration of risks that may not be fully captured in the regulatory capital tests
2. Regulatory Capital Ratios
Minimum Capital Ratio
The minimum level of capital necessary for an insurer to cover the risks specified in
the capital tests (100%)
Supervisory Target Capital Ratio
The level of capital necessary for an insurer to cover the risks specified in the
capital tests as well as to provide a margin for other types of risks not included in
the tests. (150%)
3. Establishing an Internal Target Capital Ratio
minimum risk-based capital requirements not tailored to individual insurers' risk
profiles
Internal Target
The level of capital, based on the company's own risk and capital adequacy assessment
process, necessary to cover the risks specified in the capital tests as well as all
other risks of the insurer. The Internal Target must be set above the Supervisory
Target. Normally, insurers are expected to operate at a level of capital above the
Internal Target.
Parent / heand office guarantees, potential future injections of capital or other
management actions should not be assumed in the setting of an Internal Target.
4. Capital Management Policy
OSFI expects each FRI to develop and maintain a capital management policy that includes
but is not limited to :
An Internal Target
Documented policies and procedures designed to ensure that the insurer identifies,
measures and reports all material risks potentially requiring capital
Clearly defined roles and responsibilities with respect to the design and execution of
the relevant policies and procedures
A process to measure capital needs relative to current and anticipated future levels of
risk
A policy that states capital adequacy goals relative to risk, taking into account the
insurer's strategic focus and business plan.
A set of internal controls, reviews and audits to ensure the integrity of the overall
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risk management and capital adequacy assessment processes
Identification of corrective actions that management may take to improve its capital
position if at any time the capital level falls or is anticipated to fall below the
company's Internal Target or the Supervisory Target
A requirement for the Board of Directors to regularly review and approve the capital
management policy
5. Corrective Management Actions
corrective management actions should identify
levels of capital where preventative corrective actions may be appropriate
expected effectiveness of potential actions
circumstances under which they could apply
If a plan is submitted in response to, or in anticipation of, the capital ration falling
below the Internal Target provide
clear analysis of the reasons behind the decline of the capital ratio
the plans to mitigate the impact of similar and other potential future events
include
sufficient details about the proposed corrective management actions
milestones
anticipated results against which the plan's effectiveness can be measured and
monitored
specific timeframes within which the capital ratio is expected to return to the
Internal Target
Appendix I : Determining an Internal Target Capital Ratio
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Section C : Financial Reporting and Solvency
Learning objective 1 : Describe the elements and prepare the schedules of the Canadian
Annual Return. Use these schedules as well as other tools to review the financial health
of an insurance entity. (Range of weight: 25-30 percent)
Knowledge statements
a. OSFI Annual Return
b. Valuation of assets and liabilities
c. Reinsurance accounting issues including calculation of reinsurance penalties
d. Calculation of excess (deficiency) ratio of net claim liabilities
e. Calculation of change in surplus
f. Calculation of net income and comprehensive income
g. MCT
h. MSA ratios
i. A.M. Best rating system and BCAR
j. Key financial measures used by rating agencies
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Fair Value of Claims Liabilities
Introduction
valuation of claims liabilities on a faire value basis
Background
Basis of valuation
three different bases in valuing general insurance liabilities
(1) The non-discounted basis is the oldest basis
Sum of all future claim payments
Inflation could be applied to future payments
No time value of money is recognized
(2) Actuarial present value is the basis proposed by the CIA
Time value of money
3xPfAD
(3) The fair value basis
May be slightly different from the actuarial present value because some assets might
be classified as held to maturity in which case the carried value of these assets
are not market value
Special Discount Rate
Provisions for Adverse Deviations (PfAD)
keep the PfAD within a specific range
There are three specific PfADs
(1) Discount rate
(a) Credit risk
(b) Interest Rate Risk (also known as mismatching of asset/liability risk)
interest rate risk can be approximated as
[liability / invested assets] X absolute value of [(asset duration - liability
duration) / liability duration] X anticipated change in interest rate
(c) Timing Risk
Amount of discount = annual discount rate X liability duration
Faster payment means a shorter liability duration and a smaller discount
See example on timing risk on page 4
(2) Claims development PfAD
(a) Line of business considerations
duration of liability
(b) Company specific considerations
(3) Reinsurance collectibility risk
only one which can have a zero value
Limits of MfAD
See CIA Educational Note MfAD text
Conclusion
Fair value claims liability is not market value claims liability
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Section C : Financial Reporting and Solvency
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
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b.
c.
d.
e.
f.
g.
h.
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Canadian valuation of policy liabilities
U.S. GAAP
U.S. SAP
Difference between U.S. GAAP and SAP
IFRS
Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
A.M. Best rating system and BCAR
Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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CIA Educational Note : Margins for Adverse Deviations for P&C Insurance
1. Introduction
Purpose
Provide guidance in selection of MfAD
Purpose of MfAD in an analysis of policy liabilities is to reflect the degree of
uncertainty of the best estimate assumptions
Cost of Capital Methods
not addressed here
Topics for Future Research
2. Terminology
3. Desirable risk margin characteristics
a) The less that is known about the current estimate and its trend, the higher should be
the risk margins
b) Risks with low frequency and high severity should have higher risk margins than risks
with high frequency and low severity
c) For similar risks, contracts that persist over a longer timeframe should have higher
risk margins than those of shorter duration
d) Risks with a wide probability distribution should have higher risk margins than those
risks with a narrower distribution
e) To the extent that emerging experience reduces uncertainty, risk margins should
decrease, and vice versa
4. Three categories of MfAD
claims development
recovery from reinsurance ceded
investment return rates
5. Explicit assumptions - MfAD using a deterministic analysis
Claims development between 2.5% and 20%
Recovery from reinsurance ceded between 0% and 15%
Investment return rates from 0.25% to 2%
Margin for Claim Development
low margin for stable, strong, adequate, consistent and specific
high margin for significant changes, lack of consistency, inadequate, absence of
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guidelines
considerations are related to
insurer's operations
claims management
systems affecting claims handling procedures
claims management
leadership
personnel
adequacy of staffing
guidelines for claims handling
procedures for /philosophy regarding
opening claims
minor claims
major claims
defending claims
closing claims
claims expenses
procedures for establishing case outstanding
relative adequacy of case outstanding
underwriting
systems affecting underwriting
underwriting
leadership
personnel
adequacy of staffing
guidelines for underwriting
operations
technology and processing systems
internal controls
accounting systems
data on which the estimate is based
volume of losses and premiums in each period
homogeneity in data grouping
new exposure
for reinsurers
relationships with ceding companies
types of treaties
attachment points
limits
history of credible loss development experience
mix of business
stability of historical loss development experience
potential influence of large losses
line of business
environment
legislative
judicial
government
length of tail
latent claims
liability exposure
excess of loss exposure
coverage and/or policy form
compensation system (e.g., tort or no-fault)
retention of the insurer
Margin for Recovery from Reinsurance Ceded
Proportion of related party reinsurance
Ceded loss ratio
Ceded commission rate
Unregistered reinsurance
Reinsurers under receivership or liquidation
Reinsurers with weak financial condition
Signed reinsurance contract/cover notes
Claim coverage disputes with reinsurers
Reinsurance with balance sheet exposure
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Margin for Investment Return Rates
mismatch risk between payment of claims and availability of liquid assets
error in estimating the payment pattern of future claims
asset risk including credit/default risk and liquidity risk
considerations
matching of assets and liabilities
quality of assets
reliance on capital gains
capital losses
length of claim settlement period
claim payment pattern
determination of interest rate
projected cash flow
asset default risk
asset valuation issues
concentration by type of investments
concentration within types of investments
current economic conditions
investment expenses
Formulas assume a non-stochastic approach
Weighted Formula
iPM = interest rate for discounting based on notional matching of the individual
insurer's portfolio of assets to claim liabilities prior to MfAD
iAM = interest rate for discounting after MfAD
iRFM= interest rate of risk-free bonds, which reasonably match the payout of the claim
liabilities, at least as measured by duration
k
= a factor between 0% and 100% to reflect a reasonable estimate as to the
percentage by which iRFM would need to be adjusted to reflect a plausible
shortening of the uncertain duration of the claim liabilities due to
misestimation of the payment pattern coupled with a plausible shift in the yield
curve
iAM = minimum ( iPM , IRFM x (1 - k) )
MfAD= iPM - iAM = iPM - minimum ( iPM , IRFM x (1 - k) )
Explicit Quantification - Three Margins
estimates the margin for investment return as the sum of three margins
Asset/Liability Mismatch Risk Margin
coverage ratio
x (asset duration - liability duration) / liability duration
x interest rate movement in run-off period
where,
coverage ratio = premium liability + claims liability
/
investments + installment premiums
see page 15 for details
Timing Risk Margin
D = duration
d = discount rate
^d= discount rate adjusted
L = Liabilities
if duration is shortened by 10%
L / ( 1 + ^d ) ^ D = L / ( 1 + d ) ^ ( 0.9 x D)
Credit Risk Margin
comparing yield curves of high quality bonds vs corporate bonds
the extra yield on the corporate bond represents whhat the market considers to be
credit risk spread, usually measured in basis points over the government bond with
similar maturity
Total margin
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sum
Other Considerations
Investment expenses would be deducted from the portfolio yield before any calculations
are performed
6. Relevant Statistical Concepts
7. Stochastic Techniques
When using stochastic models, it is important for the actuary to recognize that the
provisions for adverse deviations do not cover the inherent or statistical volatility
arising from a particular model.
Sample Products
Stochastic modeling will typically be of benefit for
stop loss reinsurance
catastrophic P&C insurance risks
credit, warranty, and mortgage guarantee insurance
long-tail lines of business such as professional liability
9. Quantile Approaches
Multiples of Standard Deviation
Simplicity and practicality - advantages
Percentile or Confidence Levels
common
value at risk (VaR)
CTE
conditional expected value
Evaluation of Quantile Methods
two aspects of insurance liabilities be considered to measure risk margin
time - the rate at which risk is replaced over time (i.e., settlement pattern)
shape - the risk distribution of possible outcomes around the mean value, at the
reporting date, over a specified time horizon
Practical Issues and Partial Solutions of Quantile Approaches
Selection of Confidence Level or CTE Level
no theory or practice has yet developed
Different Confidence Levels for Different Products or During Claims Runoff
While different confidence levels may be required for different products and years at
different levels of maturity, a constant CTE level or a multiple of standard deviations
approach might better achieve the desired simplicity
Sources of Risk Distributions and Treatment of Extreme Events
Among the approaches to address this problem are the use of
weighted averages of possible scenarios of relevant extreme events (usually those not
reflected routinely or at all in the available data)
judgemental analysis of particular operational or risk issues (e.g. new claims or
underwriting systems or procedures)
10. Comparison of risk margin methods
Summary Observations
In the quantile family of methods, CTE approaches are theoretically more sound than
confidence level approaches, with the differences being significant for products with
more skewed risk distributions. Regulatory oversight or actuarial practice would
apply higher confidence levels for products with risk distributions that are more
highly skewed
Quantitative Comparison
Review page 30 Table 10.2
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Section C : Financial Reporting and Solvency
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Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
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International Financial Reporting Standard 4
Insurance Contracts
Introduction
Reasons for issuing the IFRS
(a) to make limited improvements to accounting for insurance contracts until the Board
completes the second phase of its project on insurance contracts
(b) to require any entity issuing insurance contracts (an insurer) to disclose
information about those contracts
Main features of the IFRS
applies to all insurance contracts
Potential Impact of future proposals
International Financial Reporting Standard 4
Insurance Contracts
Objective
IFRS requires
(a) disclosure that identifies and explains the amount in an insurer's financial
statements arising from insurance contracts and helps users of those financial
statements understand the amount, timing and uncertainty of future cash flow from
insurance contracts
Unbundling of deposit components
to unbundle a contract, an insurer shall:
(a) apply this IFRS to the insurance components
(b) apply IFRS 9 to the deposit component
Recognition and measurement
Temporary exemption from some other IFRSs
Liability adequacy test
An insurer shall assess at the end of each reporting period whether its recognised
insurance liabilities are adequate, using current estimates of future cash flows under
its insurance contracts. If that assessment shows that the carrying amount of its
insurance liabilities (less related deferred acquisition costs and related intangible
assets, such as those discussed in paragraphs 31 and 32) is inadequate in the light
of the estimated future cash flows, the entire deficiency shall be recognised in
profit or loss.
Changes in accounting policies
An insurer may change its accounting policies for insurance contracts if, and only if,
the change makes the financial statements more relevant to the economic decision-making
needs of users and no less reliable, or more reliable and no less relevant to those
needs. An insurer shall judge relevance and reliability by the criteria in IAS 8
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Shadow accounting
An insurer is permitted, but not required, to change its accounting policies so that a
recognised but unrealised gain or loss on an asset affects those measurements in the
same way that a realised gain or loss does. The related adjustment to the insurance
liability (or deferred acquisition costs or intangible assets) shall be recognised in
other comprehensive income if, and only if, the unrealised gains or losses are
recognised in other comprehensive income. This practice is sometimes described as
'shadow accounting'
Disclosure
Explanation or recognised amounts
An insurer shall disclose information that identifies and explains the amounts in its
financial statements arising from insurance contracts
Nature and extent of risks arising from insurance contracts
An insurer shall disclose information that enables users of its financial statements
to evaluate the nature and extent of risks arising from insurance contracts
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Section C : Financial Reporting and Solvency
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Solvency II - KPMG
What is Solvency II?
new regulatory framework for the European insurance industry that adopts a more dynamic
risk-based approach and implements a non-zero failure regime, i.e., there is a 0.5
percent probability of failure.
In summary, the regime intends to provide
Alignment of economic and regulatory capital including giving appropriate recognition
of diversification benefits within companies and between subsidiaries
Freedom for companies to choose their own risk profile and match it with an appropriate
level of capital
An early warning system for deterioration in solvency by active capital management
By better aligning risk and capital management, encouraging an improvement in the
identification of risks and their mitigation
Exploring the three pillars
Differences between Basel II (banks) and Solvency II (Insurance)
Basel II
Separate models for investment, credit, and operational risks
Focus on assets side
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Solvency II
risk-based portfolio analysis by applying an integrated approach, taking into account
dependencies between risk categories
Focus on both assets and liabilities
Pillar 1
Covers all the quantitative requirements, models and stuff
Pillar 2
Impose higher standards of risk management and governance within a firm's organization
Qualitative requirements
Pillar 3
Aims for greater levels of transparency for supervisors and the public
Disclosure
Comparing U.S. and EU systems
Methodology
US : Static factor model
EU : Dynamic cash-flow model
Rule vs principle based
US : Rules-based, except variable annuities
EU : Principles-based
Total balance sheet approach
US : No
EU : Yes
Definition based on market or book values
US : Book value
EU : Market value, i.e., economic balance sheet created
Classification of available capital
US : No
EU : Yes, economic value of assets and liabilities
Consideration of off-balance-sheet items
US : No
EU : Yes
Time horizon
US : 1 year
EU : 1 year, with planning cycle for own risk and solvency assessment
Risk measure
US : No risk measure
EU : Value at risk/99.5 percent confidence level
Operational Risk
US : Not explicitly (implicit via business risk)
EU : Explicitly modeled
Catastrophe Risk
US : Not specifically identified and considered in NAIC formula
EU : An important shock component of the insurance risk component
Correlation among risk categories
US : Only considered correlation for credit risk and reserve risk; square root formula
assumes other risk components are independent
EU : Condiser correlation within and across risk categories
Consideration of management risk
US : No, but future linkages between risk assessment and capital impact are being
considered under the SMI initiative
EU : Yes
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Section C : Financial Reporting and Solvency
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Accounting Practices and Procedures Manual - NAIC
Statutory Accounting Principles Preamble
Concepts of SAP
Conservatism
Consistency
Recognition (liabilities are they are due, revenue as they are earned)
Permitted vs Prescribed accounting practices
Somewhere in there there is some content about the difference between SAP and GAAP
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Section C : Financial Reporting and Solvency
Learning objective 3 : Distinguish between different financial reporting and solvency
standards (Range of weight: 5-8 percent)
Knowledge statements
a. Canadian GAAP
b. Canadian valuation of policy liabilities
c. U.S. GAAP
d. U.S. SAP
e. Difference between U.S. GAAP and SAP
f. IFRS
g. Rules-based and principles-based solvency regulation (RBC, MCT, and Solvency II)
h. A.M. Best rating system and BCAR
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Canadian Vision For P&C Insurer Solvency Assessment
P&C MCT Advisory Committee Objective
In timeline order
Simple standardized tests like the Minimum Asset Test and Deposit Adequacy Test
Risk-based standardized tests like MCT / BAAT
Standardized test augmented with stress testing (DCAT). This is the current approach.
Increasing sophistication
Option of using internal models or standardized test. Developing models one risk at a
time (partial modeling). This is the interim objective of the committee
Internal modelling of all risks (full modelling) for insurers that opted to use internal
models. This is the ultimate objectibe of the committee.
Comparison of Minimum and Target Asset Requirements
MAR - Minimum Asset Requirement
TAR - Target Asset Requirement
Purpose
MAR : Determines the point at which the regulator takes control or other appropriate
action
TAR : Going concern level of assets that regulator expects an insurer to maintain as a
minimum
Standard vs Internal model
MAR : Standard only
TAR : Standard or internal model
Sufficiency Level
MAR : To be determined
TAR : 99.5% VaR or 99% TVaR over 1yr horizon + terminal provision
Comparison of Internal model and Standard Approaches
Type
Internal : Internal model based on multiple scenario tests and/or stochastic approaches
using company specific assumptions (where appropriate) and data
Standard : Formula or factor based calculation using industry assumptions and applied
to company specific data
Risks
Internal : All risks explicitly and appropriately modeled
Standard : All risks recognized implicitly or explicitly in formulation of standard
approach and appropriately modeled
Application
Internal : Selection of internal model vs standard approach may be made for credit,
market, insurance and operational risk separately
Standard : Selection of internal model vs standard approach may be made for credit,
market, insurance and operational risk separately
Risk Mitigation
Internal : Risk mitigation modeled
Standard : Key types of mitigation recognized implicitly or explicitly
Risk Dependencies (e.g. correlation, concentration)
Internal : Risk dependencies within and between risks are modeled when appropriate and
measurable
Standard : Partial recognition of dependencies within key risks
Confidence Level
Internal : 99.5% VaR or 99% TVaR over 1yr horizon + terminal provision
Standard : 99.5% VaR or 99% TVaR over 1yr horizon + terminal provision
Calibration
Internal : Calibrated according to internal model standards established by actuarial
profession and regulator in consultation with the industry
Standard : Periodically calibrated by the regulator in consultation with the industry
and with reference to the internal models filed with the regulator
Results
Internal : Understandable and verifiable
Standard : Understandable, verifiable and more rules based
Use
Internal : Used for TVaR if approved by regulator
Standard : Calculated by all companies. Used by companies for TAR where internal models
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are not approved. Used by all companies for MAR.
Parallel Runs
Internal : A minimum of 4 to 12 quarters (to be determined by the regulator based on
various criteria) of high quality parallel runs per risk will be required
Standard : Not required
Financial Requirement Specifics
TAR specific requirements
Time horizon
one year
Terminal provision
fulfill its policyholder obligations over the remaining lifetime or to pass the risks
on to a succeeding insurer.
Confidence Level
Value at Risk (VaR) 99.5% confidence level or TVaR with 99%
Consistency
Asset and liability risks will be assessed in a conscient manner based on "market
related information".
Market risk
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Section C : Financial Reporting and Solvency
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
d. Effect of reinsurance on MCT
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Basic Reinsurance Accounting - Selected Topics by Ralph Blanchard
Really have to check the exhibit closely, that's where the meat is
Reinsurance can be used for
1. Increase large line capacity
"surplus share" pro rata reinsurance treaty that cedes premiums and losses for such
higher valued homes, with the ceding percentage for each policy equal to the excess of
the home value over 500k divided by the total home value.
2. Provide Catastrophe Protection
catastrophe treaty, if covers from january 1st to december 31, no ceded unearned
3. Stabilize loss experience
treaty to ceded loss above a certain loss raio
4. Provide surplus relief
50% quote share
5. Facilitate withdrawal from a market segment
cede 100% liabilities for 98% of liabilities
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6. Provide underwriting guidance
closest to 1.
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Section C : Financial Reporting and Solvency
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
d. Effect of reinsurance on MCT
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No question since 2007, just do the bloody questions
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Section C : Financial Reporting and Solvency
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
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Common Pitfalls and Practical Considerations in Risk Transfer Analysis
2. Brief history of risk transfer
Generally both standards (GAAP and SAP) require that
1. The reinsurer assumes significant insurance risk under the reinsured portion of the
underlying insurance agreement
2. It is reasonably possible that the reinsurer may realize a significant loss from the
transaction
2.1 One Exemption from Risk Transfer Requirements - "Substantially All"
The most common examples are straight quota share or individual risk contracts with no
loss ratio caps or other risk limiting features. It allows companies to acquire
qualifying reinsurance on inherently profitable books of business where it may not be
File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt
reasonably possible that the reinsurer will realize a significant loss
2.2 Required Risk Transfer Documentation and Reasonably Self-Evident
"reasonably self-evident" meeting a 1% Expected Reinsurer Deficit (ERD) threshold
2.3 Selected Risk Measuring Method - Expected Reinsurer Deficit (ERD)
ERD can be viewed as the probability of a net present value (NPV) underwriting loss for
the reinsurer multiplied by the NPV of the average severity of the underwriting loss. A
treaty is typically considered to exhibit risk transfer if ERD is greater than 1%.
2.4 Risk Transfer Thresholds
1%
3. Common pitfalls and practical considerations discussion
Contract #1 is a quota share
Contract #2 is an excess of loss contract
See example on page 8-9
For the two example contracts it is not reasonably "self-evident" that risk transfer
exists due to the presence of such features as low loss ratio caps and swing-rated
premiums
3.1 Analysing Risk Transfer
3.2 Common Pitfalls
3.2.1 Profit Commissions
Should not be considered in risk transfer analysis
While profit commissions can affect the economic results of a treaty, they usually are
not triggered during a reinsurer loss.
The results of the ceding company should not be considered in a risk transfer analysis
If there is carryforward from a previous year that would affect results where there is a
loss for the reinsurer, then it must be incorporated into the cash flow model.
3.2.2 Reinsurer Expenses
Only cash flows between the ceding company and the reinsurer should be considered in a
risk transfer analysis.
3.2.3 Interest Rates and Discount Factors
The interest rate should not vary by scenario because risk transfer analysis should only
consider insurance risk. Non-insurance risks such as investment risk, currency risk and
credit risk should not be included.
3.2.4 Premiums
one of the most significant inputs
Should be gross premiums
Gross premiums entail all premium paid to the reinsurer before the consideration of any
payments back such as a ceding commission
Required that the present value of the premium be used.
It is imperative that actual premiums are developed along with the losses for each
scenario and that each scenario has a corresponding percent of reinsurer loss developed
When there are fees that depend upon future events, the impact of these events should
be included in the model.
Commutation fee (delay) should be considered as premium
Any cash flows from the ceding company to the reinsurer should be considered as premium.
If this were not the case, the determination of risk transfer could be manipulated based
upon the labeling of certain cash flows as premiums or fees.
3.2.5 Evaluation Date
date the contract comes into force
3.2.6 Commutations and Timing of Payments
any reinsurance contracts that have prescribed payment patterns do not meet the risk
transfer requirements.
There must be timing risk as well as underwriting risk.
3.3 Practical Considerations
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3.3.1 Parameter Selection
Any parameters that are not given by the contract must be selected after some
contemplation. This includes the interest rate, payment pattern, and any loss
distributions used for projecting cash flows.
3.3.2 Interest Rate
Risk-free rate based upon duration
Same rate be used throughout the analysis
3.3.3 Payment Pattern
Based on previous experience
It is important to at least consider this risk as you complete your analysis
3.3.4 Loss Distribution
Based on previous company experience, industry benchmarks, pricing information, or
judgment, or all of these factors
3.3.5 Parameter Risks
A key consideration for any simulation model is parameter risk
3.3.6 Use of Pricing Assumptions
One potential resource, the reinsurance pricing assumptions
Pricing assumptions should only be used in selecting parameters when reasonable
3.3.7 Commutation Clauses
4. Conclusions
no "bright line"
final decision belongs to the CEO or CFO
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Section C : Financial Reporting and Solvency
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
d. Effect of reinsurance on MCT
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No question since 2007, just do the bloody questions
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Section C : Financial Reporting and Solvency
Learning objective 4 : Identify reinsurance accounting issues and explain their effect on
financial reporting for an insurance entity. (Range of weight: 5-8 percent)
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Knowledge statements
a. Financial effect of different types of reinsurance
b. Risk transfer
c. Commutations
d. Effect of reinsurance on MCT
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Commutation of Claims - Steeneck
Claims commutation
a process where the future value of an unpaid claim(s) and associated expenses is current
valued, taking into account financial and non-financial aspects, to accelerate payment
and close the case(s)
Ambivalence point is a point estimate monetary figure representing the highest value the
seller is willing to pay the buyer, beyond which, the economics become unattractive
See example on pages 14-15
The commutation ambivalence point is equivalent to the tax on commutation plus the net
present value of losses.
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Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Subsequent Events
2. Definitions and Standards of Practice
Subsequent event
An event of which an actuary first becomes aware after a calculation date but before the
corresponding report date.
Events after the reporting period
Between the end of the reporting period and the date when the financial statements are
authorised for issue
Adjusting events after the reporting period
Provide evidence of conditions that existed at the end of reporting period
Non-Adjusting events after the reporting period
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Indicative of conditions that arose after the reporting period
Event Decision Tree
When did the actuary first become aware of the event?
On or before calculation date
Reflect the event in the work
Between calculation date and report date (i.e., a subsequent event)
Does the event reveal a data defect or calculation error
Yes
Reflect the event in the work
No
When did then event occur?
On or before calculation date
Reflect the event in the work
After calculation date
Does the event make the entity different?
On or before calculation date
Reflect the event in the work
After calculation date
What is the purpose of the work?
Report on entity as it will be as a result of the event
Reflect the event in the work
Report on entity as it was at the calculation date
Report event but don't reflect in the work
After report date
Would event have been reflected in the work if it were a subsequent event?
No
No further action required
Yes
Does the event invalidate the report?
No
Consider informing users but don't reflect event in the work
Yes
Withdraw or amend report
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Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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Not tested directly
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Section D : Professional Responsibilities of the Actuary in Financial Reporting
(Range of weight for section D: 8-12 percent)
Learning objective 1 : Explain de responsibilities of an actuary as defined by standards
of practice, regulators, and insurance laws for financial reporting.
Knowledge statements
a. Statutory Actuarial Opinion
b. Contents of Statutory Reports of the Actuary
c. Standards of Practice
d. Educational Notes
e. Insurance Companies Act
f. Actuary and auditor relationship
g. Regulatory requirements
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