NAIC Codification of Statutory Accounting Actuarial Considerations Pat Teufel, FCAS, MAAA Casualty Loss Reserve Seminar Minneapolis, Minnesota September 18 – 19, 2000
Actuarial Involvement in Codification • Multi-year effort, involving many actuaries • American Academy of Actuaries involved throughout project as “Interested Party” (COPLFR for P/C) • Testified on several occasions. In particular • Best Estimate • Discounting • Premium Deficiency Reserves • Continue to work with Casualty Actuarial Task Force in clarifying intent/expectations
Practice Guide Being Developed • Expected Distribution -- Property/Casualty practitioners who are members of American Academy of Actuaries • Timeframe – Mid-October, 2000 • Focus -- Impact of Codification for items within the scope of the NAIC Statements of Actuarial Opinion • Content • Pre-codification/ Codification accounting comparisons • Considerations for Reserving • Considerations for Statements of Actuarial Opinion
Other Resources • NAIC Accounting Practices and Procedures Manual ($160, ordered through naic website) • Company/Auditor accounting staff • NAIC Codification Training Sessions
Significant Issues Affecting Actuaries • “Best Estimate” • Discounting • Premium Deficiency Reserves • Premium Recognition • Booked as billed vs. booked as written • Earned but unbilled premium • Underwriting Pools & Associations • Subsequent Events – Recognition / Disclosure
SSAP 5: Liabilities, Contingencies and Impairments of Assets • Defines and establishes statutory accounting principles for liabilities, contingencies and impairment of assets • Liability has three essential characteristics: • Present duty or responsibility • That obligates a particular entity • The transaction or other event obligating the entity has already happened Liabilities shall be recorded when incurred • Loss contingency or impairment of an asset – an existing condition/situation involving uncertainty that will ultimately be resolved when one or more future event(s) occur or fail to occur
SSAP 5: Liabilities, Contingencies and Impairments of Assets • Estimated loss from a loss contingency is to be recorded by a charge to operations if BOTH of the following conditions are met: • Information available prior to issuance of the financial statements indicates that it is PROBABLE that a liability has been incurred at the date of the financial statements, AND • The amount of the loss can be reasonably estimated • If a loss contingency is NOT recorded because only one of the conditions is met, or if exposure to a loss exists in excess of the amount accrued, but there is at least reasonable possibility that a loss or an additional loss may have been incurred, disclosure is required.
SSAP 55: Unpaid Claims, Losses and Loss Adjustment Expenses • Establishes statutory accounting principles for recording liabilities for insurance contracts • Does NOT address liabilities for punitive damages • Management shall records its best estimate of its liabilities for unpaid claims, unpaid losses and loss/claim adjustment expenses for each line of business and for all lines of business in the aggregate. • Management may consider a range of reserve estimates; that range shall not include the set of all possible outcomes but only those outcomes that are considered reasonable • When there is no point within the range that is a better estimate than any other point, the MIDPOINT of the range shall be accrued.
SSAP 55: Unpaid Claims, Losses and Loss Adjustment Expenses • Various analytical techniques can be used to estimate the liability; more than one method should be considered. • Estimation process is generally to be performed by line of business, grouping contracts with like characteristics and policy provisions. • Liabilities shall not be discounted unless authorized for specific types of claims by other SSAPs (i.e., SSAP 65) • The Statement of Actuarial Opinion is with respect to the reasonableness of loss and loss adjustment expense reserves IN THE AGGREGATE. • While management likely will consider the actuarial estimates (including range) in deriving its “best estimate”, there may be differences between management’s best estimate and the actuarial estimate. • “Line of business” and “best estimate” are not defined.
SSAP 55: Unpaid Claims, Losses and Loss Adjustment Expenses • In evaluating whether the reserves “meet the requirements of the insurance laws of (state of domicile)”, the actuary may wish to obtain a representation from management that management has accrued its “best estimate, by line of business and in the aggregate” • Reclassifications of reserves by line of business may be appropriate
SSAP 65: Property and Casualty Contracts • Property and casualty insurance contracts can be written on the following reporting bases: • Occurrence • Claims Made • Extended Reporting • Property and casualty loss reserves shall not be discounted, EXCEPT for fixed and reasonably determinable payments such as those emanating from workers compensation tabular indemnity reserves and long-term disability claims • Tabular reserves are indemnity reserves calculated using discounted determined with reference to actuarial tables which incorporate interest and contingencies applied to a reasonably determinable payment stream. Tabular reserves shall NOT include medical loss reserves or LAE
SSAP 65: Property and Casualty Contracts • When establishing non-tabular discounted reserve amounts, liability shall be in accordance with ASOP 20, but in no event shall the rate used exceed the lesser of: • Net rate of return on statutory invested assets less 1.5% (assuming statutory invested assets > policyholder reserves) • Current yield to maturity on US Treasury debt instrument with maturities consistent with expected payout of liabilities • Additional disclosure requirements (for both tabular and non-tabular reserves) • High Deductible Policies – Reserves are established net of the deductible (but no reserve credit allowed when any amount due from the insured has been determined to be uncollectible)
SSAP 65: Property and Casualty Contracts • Claims Made Policies –- Extended Reporting coverage can be issued for: • Indefinite period • Premium fully earned • Loss and expense liability associated with unreported claims recognized immediately • Definite period • Establish an unearned premium reserve for the unexpired portion of the premium • Record losses as reported • Excess of statutory over statement reserves (Schedule P Penalty) eliminated • Prescribes accounting for structured settlements and for long duration contracts as well
SSAP 65: Property and Casualty Contracts • Discounting is permitted only in limited circumstances, although states continue to have authority to permit non-tabular discounting. Additional disclosures are required, including: • Rate(s) used and basis for the rate(s) used; • Amount of non-tabular discount by line of business and reserve category (case, IBNR, allocated loss adjustment expense and unallocated loss adjustment expense • Amount of non-tabular discount reported in the statement • Establishes consistent practice for recording unearned premium and loss reserves for claims made policies with extended reporting endorsements; company practice may need to be modified
SSAP 53: Property Casualty Contracts -- Premiums • Establishes general statutory accounting principles for the recording and recognition of premium revenue for property and casualty contracts. • Only workers compensation contracts may be recorded on an installment basis to match the billing to the policyholder. Written premium for all other contracts must be recorded on the effective date of the contract. • For contracts where it can be demonstrated that the period of risk differs significantly from the contract period, premiums shall be recognized as revenue over the period of risk in proportion to the amount of insurance protection provided. For most insurance contracts, the exposure to insurance risk does not vary significantly during the contract period and premium is recognized as revenue using either the daily or monthly pro-rata method
SSAP 53: Property Casualty Contracts -- Premiums • For policies where adjustments to the premium are charged for changes in the level of exposure to insurance risk (audit premiums), the amount earned but unbilled (EBUB) shall be estimated and recorded as an adjustment to premium, either through written premium or as an adjustment to earned premium • May be determined using actuarially or statistically supported aggregate calculations using historical company UEP data, or per policy calculations • Corresponding liabilities for commissions and premium taxes shall be established • 10% of EBUB in excess of collateral specifically held and identifiable on a per policy basis is NON-ADMITTED
SSAP 53: Property Casualty Contracts -- Premiums • Advance premium (resulting when policies have been processed and premium has been paid prior to the effective date) are reported as a liability in the financial statements. Advance premiums are NOT included in written premium or the unearned premium reserve • Premium Deficiency Reserve – When anticipated losses, loss adjustment expense, commissions and other acquisition costs and maintenance costs exceed the recorded unearned premium reserve and any future installment premiums on existing policies • Insurance contracts shall be grouped in a manner consistent with how policies are marketed, services and measured • Deficiencies in one policy grouping shall not be offset by anticipated profits in other groupings • If anticipated investment income is utilized in determining whether a premium deficiency reserve is required, disclosure is required
SSAP 53: Property Casualty Contracts -- Premiums • Company practices with respect to premium recognition have varied; implementation implications will also vary by company. The actuary should consider: • Installment premium recognition (Unearned premium reserve may increase) • Premium earning pattern for policies whose risk exposure varies significantly during the coverage period – premium recognition should track exposure to risk. (Certain policy exceptions such as for financial guaranty insurance existed pre-codification) • Premium deficiency reserve must be established, if indicated • Segmentation • Investment income consideration • GAAP vs. STAT • Disclosures
SSAP 53: Property Casualty Contracts -- Premiums • Company procedures for estimating premium deficiency reserve would benefit from actuarial involvement • Use of historical patterns • Explicit consideration of impact of rate actions • Earned but unbilled premiums • Actuarial methodologies can be employed for estimation • Econometric models may need to be developed • NO CHANGE FOR STATEMENT OF ACTUARIAL OPINION
SSAP 63: Underwriting Pools and Assns. Including Intercompany Pools • Underwriting pools and associations can be: • Involuntary • Voluntary • Intercompany • Underwriting results are to be accounted for on a gross basis whereby the participants portion of premiums, losses, expenses and other operations are recorded separately, rather than netted against each other • Premiums and losses shall be recorded as direct, assumed and/or ceded, as applicable. • SSAP 5 is adopted for pools (accrual basis is required; reporting lag is not permitted)
SSAP 63: Underwriting Pools and Assns. Including Intercompany Pools • Participants may use different assumptions in recording transactions (discount rates), but the timing of recording transactions must be consistent among all participants • Disclosures are required for intercompany pooling • Actuarial implications • Results associated with pool lag must be estimated • Analysis of Direct and Assumed Reserves for Intercompany pooling arrangements may need to be done separately for direct and pooled reserves. • Disclosures may be appropriate for actuarial opinion
SSAP 9: Subsequent Events • Subsequent events defined as events or transactions that occur subsequent to the balance sheet date but prior to the issuance of the statutory financial statements. • Statutory financial statements include: • Quarterly and Annual Statement • Issuance of Audit Opinion • Material subsequent events may be: • TYPE I: Events that existed at the date of the balance sheet and affect estimates inherent in the process of preparing financial statements • TYPE II: Events that did not exist at the balance sheet date but arose subsequent to that date
SSAP 9: Subsequent Events • Type I events are to be considered and reflected in the financial statements • Type I subsequent events occurring subsequent to the balance sheet date but before the statement of actuarial opinion should be considered in evaluating the reasonableness of the reserve estimate • Disclosure may be appropriate in the actuarial opinion • Type II events would not be directly considered in the recorded reserves, but may need to be disclosed • Consider in context of “risk of material adverse deviation” and “major risk factors” • Disclosure in actuarial opinion may be appropriate
Other Relevant SSAPs • SSAP 57: Title Insurance • SSAP 58: Mortgage Guaranty Insurance • SSAP 60: Financial Guaranty Insurance • SSAP 62: Property and Casualty Reinsurance