Glossary of CAS 7
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- According to Mallor, Define a tort
- A tort is any civil wrong inflicted upon a person other than by a breach of contract.
- According to Mallor,list the 4 types of wrongfulness and describe
- 1 Intent - desire to cause certainconsequences
2 Recklessness - A concious indifference to a known high risk of harm
3 Negligence - Conduct that falls below the level necessary to protect others against harm
4 Strict Liability - Liability irrespective of fault
- According to Mallor,whatare the differences in the burden of proof in a civil vs. criminal case?
- Civil - Proponderence of Evidence (less stringfent than
Criminal - Beyond a reasonable doubt
- According to Mallor, List the 2 major types of damages recoverable under cases and give examples
- 1 Compensatory Damages (tangible and intangible: like medical expenses vs. damage to reputation)
2 Puntiitve Damages - for flagrant wrongness is becoming greater part
- According to Mallor, List the 3 elements of a negligence case that a plaintiff must prove to recover:
- 1 a breach of duty by the defendant
2 actual injury suffered by the plaintiff
3 actual and proximate causation between the breach and the injury
- According to Mallor, List the 2 traditional defenses in a negligence case and the 2 newer defenses
- Traditional 1 - contributory negligence
Traditional 2 - assumption of risk
Newer 1 - compareitive negligence
Newer 2 - Comparitive fault
- According to Mallor, List the 3 classifications of people who enter your land and you owe a duty to:
- 1 Invitees - business people and public people who are lawfully on your land
2 Licensees - the privelege to enter land dependent on landowner (social guests/family/soliciters)
- According to Mallor, Define "Negligence Per Se"
- There must be a violation of a law by defendant, in addition the palintiff must be the type of person protected by said law and suffer a harm the law or statute was intended to protect against. Baldwin vs. GTE South (phone booth case were there waqs a law on locations of phone booths)
- According to Mallor, Describe the principle of Res Ipso Loquitur"
- "Thing speaks for itself"
1 - The defendant has exclusive control of the instrumentality of harm
2 - the harm that occurred would not normally occur in the absence of negligence
3 the plaintiff was in no way responsible for his own injury
- According to Mallor, Describe Contibutory Negligence
- Th plaintiff's failure to excersize reasonable care for her own safety. This can be a complete defense unless the the plaintiff can show the defendant had the "last clear chance" to avoid the injury
- According to Mallor, Describe Comparitive Negligence
- The courts determine the relative negligence of the parties and award damages in proportion to the degree of negligence determined. Also there is the pure system where percentages always apply or the "mixed system" where the dedfendant must be at least 50% at harm to pay any damages
- According to Mallor, Describe Assumption of risk:
- The palintiffs VOLUNTARY consent to a KNOWN danger
- According to Mallor, Describe Strict Liability
- Liability without fault or irrespective of fault
-no intent to harm
2 most common (abnormally dangerous activities and sale of defective dangerous products)
- According to Mallor, List the two things that a tort reform legislation can do and give some examples
- 1 - Limits plaintiff's ability to get a judgement and
2 - Limits the damages a plaintiff can recover once they get a judgement
EX1 - Restricitng the liability of social hosts or businesses for the damages caused by intoxicating people to whom they serve alchohol
EX2 statutory limits on punitive damages
EX3 Med-Mal has seem some statutory caps on claims and also forcing mediation before trial
- According to Mallor, Define Recklessness
- willful disregard for another's safety
- According to Mallor, Define Negligence
- A person or group causing injury failed to excersize reasonable care in their action or inaction
- According to Mallor, list 4 reasons for the 20th century's adaptation of "Pro-Consumer" Rules
- 1- There is less of a percieved need to protect manufacturers of defective goods in a viable industrial economy
2- Long distributioin chains means that consumers no longer deal directly with the parties responsible for the defects
3 - Large corporations dominate the economy and people have less bargaining power.
4 - Complexity of goods have made buyer inspections more difficult
- According to Mallor, How has the switch from "caveot emtor" to "caveot venditor" led ot socializtion of risk?
- Caveot Emptor - "let buyer beware"
Caveot Venditor "let seller beware"
A belief that sdellers/manufacturers and their insurers are best able to to bear the economic costs associated with product defects and can pass these costs on through higher prices.. hence this risk ahas become socialized.
- According to Mallor, Describe "Contractual Theories" and "Tort-based theories" of product liability
- Contractual theories involve a product warranty
tort-based theories - plaintiffs argue that the defendant was negligent or that strict liability should apply.
- According to Mallor, According to UCC section 2-313, states that an Express Warranty is created in any of 3 ways:
- 1 - Any affirmation of fact or promise regarding the goods (written or oral)
2 - Any descriptions of the good - staetements/blueprints/adjectives describing goods
3 - A sample or model of goods to be sold
- According to Mallor, Desribe "Implied Warranty of Merchantability"
- Implied warranty is created by law rather than the seller's statements. UCC says goods must be merchantable (be fit for ordinary purposes for which goods are used)
- According to Mallor, Desribe "Implied Warranty of Fitness"
- a) The seller has a reason to know a particular purpose for wich the buyer requires the goods
b) the seller knows that the buyer is relying on the knowelege of the seller to select a suitable good.
c) the buyer actually relies on sellers expertise to select good.
EX: Fast guy asks if hammock weill support his weight
- According to Mallor, Describe Section 402A's requirements in a strict liability case
- A seller is liable for physical harm or property damage suffered by the ultimate user of the product if the product "was in a defective condition unreasonably dangerous to the user or consumer or to his property" Sectoin 402A requires that 2 tests are met:
1 The seller must be engaged in the business of selling the product that harmed the plaintiff
2 The product must be in a defective condition when sold, and also must be unreasonably dangerous because of that condiditon
3- the buyer did not substantially alter the product from its original form
- According to Mallor, Describe the federal Magnuson-Moss Warranty Act
- Applies to sales of consumer goods that cost more than $10
If a written warranty is written, it must be full or limited
-a full warrant promises to a) remedy any defects in the product and b) replace the product or refund the purchase price
A seller who gives a limited warranty is bound to the promises it actually makes
- According to Mallor, Section 402B lests a consumer recover from injury resulting from misrepresentations about goodds they purchased if the following 4 criteria arte met:
- 1-made by a party engaged in the business of selling the same type of goods
2-made to the public by advertising, labels, or similar means
3-a fact material to the goods purchased
4-actually and justifiably relied on by the the consumer
- According to Mallor, List the 3 major kinds of damages awarded in Products liability and describe.
- 1- Basis of Bargain Damages - (direct economic loss of buying defective product)
2-Consequential DFamages - Personal Injury, property damage, and indirect economic loss, non-economic loss (pain and suffering)
3- Punitive Damages - to punish defendants who have acted in a outrageous fashion
- According to Mallor, Define a "Product Liability Disclaimer"
- a "Product Liability Disclaimer" is a clause wherby the seller tries to eliminate its liability under 1 or more theories of recovery
- According to Mallor, Define a "Remedy Limitation"
- A Remedy Limitation is a clause attempting to block recovery of certain damages (prevents recovery of certain types of damages but doesn'attack the palintiff's theory of recovery)
- According to Mallor, How can a seller exclude the implied waranty of merchantibility
- A seller must:
1- use the word merchantibility
2- make the disclaimer conspicuous if written
- According to Mallor, How can a seller exclude the implied waranty of fitness?
- A seller must
1-use a writing
2- make the disclaimer conspicuous
- According to Mallor, List 3 traditional products liability defenses that involve the plaintiff's behavior
- 1- abnormal use
2- Assumption of Risk
3- Contibutory Negligence
- According to Miceli, what are the 2 primary social functions of tort law?
- 1- To Compensate victims for their injuries
2 -to deter "unreasonably" risky behavior
- According to Miceli, what is the primary goal to an economic approach to tort law?
- primary goal to an economic approach to tort law is optimal detterence. For all those engaged in risky activities to take all cost-justified steps to minimize overall accident costs
- According to Miceli, Describe the unilateral care model
- Only the injurer can invest in in costly precaution, or care, to reduce the likelihood and severity of damages to a victim
- According to Miceli, Describe the bilateral care model
- Both injurer and victim can invest in precaution
- According to Miceli, list 3 simplifications to Miceli's model
- 1 - Administrative costs of resolving tort claims are initially ignored
2- Assumes injurers themselves suffer no damages
3- The question of wether it is beneficial for the injurer and the victim to be engaged in the risky activity and at what level is ignored
- According to Miceli, At what point does x* occur under the MArginal Hand rule?
- Optimale Care occurs where the slopes of x and pD are equal. This is referred to aS THE MARGINAL HAND RULE
- According to Miceli, List a complication in applying marginal analysis to actual accident cases
- Care ussually comes in discrete bundles and does not vary continuously.
- According to Miceli, How does Equilibrium change between a "Simple Negligence" defense and "Negligence with contributory negligence" defense?
- In NAsh equilibrium both parties choose efficient care. Adding a defense of contributory negligence
1- does not distort incentives
2- does not affect the allocation of liability in equilibrium (victim bears liability)
- According to Miceli, Since negligence with contributory negligence does not affect equilibrium or liability what isd its 1 disadvantage
- It is likely costlier to administer because it requires courts to evaluate compliance with 2 2 standards of care rather than 1.
- According to Miceli, When asctivity levels matter in a unilateral model, what is preferred negligence or strict liability?
- Strict liability because the injurer will not choose the efficient activity level under negligence
- According to Miceli, What are 2 problems with liability insurance for tort law?
- 1) Insurance reduces the ability of tort law to create incentives for care
2) Insurance will cause injurer to take too little care from a social perpective
- According to Miceli, list 2 methods insurers use to mitigate moral hazards
- 1 - Providing premium discounts/surcharges to those who adopt/fail to adopt risk-reducing behavior
2- Offering partial coverage like high dedcutibles for lower premium
- According to Miceli,
In the model with Litigation Costs, strict liability gives inadequate incentives for injurer care for 2 reasons:
- 1 - litigation costs will deter some victims from filing suit
2- the injurer will ignore the litigation costa incurred by the victims who do file suit.
- According to Miceli, Define Privity Limitation
- privity limitation means that a consumer only had the right to sue the person he had a contractual relationship with. Ex. Driver could only sue dealership, not the manufacturer of the car
- According to Miceli, What was overturned in the 1916 MacPherson vs. Buick case?
- The privity limitation was overturned
- According to Miceli, Define the Coase Thereom
- the Coase Thereom says that when parties to a legal dispute can bargain at a low cost, they will allocate recources efficiently regardfless of the assignment of liability
- According to Miceli, How do individuals tend to misperceive risks
- In a systematic way.
They tend to overestimate the low probability risks and underestimate the high probability risks
- According top Miceli, How do misperceptions affect output.
- As long as consumers expect to bear some of the losses, misperceptions will affect output.
1- If consumers overestimate risks (alpha greater than 1) output is too low (consumers demand too little of product)
2- If consumers underestimate risks (alpha less than 1) output is too high (consumers demand too much of product)
- According to Miceli, why do mispercetions by the consumer support strict liability?
- The party who more accurately perceives the risk should bear the liability in equilibrium.
The historical trend toward strict liability is supported in conjunction with the increasing complexity of most consumer products
- According to Hamilton and Ferguson, Describe a modified No-Fault plan
- -most common form of no-fault legislation
-partially restricts the right to sue but does not eliminate it
-offers a comprehensive personal injury protection package to injured auto accident victims
-in most states places a ceiling on the max personal injury benefits
- According to Hamilton and Ferguson, Define a threshold in a modified no-fault plan
- -is a boundary that must be crossed before an injured person can make a tort liability claim
-can be verbal ort monitary
-a threshold is unique element of a modified plan
-distinguishes it from a pure plan and an add-on plan
- According to Hamilton and Ferguson, Describe an Add-On no-fault plan
- -expanded version of medical payments and disability coverages
-provides benefits similar to PIP benifits in a modified plan
-NO RESTRICTION on the right to sue
-contains off-sett provision that entitle a no-fault insurer to reimbursement for no-fault benefits paid to the injured person.
- According to Hamilton and Ferguson, Describe Choice No-Fault plans
- Insured has option at the time the policy is purchased, of choosing to be covered under no-fault insurance
- Predium reductions offered to those who select no-fault coverage
-insured gets to choose appropriate amounts of coverage for himself
- According to Hamilton and Ferguson, describe what is meant by a coordination of benefits provision, in a no-fault plan
- To Reduce the cost of Auto insurance a coordination of benefits provision is used.
-these provisions make either the health or the auto insurance primary and require that the premium for the excess insurance source be reduced accordingly.
-ussually benefits from federal or state insurance plans are (WC, disability, social security) are deducted from no-fault payments
-then health insurance plans are not reduced, but, they can recover against the no-fault plan
- According to Hamilton and Ferguson, does the primary PIP follow the auto or the insured?
- It varies can be either way, but iof both apply then pasyments are pro-rated.
- According to Hamilton and Ferguson, Described the assigned claims plan in no-fault insurance
- When no insurance is available from any source (both parties uninsured) then "assigned claims plan" kicks in.
-funded by insurance companies
-claims assigned based on volume of insurance a carrier writes in that state.
-gives insurer the right of subrogation against uninsured driver.
- According to Hamilton and Ferguson, Has no-fault insurance plans succeeded in reducing auto insurance premiums?
- The reduction in premiums has not been attained, as there is a wide gap between the no-fault plans that have been introduced and the concept of a pure no-fault insurance.
-Further change and innovation are inevitable.
- According to AAA "Current Issues in Asbestos Litigation", Since a victim 's disease is often attributed to multiple exposures over decades of use, How does a typical claimant file suit?
- -A single claimant typically files suit against 60 or more defendants
-The majority of claims are filed in state courts
-the mix of claims by state has varied dramatically over time
- According to AAA "Current Issues in Asbestos Litigation", Describe the RAND corporation's may 2005 report
- - one of the most comprensive asbestos studies of all time
- it shows that at least 730,000 claimants had filed suit through 2002 against more than 8,400 defendants
--showed that the annual number of claims increased sharply beginning in the mid to late nineties, and the nonmalignant unimpaired claimants account for most of the growth.
-there is concern due to the increase in claims because of a depletion in funds to pay future claims
-there was at least $70 billiuon paid claims due to nonmalignant claimants
RAND study does not include information past 2002.
- According to AAA "Current Issues in Asbestos Litigation", list 5 notable changes since 2002 (RAND study)
- 1 - more recources to direct recources to the sickest claimants (changes to the MAnville Trust Distribution Process and state reforms imposing medical criteria to bring a claim)
2 - a decrease in claims filing in 2004-05 of less severe medical conditions
3 - additional bankruptcies, but at a lower annual rate
4 - continued federal and state reforms
5 - heightened scrutiny of potentially fraudulent claims
- According to AAA "Current Issues in Asbestos Litigation", The Manville Corporation was the largest asbestos manufacturer, they have claims experience available through 2005 describe some of the conclusions from their data
- 1- more than 100,00 claims filed in '03
2- Mesothelioma claims have steadily increased due to (a - change in TDP effective that year, b- greater medical awareness and diagnossis of mesothelioma, and c - increases in claimants propensity to sue, rather than increase in disease incedence)
-nonmalignant claims have varied much more over time
-Predicts that 1.2-2.1 million claims will ultimately be filed
- According to AAA "Current Issues in Asbestos Litigation", why could dedfense costs increase in the future?
- - more defendants are now involved in litigation and defense is no longer routinely handled on a joint basis
-many defendants have abandoned settlement strategies
-newer defendants are incurring significant discovery costs as they work to understand their exposure and potential defenses
- overage disputes between the denfendants and insures, as well as between insurers and their reinsurers might increase
- According to AAA "Current Issues in Asbestos Litigation", there have been various proposals for asbestos reform, but the economic costs are uncertain, list 2 reasons for the uncertainty:
- 1 - sources of information regarding asbestos claims are limited
- the time horizon for the projections span 50 years
- According ot AM Best's, "Business as never before" List 4 court decusions in 2004 that are changing the way insurers work.
- 1 - Plaintiff's sought rulings on coverage disputes, payment caps, and punitive damage awards
2 - World Trade Center insurance litigation has made insurers aware of the need to document complex insurance transactions carefully
3 - Health insurers can operate knowing that the Employee Retirement Income Security Act pre-empts any state lawclaims regarding employee benefit plans
4 - Premium disclosure policies are more closely examined by life insurers as numerous lawsuits regarding modal premiums make their way through the courts
- According ot AM Best's, "Business as never before" health insurers (Cigna and Aetna) had moved their cases from state to federal court on the grounds that ERISA pre-empts any claims regarding employee benefit plans. Describe 2 benefits of ERISA
- 1- Under ERISA, patients can sue an HMO or other health plan for reimbursement of denied benefits but not for damages caused by the denial.
2 - The US supreme court ruled that under ERISA, if an HMO concludes that a particular treatment isn't covered under the terms of the plan, its "denial of coverage would not be a proximate cause of any injuries arising from the denial"
-a s a result - ERISA-based plans are removed from the state statutes, which minimize risk to the insurers.
- According ot AM Best's, "Business as never before" Desribe Dimunition of value, and give facts about how different states treat it.
- Diminished value is when the market value of a car is diminished after it has been in an accident and then repaired.
-Georgia requires that the insurer refund the difference ot insureds
-43 states allow insurers to exclude dimunition in value in policy language
-18 states do not have any case law on the subject
- According ot AM Best's, "Business as never before" Was the World Trade Center 1 claim or 2 claims and why i sit important?
- A formal insurance contract was not in place at the time of the terrorist attack. Therefore the decision came down to whatever was in the different insurers binder forms.
-one jury found it to be a single loss for a a group of insurers while a second jury found it to be two occurrences for another group of insurers.
- According ot AM Best's, "Business as never before" Describe the Wallace and Gale asbestos court case by MAryland and upheld by US district court of appeals and why this case was significant.
- The courts ruled that the insurers are only liabl;e for the aggregate limits on the policy and not an unlimited amount.
Thsi si significant because policyholders have sought to shift the asbestos liability onto insurers, sometimes without regard to policy limits like policy limits on completed operations.
Wallace and Gale demonstrates that "'operations' claims can also be 'completed operations' which, in fact have an aggregate limti"
- According ot AM Best's, "Business as never before" Define Modal Premiums
- Modal premiums allow premiums to be paid more frequently than annually (monthly) - plaintiffs argue that insurers should disclose APR's and finance charges if they apply.
- According ot AM Best's, "Business as never before" why are life insurers concerned about disclosing APRs and fees associated with modal premiums?
- An Indiana professor has recommended to Insurance regulators that the information be disclosed to judge the desirability of paying monthly, and wide variations in APR's exist
-In 2003 Distrrict of Columbia's Commissioner of Insurance and Securities regulation told a seminar that failure to disclose was a an unfair trade practice.
-Insurers are taking a wait and see approach, but the risk of being sued will eventually lead to more explicit disclosures.
- According ot AM Best's, "Business as never before" What is going on with punitive damages amounts?
- A Utah case allowed an award of 145 million against state farm.
US supreme court overuled and set a single digit limit (9 million)
-Cozen O'conner Law firm study shows that punitive damages awards are rarely higher than a 4 to 1 ratio, and has made arguments to suggest this ratio should not be surpassed unless there is an agregious offense.
-although not every verdict winds up in an appeal, so insurers are still in an important fight to control punitive damage expenses.
- According ot AM Best's, "Business as never before" According ot AM Best's, "Business as never before" list the complaints of the Spitzer case vs. MArsh.
- 1 - brokers and insurers fix prices and rigged bids (illegal)
2 - insurers inappropriately offered brokers contingent commissions based on the quality or volume of business they produce without proper disclosure to their clients.
- these contingent commissions were rerwards the business that MArsh steered and allocated to the insurance companies
- Lawssuit named the biggest companies (AIG, Ace Ltd., Hartford, and Munich Re.)
-Several Insurance company employees have pleaded guilty to criminal charges
- According ot AM Best's, "Business as never before" What did Bob Zeman, SVP for Property/Casualy Insurers of America say regarding the Spitzer attack on contingent commissions?
- 1 - We need to differentiate between contingent commissions and bid rigging
2- Contingent commissions are not illegal if done legally, but bid rigging is illegal.
- According ot AM Best's, "Business as never before" What IS ONE of the effects of the Spitzer case already?
- 1 - Most of World's largest brokers have already stopped accepting contingent commissions
- According to Musulin, Describe the 4 steps of the Excess wind procedure.
- 1 - STATEWIDE loss data is accumulated by year and separated into wind and non-wind components
2 - a ratio of wind to non-wind losses is calculated by years over a long period of time (20-30 yrs). If any years ratio is in excess of 2 standard deviations of the mean then the excess losses are removed and averaged over a longer period.
3- An "excess wind factor" is then calculated. ?Normal losses = Non-Wind + Wind losses below the threshhold.
4 - The Statewide excess winf factor is then weighted with a regional excess wind factor and applied to normal losses to estimate total expected losses in an average year
- According to Musulin, List 4 assumptions about the 20-30 yr period used.
- 1- Catastrophic activity is "normal" during this period
2- Population demographics are stable
3- Insured losses by peril are stable
4- Changes in coverage or construction practices do not affect the ratio of wind to non-wind losses.
- According to Musulin, List 2 defenses of the Excess Wind Procedure
- 1 - It can be used effectively in situations where the basic assumptions are not violated.
2 - It uses actual insurer loss data and simple mathematical calculations that can be easily verified
- According to Musulin, List 3 disadvantages of using a computer model:
- 1 - Difficulty in verifying data (amount of exposure is used which cannot be seen in annual statement)
2 - Use of Black-Box model (modeler's programs are propriety)
3 - Model Complexity (the seismic and nmeteorological simulations and damage functions are difficult ot follow)
- According to Musulin, Who were the first users of modeling technology and why?
-used to estimate Probable Maximum losses
-to price reinsurance products
- According to Musulin, Who were the second major users of modeling technology?
- Rating Orginizations like AM Best
- According to Musulin, Despite the use of 'black boxes' and proprietary information, the insurer community accepted models with relatively little controversy, List 4 reasons why.
- 1 - Modeling technology was a clear technological improvemnt over the available alternatives
2 - Modeling process was not foreign to insurers
3 - Insurers benefitted from a competitive environment offering modeling services
4 - Insurers lacked a safety-net from government-sponsered windpools, leaving them little choice but to accept the modeling process used by their reinsurers and investors or face a loss of reinsurance and or capital
- According to Musulin, Describe 2 consequences if the regulators do not accept modeling technology.
- 1 - A Contraction in coverage for high-risk insureds from private companies
2 - An Expansion of coverage offered by quasi-governmental entities financed through assesments or public debt.
- According to Musulin, list 4 impacts of the regulatory acceptance of models.
- 1 - In short run, there will be disruptions as more focused pricing leads to insurance prices more alligned with risk
2 - not all consumers will be worse off (low risk consumers will benefit from price reductions and high risk consumers will be incented to mitigate risk)
3- In the long run aggrergate losses should be decline as risky behavior is discouraged
4 - If the impact on consumers is unnacceptable, public policy makers might decide that high risk consumers will be subsidized through residual markets and/or public sources of capital
- According to Musulin, What is the most significant effect of modeling?
- A greater rating resolution (more accurate pricing)
- Large amounts of daata required in traditional ratemaking are no longer required
-computer modeling allows for rating resolution at the zip code and construction class level
- According to Musulin, List 5 potential benefits to consumers by having a better estimate of individual loss exposure.
- 1 - Comprehensibility of prices (consumers can better understand and control insurance costs once they understand the characteristics that give rise to a higher exposure to loss)
2 - Rational Behavior - Consumers will take costs into account and act accordingly
3 - Fair pricing - more accurate pricing will reduce subsidies and reward consumers who mitigate risk
4 - Reduced Information risk - Investors demand higher returns to compensate for uncertainty. improved information will reduce this uncertainty and create more capacity
5 - Stable pricing - models use long term seismic or weather data and all available information on the risk to determine loss estimates
- According to Musulin, the modeleing issue has directed regulatory attention to 2 areas, list them.
- 1 - Ratemaking (where most focus has been)
2 - Solvency - The models offere regulators an improved tool to assess financial solidity of insurers (but if they use them for solvency it makes it difficult to deny their use in Ratemaking)
- According to Musilin, some people that full disclosure of models isn't necessary. List 4 tests that could be used as a validation process without having to fully disclose:
- 1 p[redicted wind fields ina storm actually observed vs. those actually observed
2 statstics such as mean windspeed, or number of storms of certain categories for simulation vs. historical averages.
3 relative damage estimates by type of structure vs. what was actually observed in recent storms
4 predicted losses vs. actual losses
- According to Musilin, Describe the Florida Commission on Hurricane loss projection Methodology.
- -started in 1995
-commission consists of 12 people from various disciplines (meteorology, computer science, engineering, actuarial, consumer advocate, DOI)
- objective of commission is, "The legislature recognizes the need for expert evaluation of computer models and other recently developed techniques or improved actuarial methodologies for projecting hurricane losses in order to resolve conflicts amoung actuarial professionals, and in order to provide both immediate and continuing improvement in the sophistication of actuarial methods used to set rates charged to consumer"
- According to Musilin, describe the results to date of the Florida Commission on Hurricane loss projection Methodology.
- -test data submitted to modelers
- outside experts visited modelers and evaluated their techniques
- outside experts shared their findings with commission
- in '96 the commission adopted model standards and specifications
- modelers were offered the opportunuity to respond to those standards and specifications
- modelers will make presentation to commission to argue that their models are sufficient
- if approved insurers could use models in rate filings
- According to Musilin, list 2 powerful disincentives for unscrupulous insurers to manipulate model results
- 1 - if rates are inflated, the insurer could loss business
2 - inflated loss estimates could: a) put downward pressure on financial ratings and increase the need for and cost of reinsurance and b)depress earnings and adversly affect stock price
- According to Musilin, list 3 safeguards against manipulating model results
- 1 - Require a legal affidavit attesting that the user has not manipulated assumptions
2 - require a formal opinion from the modeler or the proper execution of the model when run by the insurer
3 - Have modelers provide regulators with rate ranges that reflect geographic, building structure, and deductible options
- According to Musilin, List 2 issues for states with major CAT exposure
- 1 - Availability problems if you do not allow insurers to charge for high risk exposures
2 - national and regional market disruptions
- According to Musilin, Regulators and insurers need to work together or we would see these 3 consequences:
- 1 - availability shortages
2 - continuing market disruptions
3 - degraded claims paying ability
- According to Brady, define "Anti-Rebating Laws"
- Laws that prohibit agents, brokers and insurers from returning portions of premiums as incentive to applicants to purchase insurance.
- According to Brady, What were the 27 officers of the South-Eastern Underwriter Assoctiaons indicted for? (5 things)
- 1 - price fixing premiums and agents commissions
2 - coercion tactics to force non-SEUA members to abide with SEUA rules
3 - continuing agreement and concert of action to take control of 90% of the fired and allied lines market
4 - withdrawing rights of SEUA agents if they did business with non-SEUA companies
5 - threatening insurance consumers who did not purchase insurance from SEUA
- According to Brady, The SEUA case was first dismissed in district court on what grounds?
- Paul vs. Virginia was the defense (insurance not interstate commerce)
- According to Brady, describe 'Paul vs. Virginia'
- 'Paul vs. Virginia' was a ruling that insurance was not interstate commerce, insurance should be regulated by the states, and insurance was not subject to federal regulation and anti-trust laws
- According to Brady,what was the final ruling in the supreme court of the SEUA case?
- SEUA Decision - Court ruled that insurance was interstate commerce, subject to federal regulation and Sherman Act and other anti-trust legislation. (Clayton Act, Robinson-Patman Act, Federal Trade Commission Act)
- According to Brady, list 4 arguments to support federal regulation of insurance in the SEUA case?
- 1 - insurance is inter-related, interdendent, and integrated accross states
2 - only 18 of the 200 members of the SEUA were domiciled in one of the six SEUA states
3 - bothe before and after PAul vs. Virginia, intangible products such as electrical impulses of telegraph transmissions were subject to federal legislation
4 - other business make sales contracts in states where they are not headquartered and they are subject to federal regulation.
- According to Brady, describe the Sherman act.
- This act prohibits collusion in attemts to gain monopoly poower
- According to Brady, describe the results of the McCarran Ferguson act:
- Decision that it was in the public interest for states to regulate insurance and federal government regulates to the extent that states do not. Also, federal Sherman Act applies for boycott, coecion, intimidation.
- According to Brady, in the McCarran Ferguson act congress could regain control if the following were not met.
- 1 - State legislation could not supercede federal legislation regarding boycott, coercion, and intimidation
2 - if congress passes a specific law regarding the insurance industry, federal law supercedes any state regulation in the areas addressed by the federal legislation.
- According to Brady, after McCarran ferguson act, the NAIC wrote 2 model rate regulation bills, 1 applied to liability insurer the other for fire, marine, and inland marine. What were the 2 purposes?
- 1 - to ensure that rates were not excessive, unfairly discriminatory and adequate
2 - low cooperation in setting rates as long as it did not hinder competition
- According to Brady, after McCarran ferguson act, the NAIC wrote 2 model rate regulation bills, 1 applied to liability insurer the other for fire, marine, and inland marine. What 4 things did the bill require?
- 1 - Required prior approval of rates
2 - explained how to file rates
3 - described the role of rate organizations
4 - recommended anti-rebating provisions in states that did not already have such laws.
- According to Brady, with the purpose of preventing the Federal Trade Commision act, the NAIC adopted the "act relating to unfair methods of competition and unfair deceptive acts and practices in the business of insurance" List 8 prohibited acti
- 1 - misrepresentation and false advertising of policies
2 - false information and false advertising in general
3 - defamation
4 - boycott, coercion, and intimidation
5 - false financial statements
6 - stock operation and advisory board contracts
7 - unfair discrimination
8 - rebating
- According to Brady "State Insurance Departments", what branch of the state government is the insurance department a part of?
- Executive Branch!
- According to Brady "State Insurance Departments", List 4 arguments for an ELECTED insurance commissioner.
- 1 - appointed commissioner might not be aware of the publics concerns
2 - appointed commissioner might feel inclined to yield to the interests of whoever appointed him, wheras an elected commissioner is not obligated to a certain group.
3 - an elected official is elected for a full term, whereas an appointed commissioner is subject to dismissal
-an appointed commissioner is more likely not to make changes from prior commissioners.
- According to Brady "State Insurance Departments", List 4 arguments for an appointed commissioner
- - no need to campaign for funds
- would be experienced and knowelegable (some states require an expert)
- is less likely to be swayed by public opinion
- will not be perceived as a politician
- According to Brady "State Insurance Departments", List 9 typical duties of the insurance commissioner
- 1 overseeing operation of the insurance department
2 promulgating orders, rules, and regulations to administer insurance laws
3 issuing licenses to insurances to insurance company's agents and brokers
4 reviewing pricing and coverage
5 performing financial and market conduct exams
6 holding hearings on insurance laws
7 taking actions against violations of law
8 issuing annual reports on the status of the status of the states's insurance department.
9 maintaining records of department activities.
- According to Brady "State Insurance Departments", describe regulatory philosophy and regulatory style.
- REgulatory philosophy is the attitude and regulatory style is the approach.
- According to Brady "State Insurance Departments", why id important for an insurance department to have agood relationship with the state legislature.
- Since insurance dfepartments compete with other state regulatory agencies for share of a limited budget, lobbying for the departments needs is important. A good relationship with the legislature can result in insurance issues being addressed on a regular basis and in a beneficial manner.
- According to Brady "State Insurance Departments", Desribe the function of the liscensing department within the department:
- All insurance departments deal with the liscensing of insurance companies and agents. Both insurance companies angents must meet certain requirements and pay fees that vary by state.
- According to Brady "State Insurance Departments", other than the liscensing department, what is th eother major depoartment within the insurance department?
- Coverage and Pricing Regulation
- According to Brady "State Insurance Departments", List the 4 different types of filing lws for P&C lines.
- 1 Prior Approval
2 File and Use
3 Use and File
4 No File
- According to Brady "State Insurance Departments", List the 5 most common reasons for disapproval of a filing
- 1 not in the public interest
3 unfairly discriminatory
4 excessive or inadequate
5 not meeting minimum standards
- According to Brady "State Insurance Departments", Regulators can do financial and market conduct exams, descrtibe financial exams:
- Financial Examinstions include:
1 - annual audits by CPA's
2 - Actuarial Opinions on Loss Reserves
3 - can include the use of the annual statement
3 - the NAIC publishes the "Financial Condition Examiners handbook" to detect a) early detection of financial trouble or unlawful activity, and b) develop information for timely, appropriate regulatory action
- According to Brady "State Insurance Departments", Describe IRIS:
- Insuance Regulatory Information System,
1 for regulators as a guide to help highlight insurers needing financial scrutiny
2 to asses a company's finacial situation by examining certain financial ratios
- According to Brady "State Insurance Departments", Regulators can do financial and market conduct exams, descrtibe market conduct exams:
- Review ways in which insurer does business including:
4 claims handling
5 policy issuance
- According to Brady "State Insurance Departments", List 2 main reasons why every state insurance department does NOT have a fraud bureau:
- 1 restraints on budgets
2 lack of insurance fraud laws
- According to Brady "State Insurance Departments", Regulators are responsible for the functions of receivership, rehabilitation, and liquidation. List 3 grounds for rehabilitation.
- 1 liabilities exceed assets
2 insurer refuses to submit its books, records, etc. to commisssioner
3 Insurer willfully violates its charter or articles of incorporation or any state law.
- According to Brady "State Insurance Departments", ins. departments are responsible for protection and education of consumers. list 5 of these types of activities:
- 1 help with claims
3 inquiries from general public
4 offer eductional programs (insurance and loss prevention)
5 Publish information about guides for purchase of insurance
- According to Brady "State Insurance Departments", List 4 functions of the General Counsell of the insurance department
- 1 Give legal opinions on legislation
2 assist in drafting admisnistrative rules and regs
3 Represent the insurance regulators in non-criminal proceedings
4 offer legal advice on insurance issues
- According to Brady "State Insurance Departments", Give 5 reasons why the position of legislative liason is important:
- 1 testimony needs to be given
2 misconceptions addressed
3 supporting data offered
4 questions answered
5 advice to assist legislature's dealings with insurance codes and related laws.
- According to Brady "State Insurance Departments", List 4 sources for regulatory funding
- 1 Premium taxes
2 Fees and assesments
3 appropriation from the state treasury
4 Fines and penalties
- According to Brady "State Insurance Departments", which 2 states have regulatory insurance commissions and describe their functions
- Louisiana and Oklahoma
-purpose is to regulate insurance pricing
- According to Brady "State legislatures and the NAIC", List 6 ways a legislature can influence the dept. of Ins.
- 1 enactment of laws
2 deliberations about laws
6 control budget
- According to Brady "State legislatures and the NAIC", list 3 forms of legislative investigations
- 1 requiring annual reports
2 completing performance reviews
3 conducting audits of state insurance departments
- According to Brady "State legislatures and the NAIC", List 6 types on non-insurance laws that a legislature can influence the insurance environment.
- 1 Banking (some fed banks can sell insurance)
3 Premiums (monthly premiums)
- According to Brady "State legislatures and the NAIC", What was one of the first steps to creating effective insurance regulation by the NAIC?
- Uniform Financial reporting
- According to Brady "State legislatures and the NAIC", What are 3 objectives of the NAIC?
- 1 Promote public interest through fair and equitable treatment
3 Maintain and improve effective regulation
- According to Brady "State legislatures and the NAIC", what is a NAIc model law?
- The NAIC has reccommended insurance regulation in the form of hundreds of model laws. It occurs when the entire NAIC membership votes to adopt a committews recommendation
- According to Brady "State legislatures and the NAIC", Model laws can be changed by legislatures, take years to be adopted or not be adopted at all. Give 4 reasons for this
- 1 Some may be viewed as unneccesary because other state laws are viewed as sufficient
2 decide to modify a model law to meet their particular state's needs or to better coalesce with other laws
3 legislature might not have a session every year or sessions might be too brief.
4 abundance of other items for legislature to look at.
- According to Brady "State legislatures and the NAIC", in 1998 the NAIC introduced its Accredation Program to have basic standards so that regulators would have basic standards for solvency regulation. List the 3 criteria for accreditation
- 1 The laws and regulations of a state must meet certain basic standards of NAIC models
2 The regulatory methods of the state must be acceptable
3 Department practices must be adequate
- According to Brady "State legislatures and the NAIC", The research division of the NAIC does a lot of work to support the regulators, list 6 main activities performed by the research division:
- 1 Giving information to the state insurance departments
2 Helping the staffs with technical and regulatory questions
3 giving information to federal and state agencies
4 Helping to develop the NAIC financial and statistical datatabases
5 providing pertinent statistical material and research studies
6 Giving other NAIC departments support through research
- According to Brady "State legislatures and the NAIC", List 3 porimary areas of importance dealt with by the research department:
- 1 Statistics
2 Insurance Issues
3 Advice on pricing and coverage regulation
- According to Brady "State legislatures and the NAIC", list 3 databases maintained by the NAIC to keep track of problem people and companies:
- 1 Regulatory Information Retrieval System (RIRS) names of people ort companies that have had regulatory or disciplinary action taken against them
2 Special Activities Database (SAD) - names of people/companies who have had charges brought against them or been investigated, might have been involved in fraud
3 Complaints Database System (CDS)
- According to Brady "State legislatures and the NAIC", What does the Securities Valuation office do?
- monitors the quality and the value of investments of insurance companies
- According to Brady "The Role of Others in Insurance Regulation," list 4 other entities that play a role in insurance regulation:
- 1 the courts
2 the insurance industry
4 other interest groups
- According to Brady "The Role of Others in Insurance Regulation," list 4 areas in which the courts have influenced insurance regulation
- 1 effect of court decisions on state insurance department activities
2 policy language
3 policy coverage
4 claims settlement
- According to Brady "The Role of Others in Insurance Regulation," List 3 vehicles for the insurance industry to influence regulation
- 1 Trade Associations
2 Advisory Organization
3 Individual Insurance Companies
- According to Brady "The Role of Others in Insurance Regulation," List 2 functions of insurance Trade Associations
- 1 Access to legislative developments and use association personnel as their lobbying forum
2 participate on committees in drafting new legislation or influencing changes to pending legislation
- According to Brady "The Role of Others in Insurance Regulation," Describe Insurance Advisory Organizations
- 1 not as active as trade associations in shaping regulation
2 non-profits working on behalf of companies
3 primarily deal with the filing of rates or propspective loss costs
4 provide valueable services to memeber insurers.
- According to Brady "The Role of Others in Insurance Regulation," list 6 valueable services provided to memeber insurers by Insurance Advisory organizations:
- 1 develop rating systems
2 collect and tabulate statistics
3 research topics important to memebers
4 Provide a forum for discussion on important topics
5 educate members, regulators and public on particular issues
6 Monitor regulatory issues of concern ot members
- According to Brady "The Role of Others in Insurance Regulation," List 2 ways insurance companies influence regulation
- 1 Provide Expert testimony
2 providing NAIC with technical expertise
- According to Brady "The Role of Others in Insurance Regulation," what is the most influential consumer group and what has it done?
- PUBLIC CITIZEN
- automobile seatbelt/safety laws
- distrusts any action by insurance companies
- demonstartes influence by having its members testify before congressional committees
- According to Brady "The Role of Others in Insurance Regulation," list 7 major concerns of consumer groups in the 1990's
- 1 auto rates can be lowered and service improved
2 insurance industry is inefficient
3 state regulators are too weak
4 ratemaking has perverse incentives regarding cost cutting and safety
5 structural reform is needed in regulation
6 competition must be increased
7 health insurance is the #1 crisis that needs to be addressed
- According to Brady "The Role of Others in Insurance Regulation," How do Consumer groups influence the NAIC?
- Consumer groups influence the NAIC by informing members of NAIC task forces, working groups, and comittees about perceived problems. The NAIC can use this information in developing model laws.
- According to Wagner 'Rating Bureaus', list 3 goals of early rating bureaus in the 1800's.
- 1 establish and maintain adeqauate rates
2 control excessive commissions
3 standardize policy forms
- According to Wagner 'Rating Bureaus', In 1866, insurers formed the national board of fire insurance underwriters (NBFIU) list its 2 goals
- 1 control rates and commissions
2 terminate agents who did not support and maintain board mandated rates.
- According to Wagner 'Rating Bureaus', in late 1800's regional bureaus were formed, list 4 ways they differed from the NBFIU.
- 1 focused on insurer's conduct not agents
2 creating compacts with insurers to distance them from ratemaking and enforcement
3 force non-member insurers to become members by reducing rates
4 creating stampin offices to review rates and underwriting
- According to Wagner 'Rating Bureaus', The merritt committee was formed in New York to investigate non-life insurance. list 4 of its findings:
- 1 fire rate problem was 2-fold (making of rate and maintenance of rate
2 insuirer's should be able to combine to eliminate rate wars caused by competition
3 having bureau rates would reduce expenses
4 more credible rates would result from insurers pooling their premium and loss data.
- According to Wagner 'Rating Bureaus', The merritt committee also looked at what extent states should be able to regulate. List 4 results
- 1 life insurance commissions ands acquisition expenses limited (but not stock fire companies)
2 the bureau system prevented large increases in commissions
3 mutuals had advantage over stock companies, because they could declare dividends and have lower prices and commissions
4 NAIC adopted Inland MArine rules to limit what could be called IM. This closed a loophole for using non-regulated IM coverage.
- According to Wagner 'Rating Bureaus', list 3 ways bureaus tried to forestall competition
- 1 sparking judicial/legislative activity to inhibit the use of non-bureau rates
2 bureaus preventing insurer's from being partial subscribers
3 bureaus challenging independent insurers rate filings or member's deviation filings
- According to Wagner 'Rating Bureaus', List the 3 conclusions of the US SEnates antitrust and Monopoly Committee(O'Mahoney Committee)
- 1 competition should be the prime regulator of insurance
2 rate setting in concert represented the most serious threat to the competitive market
3 urged state regulators to use a 'file and use' system
- According to Wagner 'Rating Bureaus', shortly after the O'Mahoney committe these 3 things happened
- 1 rate hearings and litigation were brought to a close
2 rate enforcement activities were stopped
3 insurers began to view the bureaus role as a "provider of services"
- According to Wagner 'Rating Bureaus', In the 20th century, rating bureaus consolidated to save money list 2 noteworthy ones.
- 1 The Insurance Rating Bureau
- According to Wagner 'Rating Bureaus', Rating bureaus gradually have become advisory organizations, list services provided in fire underwriting and in Work comp
- Fire - town grading, and commercial fire scheduling rating
WC - experience rating
- According to Wagner 'Rating Bureaus', bureaus also serve as statistical agents for their members, list 1 major function of this
- gather, compile, submit to state regulators premium and loss data. This info tool for regulators to gauge U/W performanc eby line, class and territory
- According to Wagner 'Rating Bureaus', in 1988 20 state attorney generals filed antitrust lawsuits against ISO relating to the standardized policy language for commercial GL. List 3 changers ISO made in response:
- 1 majority of the board will consist of public members
2 ISO prepared loss costs without input from industry committees
3 ISO staff become responsible for policy form development, with reliance on outside recources
- According to Wagner 'Rating Bureaus', in 1997 ISO became a for profit organization, describe two changes which illustrate why the insurance industry no longer owns ISO
- 1 - insurer members only could elect 3 of 11 board members
2 - ISO employees and management have partial ownership and elect the remaining board members
- According to Wagner 'Rating Bureaus', In the 1980's and 90's, advisory orgainizations assesments went down by 50% of premium, list 4 reasons for this reduction:
- 1 consolidations
2 insurers having option to become independent
3 availability of different levels of service ot purchase
4 savings that resulted from technology
- According to Wagner 'Rating Bureaus', list 3 ways advisory organizations enhance competition in the marketplace
- 1 providing new companies with pricing assistance and policy language (easy entry)
2 assisting small carriers
3 focusing on the creation and maintenence of specialty products
- According to Harrington "Rate regulation in the 20th century", Describe a timeline of these dates: 1945, 1940's-1950's, 60's - 70's, 80's-90's
- 1945 - McCarran/Ferguson - rate regulation reaches full bloom
40's-50's - prior approval, bureau rates
60's-70's - bureau rates break down, use of competitive rating in some states
80's-90's - large commercial rates largely deregulated
- According to Harrington "Rate regulation in the 20th century", in 60's many states went to competitive rating from prior approval, list 4 reasons for this
- 1 movement away from bureau rates
2 increased administrative costs of multiple rate filings by insurers
3 solvency regulation became more important
4 hopes that price competition would stymie affordability problems
- According to Harrington "Rate regulation in the 20th century", rapid growth in claims costs in the 70's and 80's caused states to respond in these 4 ways:
- 1 Prop 103 in California
2 in 80's WC rates were widely supressed
3 development of residual market mechanisms
4 rate of return regulation
- According to Harrington "Rate regulation in the 20th century", Competition creates incentives to do these 4 things for insurers:
- 1 forecast costs accurately
2 price and underwrite as to avoid adverse selection
3 create refined system of rate classification
4 minimize claim costs and settlement expense
- According to Harrington "Rate regulation in the 20th century", competitive rating and risk classification has these 3 additional impacts
- 1 promotes coverage availability
2 provides incentives for high risk buyers to control losses
3 smaller residual markets
- According to Harrington "Rate regulation in the 20th century", List 5 consumer advocacy arguments for regulation
- 1 the insurance industry limited exemption form federal antirust laws facilitates collusion
2 consumers need protection from inadvertantly purchasing high priced coverage
3 when insurance is cumpolsory, regulation is needed
4 rate supression is good for affordability and will encourage people to buy
5 restrictions on classification will lead to fairness
- According to Harrington "Rate regulation in the 20th century", list 5 possible adverse effects of prior approval witrh regulatory lag
- 1 administrative costs high
2 delays make it hard to keep up with trends
3 greater variation in coverage ability over time
4 greater variability in insurer profits
5 higher long-run prices
- According to Harrington "Rate regulation in the 20th century", list 3 possible adverse effects of prior approval with binding rate floors
- 1 inefficient non-price competition (excessive service)
2 slower expansion of efficient firms
3 higher prices
- According to Harrington "Rate regulation in the 20th century", list 6 possible adverse effects of prior approval with average rate suppression
- 1 larger residual market
2 reduced service
3 increased risk for insurers and increased solvency risk
4 adverse spillover on other states
5 reduced insurer investment infrastructure
6 reduced entry and increased exit
- According to Harrington "Rate regulation in the 20th century", list possible adverse effects of restrictions on classification residual market ceilings
- 1 costs of enforcement of classification compliance
2 large residual markets
3 high prices for low risk insureds
4 low loss-control incentives for high risk insureds and vice-versa
- According to Brady, "Governments role in regulation", federal government can declare state laws void for these 3 reasons:
- 1 state law Contradicts federal law
2 court determines there isw interference with federal law
3 stste law imposes improper burden on interstate commerce
- According to Brady, "Governments role in regulation", after maccarran/ferguson act states were given primary regulatory control except in these 3 situations
- 1 situations of boycott, coercion and intimidation
2 when federal antitrust laws apply
3 specific federal laws aimed at regulation of insurance
- According to Brady, "Governments role in regulation", list 3 us supreme court cases that helped define the term, the "business of insurance"
- 1944 - SE Underwriters case
1946 - Robertson vs. California (dealt with liscensing of companies/agents)
1958 - FTC vs. National Casualy Co. (advertising and selling policies)
- According to Scedule F, List the 3 Purposes of Schedule F
- 1) Provide SUPPORTING DATA for assumed and ceded reinsurance accounting entries
2) Develop PROVISION FOR REINSURANCE
3) Restate the balance sheet from a Net to Gross basis
- According to Schedule F, Fronting companies are identified in collumn 5 of Schd F part 3. List the 4 types of fronting contracts that are exempt from identification in this collumn
- 1) Affiliated Transactions
3) Small amounts (under 5% of PHs)
- According to Schedule F, Provisions fro Reinsurance arise from the following 4 reinsurance recoverables
- 1) Unsecured Recoverables from Unauthorized reinsurers
2) Unsecured Recoverables form Slow Paying Reinsurers
3) Overdue Recoverables from authorized and unauthorized reinsurers
4) Recoverables in Dispute from unauthorized and slow paying reinsurers
- According to Schedule F, List the 3 objectives for The Provision for Reinsurance
- 1) encourages insurers tio use authorized reinsurers
2) encourages ceding companies to seek collateral from unauthorized or slow paying reinsurers
3) encourages ceding companies to demand timely payment
- According to Schedule F, list the 2 unintended consequences of the Provision for Reinsurance
- 1) since unauthorized reinsurers often provide cheaper coverage the higher expense gets passed on to the customer
2) Securing recoverables is expensive, leads to increased prices
- According to Schedule F, what is the formula for a reinsurer who is not authorized
- -Provision = Unsecured total recoverables + 20% (recoverables over 90 days
overdue) + 20%(amounts in dispute).
-Disputed balances are counted in the above equation, in order to prevent the
reinsurer from avoiding the penalty for overdue recoverables by classifying them as
- According to Schedule F, What is the formula for the Reinsurance Provision for an Authorized Slow-paying Reinsurer
- -Provision= max[ 20% (unsecured total recoverables), 20% (recoverables over 90
days overdue) ]
- According to Schedule F, What is the formula for the Reinsurance Provision for an Authorized NON-Slow-paying Reinsurer
- -Provision = 20% (recoverables over 90 days overdue) + 20% (amounts in dispute).
- According to Schedule F, What is the formula for calculating whether an reinsurer is slow-paying or not?
- A reinsurer is classified as “slow paying” if the ratio of recoverables over 90 dues
overdue, to (all recoverables on paid losses & LAE + amounts received in the last 90
days) >= 20%.
- According to Feldblum Satutory Surplus, List 7 entries on the balance sheet that do not go through the income statement, rather they are a direct charge to Surplus
- 1) Change in Non-Admitted Assetts
2) Net Unrealized Capital Gains
3) Change in Net unrealized Foreign Exchange Gains/Losses
4) Change in Net Deferred Income Tax
5) Change in Provision for Reinsurance
6) Change in Surplus Notes
7) Cumulative effect of change in accounting procedures
- According to Feldblum Satutory Surplus, What is the formula for Invested capital for a P&C Insurer? or in other words what composes the amount of capital that is subject to the cost of capital
- Invested Capital = PHS + capital embedded in gross UPR and full value of loss reserves - Deferred Tasx Asset
- According to Feldblum Satutory Surplus, List 4 factors that determine the amount of capital invested in an insurance company
- 1) Undiscounted Loss Reserves
2) Equity in UEPR
3) RBC Requirements
4) any other need determined by "ruin criterion"
- According to Feldblum Statutory Surplus, When an insurer looks at wether or not to stay in business based off of the amount of invested capital and value of its income, what two items are compared and how is the value of the income evaluated?
- If the PV of the income perpetuity is greater than the amount of invested capital, then stay in business. The perpetuity formula = annual income after tax/interest rate from the equities market
- According to SSAP 65, List the 3 things that shall be disclosed about tabular discounting:
- 1) Tables and Rates used
2) Amount of any discounted liability in the financial statement
3) Amount of tabular discounting by line and reserve (Case vs. IBNR)
- According to SSAP 65, If there have been changes in rates or other key discount assumptions in discounting loss reserves from prior years, then the current annual statement shall disclose the following 4 things:
- 1)Amount of discount on ALL Prior years liabilities under current rates and assumptions
2)Amount of discount on ALL Prior years liabilities under previous rates and assumptions
3)Change in discounted liability due to the change in rates and assumptions
4)Amount of non-tabular discount by line and reserve category,
- According to SSAP 65, How are changes in reserve discounting accounted for in the annual statement that are due to changes in rate sand assumptions?
- changes hit the income statement and affect current calendar year earnings
- According to SSAP 65, list 3 facts about High Deductible policies
- 1) Reserves are net of deductibles to the extent deductibles are collectible
2) Reimbursements are accrued when losses are paid
3) Recoverables represent credit risk and not underwriting risk. In absence of contractual due date, billing date is used for aging. Deductibles > 90 days overdue are non-admitted. However if the insurer holds security, a minimum of 10% of the recoverable in excess of the collateral amount is reported in lieu of applying the aging requirement
- According to SSAP 65, an insurer must disclose the following 4 things about its A&E exposures:
- 1) Reserving methodology for both case and ibnr
2) Amount paid and reserves for loss and ALE, direct, assumed and net (after intercompany pooling)
3) Description of the lines where there might be exposure (including there nature)
4) The following data field for the most recent 5 calendar years: (beginning reserves, incurred loss and ale, CY paid loss and LAE, ending reserves)
- According to SSAP 65, for long duration contracts (over 13 months), the amount of the UEPR shall be no less than the max of three tests.
- 1) mgmt’s best estimate of amounts refundable as of the date
2) GPW * (% of loss not yet incurred out of total expected loss)
- According to Notes on the Financial Sattements, if tabular discounting is used, the notes must diclose the following information
- 1) Identify table used
2) Rates used to discount
3) amoutn of discounted liabilites reported
4) Amount of tabular discount by LOB and split between case and IBNR
- According to Notes on the Financial Sattements, list the 3 situations where the use of tabular discounting is permitted
- 1) Indemnity portions of WC pension claims and LTD claims on A&H policies
2) certain monoline med-mal writers to help privately organized doctor's mutuals write busines without havign to raise more capital
3) as permitted by a regulator to enable a domestic insurer to continue operations
- According to Notes on the Financial Sattements, List the 4 things needed to be disclosed in the Notes if non-tabular discounting applies
- 1) Rate used and the basis used to discount liabilities
2) amoutn of discoutn by LOB split by Case vs IBNR and DCC vs AO
3) Total amoutn of non-tabular discoutnign in annual statement
4) If rates used have change from previous statement, then amount of discount at current and prior rates, change in discount, and by LOB
- According to Notes on the Financial Sattements, list the 6 things an insurer should dislose abotu intercompany pooling:
- 1) Identify the lead company
2) Descriptions of LOB's subject to pooling
3) Unnafilliated cessions and wether they occur prior to pooling
4) Identification of pool members that contractual right of direct recovery from non-affiliates on reinsurance coverign business subject tot he pool
5) Explainations of any descrepancies between entities regarding pooled business
6) Description of the sharing of the Provision for Reinsurance
- According to Notes on the Financial Sattements, List 3 similarities of HIGH DEDUCTIBLE policies to retrospective rating policies
- 1) Insurer is liable for all claims and is reimbursed by insureds
2) Insurer's liability to the claimant is not dependent on wether the insured reimbureses (there is credit risk)
3) In states that levy premium taxes and assessments, reimbursements are treated like premium
- According to Notes on the Financial Sattements, List 5 similarities of HIGH DEDUCTIBLE policies to excess polies with a service contract to handle claims from a first dollar
- 1) statutory loss reserves are net of expected reimbursements
2) The RBC WP risk charge is levies on actual premium, not premium equivalents, the RBC reserving risk charge is levied on net reserves
3) In states which levy premium taxes only on premium and not on premium equivalents, taxes are just on premium and reimbursements are like TPA fees
4) The RBC non-admitted assett charge is levied only on unreimburesd paid losses (not on unpaid losses)
5) High deductible p[oliceis require heavy underwriitng for credit risk and periodic monitoring of insured's financials
- According to Notes on the Financial Sattements, What is the survival ratio when talking about A&E exposure?
- = current carried reserves/payments in recent 3 years - this measuree is used to gage the adequacy of A&E reserves
- According to SSAP 65, An insurer must disclose the following 4 things about it’s a&E exposures:
- 1) Reserving methodology for both case and ibnr
2) Amount paid and reserves for loss and ALE, direct, assumed and net (after intercompany pooling)
3) Description of the lines where there might be exposure (including there nature)
4) The following data field for the most recent 5 calendar years: (beginning reserves, incurred loss and ale, CY paid loss and LAE, ending reserves)
- According to Feldblum Schedule P part 1, describe what is shown in the prior years column:
- The prior years row shows payments in the current CY
- According to Feldblum Schedule P part 1, Shedule P is a tool used by regulator to monitor the solvency of an insurer, list 8 funtions of Sched P:
- 1) Measures Loss and ALE adequacy
2) shows payments & reserves by line & AY. In this way, a company can identify segments of business with good or bad experience.
3) the effects of changes in loss reserve margins on Calendar Year results can beseen via the Accident Year figures.
4) it provides loss payment patterns needed to discount the reserves
5) provides data for reserving risk & written premium risk in the RBC formula.
6) shows the percentage of premium & losses associated with loss sensitive contracts, and the sensitivity of those.
7) separates the occurrence & claims made experience needed for the RBC offset.
8) supports the SAO (Statement Of Actuarial Opinion).
- According to RBC, What is the RBC charge for cash or money market funds?
- According to RBC, What is the RBC charge for Equities?
- According to RBC, What is the RBC charge for Reinsuarnce Recoverables?
- According to RBC, What is the RBC charge for miscellaneous recoverables?
- According to RBC, What is are the ranges for the action levels: Company Action Level, Regulatory Action Level, Authorized Control Level, Mandatory Control Level
- 150%-200% - Company Action Level
100% to 150% Regulatory Action Level
70% to 100% Authorized Control Level
less than 70% Mandatory Control Level
- According to RBC, what are the actions associated with Company Action Level, Regulatory Action Level, Authorized Control Level, Mandatory Control Level
- Company Action Level - Cmpanyt submit a plan how additional capital will be obtained or reduce risk exposure
Regulatory Action Level - Company submit a plan and regulator has right to take action (restrict new business) at his discretion
Authorized Control Level- The commisioner isd authorized to take control
Mandatory Control Level - The commissioner is authorized to place the company under regulatory control (rehab or liquidization)
- According to RBC, List 3 incebtives related to RBC forulas for companies to report inadequate reserves -"Triple Whammy"
- 1) Stat Surplus is increased when reserves are lowered
2) Reserving Risk Charge is lowered therefore lowereing required capital
3) Adverse development is lowered therefore reducing reserving risk charge
- According to RBC, list 2 rebuttles to the argument of the tripple whammy on incentives to reduce reported reserves
- 1) NOT PURPOSE of RBC - it is not the purpose of RBC to ensure reserve adequacy - that is taks of actuaries and regulators
2) MANIFEST - any inadequate reserves will manifest themselves through adverse development and hence higher reserving risk
- According to RBC, List one incentive for insurers not to undertate reserves
- TAX - increased taxable income
- According to RBC, What is the purpose of the Premium concentration factor in the written premium risk?
- Diversification - If an insurer writes many LOB's, risk is reduced because the UW results of th evarious lines are not completely correlated with eachother. -More diversification leads to greater reduction in RBC charge
- According to RBC, Which risk charge is outside the square root formula and why is that?
- R0, investments in insurance affiliates, it is outside to avoid a reduction of overall capital requirements by simple layering of company's legal structure
- According to RBC, what is the purpose of "adjustment for investment income" in the reserving risk calc?
- Reserves are undiscounted, this is an implicit margin that should be remnoved to avoid double-counting of required capital
- According to RBC, RBC charge for for investments in alien insurance subsidiaries is estim ated as 50% of reported value of enterprise. What is rationale?
- Data indicates an average of RBC charge of 50% carrying value
- According to RBC, Whay is the RBC charge different for US and alien subsidiaries?
- Outside US have different annual filing requirements. It would be difficult to calculate their RBC charge
- According to RBC, provide 2 arguments against the statement RBC is understated because the RBC doesn't use covariance adjustments in its square root calculation (it actually assumes independence)
- 1) The correlation is weak and the main correlation between reserving and reisnurance collectibles is taken care of by moving half of credit risk from R3 to R4
2) Teh squre root rule will overstte required capital for aq given expected policyholder deficit if the risk elements have a bormal or lognormal distirbution
- According to RBC, list 3 actions taken by NAIC to ensure nationwide adoption of uniform RBC requiorements:
- 1) Annual statement - they made it part of the annual statment
2) The did not includse the formula in model law, so the states couldn't modify it
3) They made passing the model law a requirement for accredation
- According to RBC, List 3 criticism of the reinsurance credit risk RBC charge
- 1) Disincentive - The high charge is a disincentive to reinsure and reduce risk
2) Does not differentiate between types of reinsurers (well capitalized vs. not)
3) Collaterlization - RBC does not consider the collateralization of reinsurance recoverables
- According to RBC, List 3 arguments for the reinsurance credit risk RBC charge
- 1) Contibuted to insolvency - reinsurance collectibility has contributed to major insolvencies
2) "Sham reinsurance" - financially troubled insurers have used sham reinsurance to hide their financial problems
3) RBC does not contemplate additional reinsurance premiums paid on loss sensitive contracts
- According to RBC, the NAIC retained its 10% chare for reinsurance recoverables for the following 3 reasons
- 1) Pooor Historical Data
2) continually changing marketplace
3) other factors affecting collectibility (quality of reinsurer)
- According to RBC, what is the risk charge for credit risk on recoverables from Involuntary market pools?
- No charge - this is designed to increase availability for hard to service risks
- According to RBC, what is the risk charge for credit risk on recoverables from intercompany pooling (affiliated companies)?
- No Charge
- According to RBC, howe is the statutory provision for reinsurance treated with regards to to RBC charge for reinsurance credit risk?
- Stat Provision is deducted from reinsurance recoverables subject to RBC charge to avoid double counting
- According to RBC, the RBC formulabalances 3 major considerations: list them
- 1) Accuracy
- According to RBC, List 2 criticisms for the RBC "worst Case Year" approach to reservign and premium risk:
- 1- historical results may be a result of happenstance and not risk characteristics
2) Calibrating the required capital may not use observed adverse development in determining a good proxy for risk characteristics
- According to RBC, list two arguments for why the RBC reserving risk charge should reflect the net effect of adverse development and the implicit interest discount
- 1) long duration implies high interest discount
2) volitility of adverse development of statutory WC reserve payments is low. any changes are likely slow and incremental
- According to RBC, list 3 arguments for why the RBC reserving risk charge should NOT reflect the net effect of adverse development and the implicit interest discount
- 1) 1980's OBSERVED loss development does not reflect the riskiness of WC in 80's
2) Industry wide WC reserves are DEFICIENT and nto reflected in financial statements
3) Use of tabular discounts is already used
- List 5 purposes of RBC standards and which two have been prohibited to use
- 1) Minimum Capital Requirements
2) Solvency monitoring
3) Legal authority of regulators tro take action
4) Ratemaking - prohibited
5) MArketing - prohibited
- According to IASA Chpt 14, Describe 5 instances where SAP is more conservative than GAAP
- 1) Provision for Reinsuriance
2) Excess of statutory over Statement Reserves
3) Non-adnitted Assetts like agents balances over 90 days
4)DAC asset not recognized
5)Equipment, Furniture and supplies are non-admitted
- According to IASA Chpt 14, Describe 4 instances where GAAP is more conservative than SAP
- 1) Tax Provision on Unrealized Capital Gains
2) Premium Deficiency
3) Undeclared PH Dividends
4) SAP allows all NAIC category 1 and 2 bonds to be carried at amoritized cost regardless of company’s ability to hold until maturity
- According to IASA Chpt 14, Give an ezample of where SAP is contradictory to the liquidation basis of accounting:
- -The use of amoritized values for bonds and other fixed income securities
- According to IASA Chpt 14, Under GAAP, is it necessary for actuarial cerification of Loss and ALE reserves? How about UEPR?
- NO, NO
- According to IASA Chpt 14, What is the purpose of premium deficiency? And how is it reflected in GAAP?
- Prem Deficiency is established in GAAP to account for shortfall between UEPR and expected Loss, ALE and Expense
This deficiency first reduces the DAC asset and then any excess is set up as liability Excess premium deficiency reserve
- According to IASA Chpt 14, Under SAP how are bonds valued?
- Category 1-2 – amortized value
Category 3-6 Lower of market value and amortized value
Market values are promulgated by NAIC SVO (securities valuation Office)
- According to IASA Chpt 14, Under GAAP how are bonds valued?
- “Held to maturity bonds” – amortized value
“trading securities” –market value (and unrealized gains included in income)
“other than maturity and trading” - market values with changes in market values recognized as unrealized gains net of deferred taxes that affect surplus
- According to IASA Chpt 14, How does SAP and GAAP treat undeclared PH Dividends?
- SAP – not recorded as liabilities until declared
GAAP – amount ot be accrued as liability on balance sheet with estimate of amount to be declared
- According to IASA Chpt 14, Identify the principal user of GAAP and SAP
- SAP – Regulators and Policyholders
GAAP - Investors
- According to IASA Chpt 14, , Identify the main objectives of GAAP and SAP
- SAP – Adequacy of surplus – ability to meet it sobligations to policyholders and a focus on liquidity
GAAP – Going Concern – matching of income earned with costs incurred
- According to IASA Chpt 14, how do GAAP and SAP treat Federal Income Taxes?
- GAAP- includes provision for taxes currently payable AND a provision for Defererred Taxes to future periods
SAP – Only includes provision for taxes currently payable
- According to IASA Chpt 14, How is salvage and subrogation treated in SAP and GAAP?
- SAP – anticipated Sal/Sub reduces liability for related upaid loss is allowed
GAAP – Reduces liability for unpaid loss is required
- According to IASA Chpt 14, How do you record estimate for loss reserves based on management’s range in GAAP and SAP?
- GAAP – the low end of range
SAP – the midpoint of range
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