File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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) Page 1 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 2 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 3 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 4 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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. Page 5 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 6 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 7 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 8 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Page 9 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 10 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 11 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 12 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 13 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary Page 14 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Life Insurance Laws of Canada (Common Law Provinces) B.R. McDonald, 1995 Page 15 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt (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) Page 16 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt - 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 Page 17 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Foundations of US Insurance Regulation Page 18 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 19 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 20 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 21 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Page 22 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 23 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 24 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## Page 25 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 26 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 27 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) Page 28 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 29 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 30 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 31 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Section 10: Rating examples Annual basis If more than one rate is possible, provide lowest and highest rate Section 11: Fee changes Appendix D ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 32 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt (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 Page 33 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 34 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text Page 35 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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) Page 36 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 37 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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[Î ut] Î ut 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 Page 38 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 39 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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. Page 40 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt (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) ########################################################################################## # # Summary # ########################################################################################## 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 Page 41 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 42 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 43 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt -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 Page 44 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 45 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 46 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # Page 47 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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) Page 48 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 49 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 50 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 51 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 52 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 53 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 54 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) Page 55 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## Page 56 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt # # Summary # ########################################################################################## 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? Page 57 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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". Page 58 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## Section A : Regulation of Insurance and Canadian Insurance Law Learning objective 4 : Describe the litigation environment with respect to insurance. Page 59 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt (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 ########################################################################################## # # Summary # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## Page 60 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 61 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## # # Summary # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 62 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) ########################################################################################## # # Summary # ########################################################################################## 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 Page 63 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 64 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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: Page 65 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt -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) ########################################################################################## # # Summary # ########################################################################################## 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 Page 66 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 67 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt b. How well program meets its purpose c. Effect of external factors (e.g., economic conditions, weather, regulation, etc) ########################################################################################## # # Summary # ########################################################################################## 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. Page 68 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 69 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 70 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) ########################################################################################## # # Summary # ########################################################################################## 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 | ------------------------------------------------------------| | | 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 Page 71 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # Page 72 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt # Specific LOs for this text # ########################################################################################## 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) ########################################################################################## # # Summary # ########################################################################################## 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 Page 73 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 74 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 75 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 76 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 77 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 78 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 79 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 80 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 81 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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) ########################################################################################## # # Summary # Page 82 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt ########################################################################################## 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 Page 83 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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) ########################################################################################## # # Summary # ########################################################################################## 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 Page 84 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 85 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 86 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 87 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Dialogue IBC Support existing efforts, not replace current land use planning ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 88 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ) Page 89 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 90 of 164 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 Page 91 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Terrorism : Terrorism charge Stress Test Adjustments : Reduce surplus Two-Company illustration (A and B) Conclusion It's only a tool. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 92 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 93 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 94 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Conclusion Tailored BCAR for each entity's financial condition after a catastrophe ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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. Page 95 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 Page 96 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 ########################################################################################## # # Summary # ########################################################################################## 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) Page 97 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 98 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 99 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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) Page 100 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 101 of 164 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 Page 102 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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% Page 103 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 104 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 105 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 106 of 164 / (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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 107 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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" File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 108 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 109 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 110 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 111 of 164 (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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 112 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 113 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 114 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 115 of 164 g. Regulatory requirements ########################################################################################## # # Summary # ########################################################################################## 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 .... ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt g. h. i. j. Page 116 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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?) File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 117 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 118 of 164 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 119 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Evaluation of the runoff of claim liabilities when the liabilities are discounted in accordance with accepted actuarial practice File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 120 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 121 of 164 (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 ########################################################################################## # # Summary # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## Section C : Financial Reporting and Solvency File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 122 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 123 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 125 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 126 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 127 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 128 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 129 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 130 of 164 # # Summary # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 131 of 164 # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 132 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 133 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 134 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 135 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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) File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 136 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 137 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 138 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 139 of 164 (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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 140 of 164 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 141 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 142 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 143 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 144 of 164 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 145 of 164 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) ########################################################################################## # # Specific LOs for this text # ########################################################################################## Section C : Financial Reporting and Solvency Learning objective 2 : Calculate MCT and use MCT and DCAT to evaluate the health of an File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 146 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 147 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 148 of 164 # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt b. c. d. e. f. g. h. Page 149 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 150 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 151 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 152 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## Section C : Financial Reporting and Solvency File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 153 of 164 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 154 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt 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 Page 155 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 156 of 164 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 157 of 164 # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 158 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 159 of 164 6. Provide underwriting guidance closest to 1. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## No question since 2007, just do the bloody questions ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 Page 160 of 164 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 161 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## No question since 2007, just do the bloody questions ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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) File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 162 of 164 Knowledge statements a. Financial effect of different types of reinsurance b. Risk transfer c. Commutations d. Effect of reinsurance on MCT ########################################################################################## # # Summary # ########################################################################################## 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. ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## 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 File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 163 of 164 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 ########################################################################################## # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ########################################################################################## Not tested directly ########################################################################################## File: /home/bruno/Dropbox/Brunob/Exams/Exam 6C/summaries/all.txt Page 164 of 164 # # Specific LOs for this text # ########################################################################################## 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 ########################################################################################## # # Summary # ##########################################################################################
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