BattleActs - User contributions [en]

NAIC.SSAP-65

2026-01-30T01:24:50Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

Questions on disclosures are not uncommon in exam questions related to the SAO (Statement of Actuarial Opinion). The items highlighted in red in the table below seem like they could be important for the exam. The other disclosures listed in the table are either obvious or too detailed for a minor reading like SSAP-65.

{| class="wikitable"
! Topic
! style="width:400px;" | Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
|
• Reserves removed due to annuities with claimant as payee 
• Contingent liability if annuity issuer fails 
• Concentrations with any life insurer ≥1% of surplus 
• Licensing status of annuity issuers 
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
|
• Gross loss reserves before deductibles 
• Deductible recoverables (paid and unpaid) 
• Overdue and nonadmitted amounts 
• Collateral held (on- and off-balance sheet) 
• Unsecured amounts and largest counterparties 
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
|
• Reserving methodologies for case and IBNR 
• Paid and reserved amounts (gross, assumed, net) 
• Lines of business with exposure 
• Multi-year reserve rollforward 
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:23:00Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! style="width:400px;" | Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
|
• Reserves removed due to annuities with claimant as payee 
• Contingent liability if annuity issuer fails 
• Concentrations with any life insurer ≥1% of surplus 
• Licensing status of annuity issuers 
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
|
• Gross loss reserves before deductibles 
• Deductible recoverables (paid and unpaid) 
• Overdue and nonadmitted amounts 
• Collateral held (on- and off-balance sheet) 
• Unsecured amounts and largest counterparties 
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
|
• Reserving methodologies for case and IBNR 
• Paid and reserved amounts (gross, assumed, net) 
• Lines of business with exposure 
• Multi-year reserve rollforward 
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:22:05Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! style="width:400px;" | Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
|
• Reserves removed due to annuities with claimant as payee 
• Contingent liability if annuity issuer fails 
• Concentrations with any life insurer ≥1% of surplus 
• Licensing status of annuity issuers 
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
|
• Gross loss reserves before deductibles 
• Deductible recoverables (paid and unpaid) 
• Overdue and nonadmitted amounts 
• Collateral held (on- and off-balance sheet) 
• Unsecured amounts and largest counterparties 
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
|
• Reserving methodologies for case and IBNR 
• Paid and reserved amounts (gross, assumed, net) 
• Lines of business with exposure 
• Multi-year reserve rollforward 
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:19:54Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! style="width:400px;" | Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
|
• Reserves removed due to annuities with claimant as payee 
• Contingent liability if annuity issuer fails 
• Concentrations with any life insurer ≥1% of surplus 
• Licensing status of annuity issuers 
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
|
• Gross loss reserves before deductibles 
• Deductible recoverables (paid and unpaid) 
• Overdue and nonadmitted amounts 
• Collateral held (on- and off-balance sheet) 
• Unsecured amounts and largest counterparties 
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
|
• Reserving methodologies for case and IBNR 
• Paid and reserved amounts (gross, assumed, net) 
• Lines of business with exposure 
• Multi-year reserve rollforward 
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:18:18Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
|
• Reserves removed due to annuities with claimant as payee 
• Contingent liability if annuity issuer fails 
• Concentrations with any life insurer ≥1% of surplus 
• Licensing status of annuity issuers 
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
|
• Gross loss reserves before deductibles 
• Deductible recoverables (paid and unpaid) 
• Overdue and nonadmitted amounts 
• Collateral held (on- and off-balance sheet) 
• Unsecured amounts and largest counterparties 
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
|
• Reserving methodologies for case and IBNR 
• Paid and reserved amounts (gross, assumed, net) 
• Lines of business with exposure 
• Multi-year reserve rollforward 
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:17:30Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
|
• Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
| • Reserves removed due to annuities with claimant as payee
• Contingent liability if annuity issuer fails
• Concentrations with any life insurer ≥1% of surplus
• Licensing status of annuity issuers
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
| • Gross loss reserves before deductibles
• Deductible recoverables (paid and unpaid)
• Overdue and nonadmitted amounts
• Collateral held (on- and off-balance sheet)
• Unsecured amounts and largest counterparties
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
| • Reserving methodologies for case and IBNR
• Paid and reserved amounts (gross, assumed, net)
• Lines of business with exposure
• Multi-year reserve rollforward
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:17:16Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
| • Whether reserves are discounted
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
| • Reserves removed due to annuities with claimant as payee
• Contingent liability if annuity issuer fails
• Concentrations with any life insurer ≥1% of surplus
• Licensing status of annuity issuers
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
| • Gross loss reserves before deductibles
• Deductible recoverables (paid and unpaid)
• Overdue and nonadmitted amounts
• Collateral held (on- and off-balance sheet)
• Unsecured amounts and largest counterparties
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
| • Reserving methodologies for case and IBNR
• Paid and reserved amounts (gross, assumed, net)
• Lines of business with exposure
• Multi-year reserve rollforward
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:17:04Z

Graham: /* Disclosures */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
| • Whether reserves are discounted 
• Discount rates and tables used 
• Amount of discounted reserves 
• Interest accretion recognized 
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
| • Reserves removed due to annuities with claimant as payee
• Contingent liability if annuity issuer fails
• Concentrations with any life insurer ≥1% of surplus
• Licensing status of annuity issuers
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
| • Gross loss reserves before deductibles
• Deductible recoverables (paid and unpaid)
• Overdue and nonadmitted amounts
• Collateral held (on- and off-balance sheet)
• Unsecured amounts and largest counterparties
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
| • Reserving methodologies for case and IBNR
• Paid and reserved amounts (gross, assumed, net)
• Lines of business with exposure
• Multi-year reserve rollforward
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-65

2026-01-30T01:16:34Z

Graham: /* The 3 Tests for Long-Duration Contracts */

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Disclosures===

{| class="wikitable"
! Topic
! Key Disclosures (Examples)
! Why the Disclosure Exists
! Primary Risk Highlighted
|-
| Discounted loss reserves
| • Whether reserves are discounted
• Discount rates and tables used
• Amount of discounted reserves
• Interest accretion recognized
• Effect of changes in discount assumptions
| To ensure transparency when reserves are sensitive to interest rate and timing assumptions, and to prevent masking reserve inadequacy through aggressive discounting
| Assumption risk; understatement of liabilities due to discounting
|-
| Structured settlements
| • Reserves removed due to annuities with claimant as payee
• Contingent liability if annuity issuer fails
• Concentrations with any life insurer ≥1% of surplus
• Licensing status of annuity issuers
| To clarify whether risk has truly been transferred and to expose continued dependence on third-party life insurers
| Counterparty credit risk; residual liability risk
|-
| High deductible policies
| • Gross loss reserves before deductibles
• Deductible recoverables (paid and unpaid)
• Overdue and nonadmitted amounts
• Collateral held (on- and off-balance sheet)
• Unsecured amounts and largest counterparties
| Because insurers pay losses first and rely on insureds for reimbursement, regulators need visibility into collectibility and collateral adequacy
| Credit risk from insureds; liquidity strain
|-
| Asbestos and environmental exposures
| • Reserving methodologies for case and IBNR
• Paid and reserved amounts (gross, assumed, net)
• Lines of business with exposure
• Multi-year reserve rollforward
| To surface long-tail uncertainty, estimation volatility, and exposure to legacy liabilities that may not be apparent in current-year results
| Extreme reserve uncertainty; long-duration development risk
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

Odomirok.26-Taxes

2026-01-27T22:40:12Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 26''' - '''Taxation in the U.S.'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO → [https://battleacts6us.ca/video/160_Taxation_General_(v01).mp4 '''(8:15) → Taxation - General Overview''']
   ([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Taxation in the U.S.'''

* Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the '''impact of federal taxes on insurance pricing''', company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses.
* The discussion also highlights significant changes from the '''Tax Cuts and Jobs Act of 2017''', such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.

|}

==Pop Quiz==

==Study Tips==

The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.

This chapter on taxes is one of the easier chapters. There was a big change for 2021-Spring that made one of the difficult calculation problems much simpler. ''(The old version required you to calculate the tax implication of dividends which was a messy calculation.)''

Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a '''new calculation''' called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.

{| class='wikitable' style='background-color: yellow;"
|-
|| Altogether, there were 4 important changes for '''2021-Spring''' due to the TCJA (Tax Cut and Jobs Act of 2017):
|}

* decrease in the corporate tax rate
* cannot use company-specific data to determine payment patterns for discounting
* change how the interest rate is determined
* BEAT calculation (Base Erosion and Anti-Abuse Tax)   ← ''this is probably the most testable of the new information''

{| class='wikitable' style='background-color: yellow;"
|-
|| For changes in the discounting procedure, click ''[[Odomirok.26-Taxes#Discounting_Loss_Reserves_for_Taxes | Discounting Loss Reserves for Taxes]]'' and look for the yellow boxes.
|}

'''Estimated study time''': 1 day ''(not including subsequent review)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* '''SAP income''' calculation, both pre-tax and post-tax
* tax basis income, tax rates, discounting loss reserves for tax purposes
* ('''income tax''' calculation  ← ''no longer important so don't panic if you see it on past published exams.'')

 '''Outdated'''   → ''questions highlighted in orange are at least partially outdated because they refer to AMIT (Alternative Minimum Income Tax)''.

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 195px;" | part (a) !! style="width: 195px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''
|| '''tax basis income''': - calculate '''5'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf E] '''(2016.Fall #19)'''
|| '''tax rate''': - various income types '''3'''
|| '''taxable income''': - from SAP income
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''
| style='background-color: orange;' | '''discounting reserves''': - for tax purposes '''2'''
|| '''SAP income:''' - calculate pre-tax value
|| '''federal tax''': - identify missing info
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''
| style='background-color: orange;' | '''income tax:''' - calculate '''1'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(18).pdf E] '''(2013.Fall #18)'''
|| '''SAP income:''' - calculate '''4'''
|| '''bond/stock allocation''': - considerations
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)
: '''2''' Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.
: '''3''' This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.
: '''4''' Click for an ''[https://www.battleacts6us.ca/Excel/2013-Fall-Q18-(updated)_v01.xlsx updated solution to 2013-Fall-Q18]''
: '''5''' Click for ''[https://battleacts.discourse.group/t/2018s-14/2962 comments regarding discounting in this problem]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==In Plain English!==

===Tax-Basis Income===

Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the tax-basis income. Don't try to solve it for now - Alice's solution is presented in the next section.

: [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''

The first question that popped into my mind was:

:{| class='wikitable'
|-
| '''Question''': what is tax-basis income and how is it different from "normal" SAP income
|}

:* tax-basis income is SAP or statutory income with a few adjustments:
::    ==> EP is adjusted with a '''revenue-offset'''
::    ==> losses ''(or reserves)'' are '''discounted'''

The concept of ''discounting'' is already familiar, but let's take a closer look at the revenue-offset term. ''(If you want, you can glance ahead at the '''TBEP formula''' which is given in the next section.)''

:{| class='wikitable'
|-
| '''Question''': briefly describe the IRS's revenue offset procedure as it applies to tax-basis income
|}

:* in SAP, acquisition costs are not deferred so the insurer would incur a loss (because these costs are expensed immediately)
:* the insurer would then be entitled to a future tax refund on this loss
:* '''but the IRS wanted to simplify the process:''' instead of a refund, the IRS reduces UEP liability by 20% for all insurers
:: ''(assumes the acquisition cost ratio is 20% for all lines for all insurers)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Calculating the Tax-Basis Income (Version 1)===

Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a ''[https://battleacts.discourse.group/t/2015-spring-17/2479 brief forum post]'' mentioning this.

Let

: '''TBI''' = Tax-Basis Income
: '''TBEP''' = Tax-Basis EP
: '''InvInc''' = Investment Income
:: ''(Strictly speaking, InvInc refers to the taxable portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume all of this InvInc is taxable.)''
: '''TBIL''' = Tax-Basis Incurred Loss

then

:{| class='wikitable' style='background-color: lightgreen;'
|-
|    '''TBI'''    =    TBEP    +    InvInc    –    TBIL
|}

where the right-hand-side terms TBEP and TBIL can each be calculated two different ways:

Let

: '''PL''' = Paid Loss ''(during year)''
: '''IL''' = Incurred Loss ''(during year)''
: '''LD''' = Loss reserves after Discounting
: '''D''' = Discount amount ''(= difference between undiscounted and discounted loss reserves)''

Then

:{| class='wikitable'
|-
|    '''TBEP'''    '''='''    EP    +    20% x chg(UEP)    '''='''    WP    –    80% x chg(UEP)
|}

:{| class='wikitable'
|-
|    '''TBIL'''    '''='''    PL    +    chg(LD)    '''='''    IL    –    chg(D)
|}

'''Side Note''':

: The formula for TBEP doesn't look like it matches the above description of ''revenue-offset'', but it amounts to the same thing:

:: ==> the TBEP formula increases the statutory EP by 20% of the chg(UEP)

'''Alice's solution to''' '''(2018.Spring #14)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf '''''Solution to 2018.Spring #14''''']  ← ''see [https://battleacts.discourse.group/t/2nd-year-inv-inc/2835 this forum post] for an alternate way to compute investment income

And here's a practice problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14)_practice_01.pdf '''''1 practice problem like 2018.Spring #14''''']

The quiz has a practice template for this problem. ''(In the next section, we'll look at a slightly harder version of calculating TBI.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Calculating the Tax-Basis Income (Version 2)===

We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021-Spring, it's now much easier. The reason it's easier is that the tax implication of '''dividend income''' is no longer covered in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''

There were 2 things that made this problem harder:

* the calculation of '''InvInc''' ''(Investment Income)'' required you to know details of how certain bonds are taxed
:    → remember that in these problems, InvInc refers only to the taxable portion of investment income
* you were asked to calculate '''IT''' ''(Income tax)'' which is an extra step ''(the previous problem asked only for '''TBI''', the Tax-Basis Income, not the actual tax)''

We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $21)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.

First, you should know that in this context, the term proration means to increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income.

:{| class='wikitable'
|-
| '''Question''': describe the tax adjustments to bonds
|}

:* proration of tax-exempt municipal bonds
::    ==> add 25% of interest income to TBI
::    ==> taxable amounts are then multiplied by the standard corporate tax rate of 21% to obtain the actual tax.

For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Income Tax)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 21%. It is no longer required to calculate AMTI ''(Alternative Minimum Taxable Income)'' or AMIT ''(Alternative Minimum Income Tax)''

'''Alice's solution to''' '''(2017.Fall #21)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_2021.Spring.pdf '''''Solution to 2017.Fall #21 (updated for 2021-Spring)''''']

And here are 2 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01ab_2021.Spring_v2.pdf '''''2 practice problems like 2017.Fall #21 (2021-Spring version)''''']

===BEAT or Base Erosion and Anti-Abuse TAX===

BEAT is a new tax under the Tax Cuts and Jobs Act of 2017.

:{| class='wikitable'
|-
|| '''Question''': what is the purpose of BEAT
|}

:* BEAT limits the ability of multinational corporations to shift profits from the United States
:: ''(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)''

:{| class='wikitable'
|-
|| '''Question''': how does BEAT work
|}

:# the corporation calculates its regular tax ''(as a percentage of taxable income, currently 21%)''
:# the corporation calculates its alternative tax ''(as a percentage of gross income, currently 10%)''
:# if alternative tax > regular tax then the corporation must pay the difference ''(BEAT = this difference)''

Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:

* ''Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)''

Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:

* insurer is part of a U.S. group of companies with average gross receipts in the past three years ≥ $500M
* insurer makes base erosion payments ≥ 3% of the total deductions taken by the U.S. group on its current tax return.

Again, BEAT is a type of minimum tax that is added to the regular tax liability. Note however that if the '''foreign company''' to which tax-deductible payments have been made has elected to be '''taxed as a U.S. taxpayer''' then the U.S. corporation or insurer is '''not''' subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! ''(Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)''

: {| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:    In which of the following situations would the insurer be potentially subject to BEAT:

:: '''Situation 1''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 2''':
::* average gross receipts in past 3 years is $400 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 3''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 4''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is taxed as a U.S. taxpayer

:    ''[[Odomirok.26-Taxes#Pop_Quiz_A_-_Answer |Click for Answer]]'' 
Below is the example from the text. It's very easy. ''(And below that are a couple of practice problems.)''

{| class='wikitable'
|-
|| Here's the problem...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_problem.png]]

{| class='wikitable'
|-
|| Here's the solution...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_solution.png]]

Here are a couple of really easy practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(text)_BEAT_practice_01_02.pdf '''''2 BEAT problems (taxes)''''']

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]'''

===Discounting Loss Reserves for Taxes===

Let's start with a very important distinction regarding discounting:

:{| class='wikitable'
|-
| '''Question''': explain the difference between a '''company's''' own estimate of discounted reserves versus the estimate derived for '''tax purposes'''
|}

:* Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the '''economic impact''' of their assets & liabilities ''(versus the purely statutory impact)''. Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you '''don't''' need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an '''economic calculation'''.

:* But the calculation is different for taxes. The discount rate applied to this $1,000 for '''tax purposes''' is calculated according to the procedure below and probably won't be the same as the discount the company used in their '''economic''' calculation.

This is the final section from chapter 26 of Odomirok and there is a lot of overlap with ''[[Feldblum.Discount]]''. Note however that Feldblum's reading was removed from the syllabus for the 2019-Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. My suggestion is that you get a basic understanding of discounting facts and calculations, but if you are pressed for time, you could consider giving that topic a slightly lower priority versus other topics we know are important.

First, let's recall our earlier discussion of discounting as it related to the ''Fair Value of the Liabilities''. That was discussed in ''[[Odomirok.22-23-GAAP | Chapter 23 Purchase GAAP]]''. Discounting was component #2 of the ''Fair Value of the Liabilities''. As a reminder, component #1 was ''future cash flows'' and component #3 was the ''risk margin''. These components were asked on an exam question in 2017, so make sure you know them.

Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to memorize:

:{| class='wikitable'
|-
| '''Question''': what 3 components are required to calculate discounted loss reserves ''(for tax purposes)''
|}

:* undiscounted loss reserves
:* discount rate for the AY reserves to be discounted ''(use U.S. Treasury rate)''
:* payment pattern

Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.


{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Information regarding the components of discounting has changed.
|}

:{| class='wikitable'
|-
| '''Question''': where do you get these 3 components for discounting ''(for tax purposes)''
|}

:* undiscounted loss reserves:
::    - Schedule P, Part 1
::    - note that Part 1 is net of tabular discount, but gross of nontabular discount ''(means that any tabular discount must first be eliminated to get the true undiscounted reserves)''

:* discount rate:  
::    - '''NEW''': based on the corporate bond yield curve ''(determined by the U.S. Treasury for each accident year)''
::    - ''('''no longer valid''': 60-month moving average of Federal midterm rates for each AY)''

:* payment pattern:
::    - use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
::    - ''('''no longer valid:''' using Schedule P, Part 1 from company data)''

Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discount]] in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)''

:{| class='wikitable'
|-
| '''Question''': why is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3 ''(for tax purposes)''
|}

:* Part 3 may be '''skewed''' because it doesn't include adjusting/other expenses
:* Part 3 is '''not audited''' ''(Part 1 is audited)''
:* Part 1 requires '''no judgment''' for the IRS method

{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Calculating the discount factor using company Schedule P data is no longer covered in the current version of Odomirok and should not be tested.
|}

Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''

Details of discounting calculation from above exam problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf '''''Solution to 2016.Spring #18 (discount calc only)''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

Random practice problems on calculating the discount factor:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf '''''4 discounting practice problems like 2016.Spring #18''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]'''

===A Few Old Exam Problems===

Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:

: [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''

* Part of the solution involves calculating RTI (or TBI).
* The standard formula is: TBI = TBEP + InvInc - TBIL
* You can calculate InvInc using the methods discussed above, but the '''trick''' involves getting the value for TBEP - TBIL
* You are not given TBEP. Instead you are given '''U/W profit'''. Recall the U/W profit formula from ''[[Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29 | Chapter 8]]''.

:: U/W profit = EP - IL
::: so
:: EP = U/W profit + IL

: '''also''': TBEP = EP + 20% x chg(UEP)

: '''and''': TBIL = IL - chg(resv disc)

* Putting this all together gives:

:: TBEP - TBIL
::: = [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
::: = U/W profit + 20% x chg(UEP) + chg(resv disc)

The other piece of RTI is InvInc which is given in the examiner's report as:

: '''==>''' (taxable InvInc) + (realized gains)

Then the rest of the solution isn't too bad, but the part about AMTI or Alternative Minimum Taxable Income is now outdated, as is the part about the dividends received deduction. ''(See examiner's report.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==POP QUIZ ANSWERS==

===Pop Quiz A - Answer===

: '''Situation 1''': potentially subject to BEAT because all conditions are satisfied
: '''Situation 2''': not subject to BEAT because average gross receipts over last 3 years < 500M
: '''Situation 3''': not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company
: '''Situation 4''': not subject to BEAT because foreign company to which tax-deductible payments were made is taxed as a U.S. taxpayer

* <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.26-Taxes

2026-01-27T22:37:53Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 26''' - '''Taxation in the U.S.'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO → [https://battleacts6us.ca/video/160_Taxation_General_(v01).mp4 '''(8:15) → Taxation - General Overview''']
   ([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Taxation in the U.S.'''

* Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the '''impact of federal taxes on insurance pricing''', company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses.
* The discussion also highlights significant changes from the '''Tax Cuts and Jobs Act of 2017''', such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.

|}

==Pop Quiz==

==Study Tips==

The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.

This chapter on taxes is one of the easier chapters. There was a big change for 2021-Spring that made one of the difficult calculation problems much simpler. ''(The old version required you to calculate the tax implication of dividends which was a messy calculation.)''

Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a '''new calculation''' called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.

{| class='wikitable' style='background-color: yellow;"
|-
|| Altogether, there were 4 important changes for '''2021-Spring''' due to the TCJA (Tax Cut and Jobs Act of 2017):
|}

* decrease in the corporate tax rate
* cannot use company-specific data to determine payment patterns for discounting
* change how the interest rate is determined
* BEAT calculation (Base Erosion and Anti-Abuse Tax)   ← ''this is probably the most testable of the new information''

{| class='wikitable' style='background-color: yellow;"
|-
|| For changes in the discounting procedure, click ''[[Odomirok.26-Taxes#Discounting_Loss_Reserves_for_Taxes | Discounting Loss Reserves for Taxes]]'' and look for the yellow boxes.
|}

'''Estimated study time''': 1 day ''(not including subsequent review)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* '''SAP income''' calculation, both pre-tax and post-tax
* tax basis income, tax rates, discounting loss reserves for tax purposes
* ('''income tax''' calculation  ← ''no longer important so don't panic if you see it on past published exams.'')

 '''Outdated'''   → ''questions highlighted in orange are at least partially outdated because they refer to AMIT (Alternative Minimum Income Tax)''.

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 195px;" | part (a) !! style="width: 195px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''
|| '''tax basis income''': - calculate '''5'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf E] '''(2016.Fall #19)'''
|| '''tax rate''': - various income types '''3'''
|| '''taxable income''': - from SAP income
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''
| style='background-color: orange;' | '''discounting reserves''': - for tax purposes '''2'''
|| '''SAP income:''' - calculate pre-tax value
|| '''federal tax''': - identify missing info
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''
| style='background-color: orange;' | '''income tax:''' - calculate '''1'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(18).pdf E] '''(2013.Fall #18)'''
|| '''SAP income:''' - calculate '''4'''
|| '''bond/stock allocation''': - considerations
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)
: '''2''' Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.
: '''3''' This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.
: '''4''' Click for an ''[https://www.battleacts6us.ca/Excel/2013-Fall-Q18-(updated)_v01.xlsx updated solution to 2013-Fall-Q18]''
: '''5''' Click for ''[https://battleacts.discourse.group/t/2018s-14/2962 comments regarding discounting in this problem]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==In Plain English!==

===Tax-Basis Income===

Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the tax-basis income. Don't try to solve it for now - Alice's solution is presented in the next section.

: [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''

The first question that popped into my mind was:

:{| class='wikitable'
|-
| '''Question''': what is tax-basis income and how is it different from "normal" SAP income
|}

:* tax-basis income is SAP or statutory income with a few adjustments:
::    ==> EP is adjusted with a '''revenue-offset'''
::    ==> losses ''(or reserves)'' are '''discounted'''

The concept of ''discounting'' is already familiar, but let's take a closer look at the revenue-offset term. ''(If you want, you can glance ahead at the '''TBEP formula''' which is given in the next section.)''

:{| class='wikitable'
|-
| '''Question''': briefly describe the IRS's revenue offset procedure as it applies to tax-basis income
|}

:* in SAP, acquisition costs are not deferred so the insurer would incur a loss (because these costs are expensed immediately)
:* the insurer would then be entitled to a future tax refund on this loss
:* '''but the IRS wanted to simplify the process:''' instead of a refund, the IRS reduces UEP liability by 20% for all insurers
:: ''(assumes the acquisition cost ratio is 20% for all lines for all insurers)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Calculating the Tax-Basis Income (Version 1)===

Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a ''[https://battleacts.discourse.group/t/2015-spring-17/2479 brief forum post]'' mentioning this.

Let

: '''TBI''' = Tax-Basis Income
: '''TBEP''' = Tax-Basis EP
: '''InvInc''' = Investment Income
:: ''(Strictly speaking, InvInc refers to the taxable portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume all of this InvInc is taxable.)''
: '''TBIL''' = Tax-Basis Incurred Loss

then

:{| class='wikitable' style='background-color: lightgreen;'
|-
|    '''TBI'''    =    TBEP    +    InvInc    –    TBIL
|}

where the right-hand-side terms TBEP and TBIL can each be calculated two different ways:

Let

: '''PL''' = Paid Loss ''(during year)''
: '''IL''' = Incurred Loss ''(during year)''
: '''LD''' = Loss reserves after Discounting
: '''D''' = Discount amount ''(= difference between undiscounted and discounted loss reserves)''

Then

:{| class='wikitable'
|-
|    '''TBEP'''    '''='''    EP    +    20% x chg(UEP)    '''='''    WP    –    80% x chg(UEP)
|}

:{| class='wikitable'
|-
|    '''TBIL'''    '''='''    PL    +    chg(LD)    '''='''    IL    –    chg(D)
|}

'''Side Note''':

: The formula for TBEP doesn't look like it matches the above description of ''revenue-offset'', but it amounts to the same thing:

:: ==> the TBEP formula increases the statutory EP by 20% of the chg(UEP)

'''Alice's solution to''' '''(2018.Spring #14)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf '''''Solution to 2018.Spring #14''''']  ← ''see [https://www.battleacts6us.ca/vanillaforum6us/discussion/454/2nd-year-inv-inc this forum post] for an alternate way to compute investment income

And here's a practice problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14)_practice_01.pdf '''''1 practice problem like 2018.Spring #14''''']

The quiz has a practice template for this problem. ''(In the next section, we'll look at a slightly harder version of calculating TBI.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Calculating the Tax-Basis Income (Version 2)===

We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021-Spring, it's now much easier. The reason it's easier is that the tax implication of '''dividend income''' is no longer covered in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''

There were 2 things that made this problem harder:

* the calculation of '''InvInc''' ''(Investment Income)'' required you to know details of how certain bonds are taxed
:    → remember that in these problems, InvInc refers only to the taxable portion of investment income
* you were asked to calculate '''IT''' ''(Income tax)'' which is an extra step ''(the previous problem asked only for '''TBI''', the Tax-Basis Income, not the actual tax)''

We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $21)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.

First, you should know that in this context, the term proration means to increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income.

:{| class='wikitable'
|-
| '''Question''': describe the tax adjustments to bonds
|}

:* proration of tax-exempt municipal bonds
::    ==> add 25% of interest income to TBI
::    ==> taxable amounts are then multiplied by the standard corporate tax rate of 21% to obtain the actual tax.

For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Income Tax)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 21%. It is no longer required to calculate AMTI ''(Alternative Minimum Taxable Income)'' or AMIT ''(Alternative Minimum Income Tax)''

'''Alice's solution to''' '''(2017.Fall #21)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_2021.Spring.pdf '''''Solution to 2017.Fall #21 (updated for 2021-Spring)''''']

And here are 2 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01ab_2021.Spring_v2.pdf '''''2 practice problems like 2017.Fall #21 (2021-Spring version)''''']

===BEAT or Base Erosion and Anti-Abuse TAX===

BEAT is a new tax under the Tax Cuts and Jobs Act of 2017.

:{| class='wikitable'
|-
|| '''Question''': what is the purpose of BEAT
|}

:* BEAT limits the ability of multinational corporations to shift profits from the United States
:: ''(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)''

:{| class='wikitable'
|-
|| '''Question''': how does BEAT work
|}

:# the corporation calculates its regular tax ''(as a percentage of taxable income, currently 21%)''
:# the corporation calculates its alternative tax ''(as a percentage of gross income, currently 10%)''
:# if alternative tax > regular tax then the corporation must pay the difference ''(BEAT = this difference)''

Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:

* ''Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)''

Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:

* insurer is part of a U.S. group of companies with average gross receipts in the past three years ≥ $500M
* insurer makes base erosion payments ≥ 3% of the total deductions taken by the U.S. group on its current tax return.

Again, BEAT is a type of minimum tax that is added to the regular tax liability. Note however that if the '''foreign company''' to which tax-deductible payments have been made has elected to be '''taxed as a U.S. taxpayer''' then the U.S. corporation or insurer is '''not''' subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! ''(Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)''

: {| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:    In which of the following situations would the insurer be potentially subject to BEAT:

:: '''Situation 1''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 2''':
::* average gross receipts in past 3 years is $400 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 3''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 4''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is taxed as a U.S. taxpayer

:    ''[[Odomirok.26-Taxes#Pop_Quiz_A_-_Answer |Click for Answer]]'' 
Below is the example from the text. It's very easy. ''(And below that are a couple of practice problems.)''

{| class='wikitable'
|-
|| Here's the problem...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_problem.png]]

{| class='wikitable'
|-
|| Here's the solution...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_solution.png]]

Here are a couple of really easy practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(text)_BEAT_practice_01_02.pdf '''''2 BEAT problems (taxes)''''']

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]'''

===Discounting Loss Reserves for Taxes===

Let's start with a very important distinction regarding discounting:

:{| class='wikitable'
|-
| '''Question''': explain the difference between a '''company's''' own estimate of discounted reserves versus the estimate derived for '''tax purposes'''
|}

:* Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the '''economic impact''' of their assets & liabilities ''(versus the purely statutory impact)''. Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you '''don't''' need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an '''economic calculation'''.

:* But the calculation is different for taxes. The discount rate applied to this $1,000 for '''tax purposes''' is calculated according to the procedure below and probably won't be the same as the discount the company used in their '''economic''' calculation.

This is the final section from chapter 26 of Odomirok and there is a lot of overlap with ''[[Feldblum.Discount]]''. Note however that Feldblum's reading was removed from the syllabus for the 2019-Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. My suggestion is that you get a basic understanding of discounting facts and calculations, but if you are pressed for time, you could consider giving that topic a slightly lower priority versus other topics we know are important.

First, let's recall our earlier discussion of discounting as it related to the ''Fair Value of the Liabilities''. That was discussed in ''[[Odomirok.22-23-GAAP | Chapter 23 Purchase GAAP]]''. Discounting was component #2 of the ''Fair Value of the Liabilities''. As a reminder, component #1 was ''future cash flows'' and component #3 was the ''risk margin''. These components were asked on an exam question in 2017, so make sure you know them.

Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to memorize:

:{| class='wikitable'
|-
| '''Question''': what 3 components are required to calculate discounted loss reserves ''(for tax purposes)''
|}

:* undiscounted loss reserves
:* discount rate for the AY reserves to be discounted ''(use U.S. Treasury rate)''
:* payment pattern

Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.


{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Information regarding the components of discounting has changed.
|}

:{| class='wikitable'
|-
| '''Question''': where do you get these 3 components for discounting ''(for tax purposes)''
|}

:* undiscounted loss reserves:
::    - Schedule P, Part 1
::    - note that Part 1 is net of tabular discount, but gross of nontabular discount ''(means that any tabular discount must first be eliminated to get the true undiscounted reserves)''

:* discount rate:  
::    - '''NEW''': based on the corporate bond yield curve ''(determined by the U.S. Treasury for each accident year)''
::    - ''('''no longer valid''': 60-month moving average of Federal midterm rates for each AY)''

:* payment pattern:
::    - use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
::    - ''('''no longer valid:''' using Schedule P, Part 1 from company data)''

Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discount]] in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)''

:{| class='wikitable'
|-
| '''Question''': why is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3 ''(for tax purposes)''
|}

:* Part 3 may be '''skewed''' because it doesn't include adjusting/other expenses
:* Part 3 is '''not audited''' ''(Part 1 is audited)''
:* Part 1 requires '''no judgment''' for the IRS method

{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Calculating the discount factor using company Schedule P data is no longer covered in the current version of Odomirok and should not be tested.
|}

Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''

Details of discounting calculation from above exam problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf '''''Solution to 2016.Spring #18 (discount calc only)''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

Random practice problems on calculating the discount factor:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf '''''4 discounting practice problems like 2016.Spring #18''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]'''

===A Few Old Exam Problems===

Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:

: [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''

* Part of the solution involves calculating RTI (or TBI).
* The standard formula is: TBI = TBEP + InvInc - TBIL
* You can calculate InvInc using the methods discussed above, but the '''trick''' involves getting the value for TBEP - TBIL
* You are not given TBEP. Instead you are given '''U/W profit'''. Recall the U/W profit formula from ''[[Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29 | Chapter 8]]''.

:: U/W profit = EP - IL
::: so
:: EP = U/W profit + IL

: '''also''': TBEP = EP + 20% x chg(UEP)

: '''and''': TBIL = IL - chg(resv disc)

* Putting this all together gives:

:: TBEP - TBIL
::: = [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
::: = U/W profit + 20% x chg(UEP) + chg(resv disc)

The other piece of RTI is InvInc which is given in the examiner's report as:

: '''==>''' (taxable InvInc) + (realized gains)

Then the rest of the solution isn't too bad, but the part about AMTI or Alternative Minimum Taxable Income is now outdated, as is the part about the dividends received deduction. ''(See examiner's report.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==POP QUIZ ANSWERS==

===Pop Quiz A - Answer===

: '''Situation 1''': potentially subject to BEAT because all conditions are satisfied
: '''Situation 2''': not subject to BEAT because average gross receipts over last 3 years < 500M
: '''Situation 3''': not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company
: '''Situation 4''': not subject to BEAT because foreign company to which tax-deductible payments were made is taxed as a U.S. taxpayer

* <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.26-Taxes

2026-01-27T22:37:22Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 26''' - '''Taxation in the U.S.'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO → [https://battleacts6us.ca/video/160_Taxation_General_(v01).mp4 '''(8:15) → Taxation - General Overview''']
   ([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Taxation in the U.S.'''

* Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the '''impact of federal taxes on insurance pricing''', company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses.
* The discussion also highlights significant changes from the '''Tax Cuts and Jobs Act of 2017''', such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.

|}

==Pop Quiz==

==Study Tips==

The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.

This chapter on taxes is one of the easier chapters. There was a big change for 2021-Spring that made one of the difficult calculation problems much simpler. ''(The old version required you to calculate the tax implication of dividends which was a messy calculation.)''

Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a '''new calculation''' called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.

{| class='wikitable' style='background-color: yellow;"
|-
|| Altogether, there were 4 important changes for '''2021-Spring''' due to the TCJA (Tax Cut and Jobs Act of 2017):
|}

* decrease in the corporate tax rate
* cannot use company-specific data to determine payment patterns for discounting
* change how the interest rate is determined
* BEAT calculation (Base Erosion and Anti-Abuse Tax)   ← ''this is probably the most testable of the new information''

{| class='wikitable' style='background-color: yellow;"
|-
|| For changes in the discounting procedure, click ''[[Odomirok.26-Taxes#Discounting_Loss_Reserves_for_Taxes | Discounting Loss Reserves for Taxes]]'' and look for the yellow boxes.
|}

'''Estimated study time''': 1 day ''(not including subsequent review)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* '''SAP income''' calculation, both pre-tax and post-tax
* tax basis income, tax rates, discounting loss reserves for tax purposes
* ('''income tax''' calculation  ← ''no longer important so don't panic if you see it on past published exams.'')

 '''Outdated'''   → ''questions highlighted in orange are at least partially outdated because they refer to AMIT (Alternative Minimum Income Tax)''.

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 195px;" | part (a) !! style="width: 195px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''
|| '''tax basis income''': - calculate '''5'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf E] '''(2016.Fall #19)'''
|| '''tax rate''': - various income types '''3'''
|| '''taxable income''': - from SAP income
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''
| style='background-color: orange;' | '''discounting reserves''': - for tax purposes '''2'''
|| '''SAP income:''' - calculate pre-tax value
|| '''federal tax''': - identify missing info
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''
| style='background-color: orange;' | '''income tax:''' - calculate '''1'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(18).pdf E] '''(2013.Fall #18)'''
|| '''SAP income:''' - calculate '''4'''
|| '''bond/stock allocation''': - considerations
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)
: '''2''' Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.
: '''3''' This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.
: '''4''' Click for an ''[https://www.battleacts6us.ca/Excel/2013-Fall-Q18-(updated)_v01.xlsx updated solution to 2013-Fall-Q18]''
: '''5''' Click for ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/581/2018s-14#latest comments regarding discounting in this problem]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==In Plain English!==

===Tax-Basis Income===

Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the tax-basis income. Don't try to solve it for now - Alice's solution is presented in the next section.

: [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''

The first question that popped into my mind was:

:{| class='wikitable'
|-
| '''Question''': what is tax-basis income and how is it different from "normal" SAP income
|}

:* tax-basis income is SAP or statutory income with a few adjustments:
::    ==> EP is adjusted with a '''revenue-offset'''
::    ==> losses ''(or reserves)'' are '''discounted'''

The concept of ''discounting'' is already familiar, but let's take a closer look at the revenue-offset term. ''(If you want, you can glance ahead at the '''TBEP formula''' which is given in the next section.)''

:{| class='wikitable'
|-
| '''Question''': briefly describe the IRS's revenue offset procedure as it applies to tax-basis income
|}

:* in SAP, acquisition costs are not deferred so the insurer would incur a loss (because these costs are expensed immediately)
:* the insurer would then be entitled to a future tax refund on this loss
:* '''but the IRS wanted to simplify the process:''' instead of a refund, the IRS reduces UEP liability by 20% for all insurers
:: ''(assumes the acquisition cost ratio is 20% for all lines for all insurers)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Calculating the Tax-Basis Income (Version 1)===

Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a ''[https://battleacts.discourse.group/t/2015-spring-17/2479 brief forum post]'' mentioning this.

Let

: '''TBI''' = Tax-Basis Income
: '''TBEP''' = Tax-Basis EP
: '''InvInc''' = Investment Income
:: ''(Strictly speaking, InvInc refers to the taxable portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume all of this InvInc is taxable.)''
: '''TBIL''' = Tax-Basis Incurred Loss

then

:{| class='wikitable' style='background-color: lightgreen;'
|-
|    '''TBI'''    =    TBEP    +    InvInc    –    TBIL
|}

where the right-hand-side terms TBEP and TBIL can each be calculated two different ways:

Let

: '''PL''' = Paid Loss ''(during year)''
: '''IL''' = Incurred Loss ''(during year)''
: '''LD''' = Loss reserves after Discounting
: '''D''' = Discount amount ''(= difference between undiscounted and discounted loss reserves)''

Then

:{| class='wikitable'
|-
|    '''TBEP'''    '''='''    EP    +    20% x chg(UEP)    '''='''    WP    –    80% x chg(UEP)
|}

:{| class='wikitable'
|-
|    '''TBIL'''    '''='''    PL    +    chg(LD)    '''='''    IL    –    chg(D)
|}

'''Side Note''':

: The formula for TBEP doesn't look like it matches the above description of ''revenue-offset'', but it amounts to the same thing:

:: ==> the TBEP formula increases the statutory EP by 20% of the chg(UEP)

'''Alice's solution to''' '''(2018.Spring #14)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf '''''Solution to 2018.Spring #14''''']  ← ''see [https://www.battleacts6us.ca/vanillaforum6us/discussion/454/2nd-year-inv-inc this forum post] for an alternate way to compute investment income

And here's a practice problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14)_practice_01.pdf '''''1 practice problem like 2018.Spring #14''''']

The quiz has a practice template for this problem. ''(In the next section, we'll look at a slightly harder version of calculating TBI.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Calculating the Tax-Basis Income (Version 2)===

We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021-Spring, it's now much easier. The reason it's easier is that the tax implication of '''dividend income''' is no longer covered in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''

There were 2 things that made this problem harder:

* the calculation of '''InvInc''' ''(Investment Income)'' required you to know details of how certain bonds are taxed
:    → remember that in these problems, InvInc refers only to the taxable portion of investment income
* you were asked to calculate '''IT''' ''(Income tax)'' which is an extra step ''(the previous problem asked only for '''TBI''', the Tax-Basis Income, not the actual tax)''

We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $21)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.

First, you should know that in this context, the term proration means to increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income.

:{| class='wikitable'
|-
| '''Question''': describe the tax adjustments to bonds
|}

:* proration of tax-exempt municipal bonds
::    ==> add 25% of interest income to TBI
::    ==> taxable amounts are then multiplied by the standard corporate tax rate of 21% to obtain the actual tax.

For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Income Tax)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 21%. It is no longer required to calculate AMTI ''(Alternative Minimum Taxable Income)'' or AMIT ''(Alternative Minimum Income Tax)''

'''Alice's solution to''' '''(2017.Fall #21)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_2021.Spring.pdf '''''Solution to 2017.Fall #21 (updated for 2021-Spring)''''']

And here are 2 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01ab_2021.Spring_v2.pdf '''''2 practice problems like 2017.Fall #21 (2021-Spring version)''''']

===BEAT or Base Erosion and Anti-Abuse TAX===

BEAT is a new tax under the Tax Cuts and Jobs Act of 2017.

:{| class='wikitable'
|-
|| '''Question''': what is the purpose of BEAT
|}

:* BEAT limits the ability of multinational corporations to shift profits from the United States
:: ''(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)''

:{| class='wikitable'
|-
|| '''Question''': how does BEAT work
|}

:# the corporation calculates its regular tax ''(as a percentage of taxable income, currently 21%)''
:# the corporation calculates its alternative tax ''(as a percentage of gross income, currently 10%)''
:# if alternative tax > regular tax then the corporation must pay the difference ''(BEAT = this difference)''

Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:

* ''Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)''

Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:

* insurer is part of a U.S. group of companies with average gross receipts in the past three years ≥ $500M
* insurer makes base erosion payments ≥ 3% of the total deductions taken by the U.S. group on its current tax return.

Again, BEAT is a type of minimum tax that is added to the regular tax liability. Note however that if the '''foreign company''' to which tax-deductible payments have been made has elected to be '''taxed as a U.S. taxpayer''' then the U.S. corporation or insurer is '''not''' subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! ''(Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)''

: {| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:    In which of the following situations would the insurer be potentially subject to BEAT:

:: '''Situation 1''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 2''':
::* average gross receipts in past 3 years is $400 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 3''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 4''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is taxed as a U.S. taxpayer

:    ''[[Odomirok.26-Taxes#Pop_Quiz_A_-_Answer |Click for Answer]]'' 
Below is the example from the text. It's very easy. ''(And below that are a couple of practice problems.)''

{| class='wikitable'
|-
|| Here's the problem...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_problem.png]]

{| class='wikitable'
|-
|| Here's the solution...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_solution.png]]

Here are a couple of really easy practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(text)_BEAT_practice_01_02.pdf '''''2 BEAT problems (taxes)''''']

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]'''

===Discounting Loss Reserves for Taxes===

Let's start with a very important distinction regarding discounting:

:{| class='wikitable'
|-
| '''Question''': explain the difference between a '''company's''' own estimate of discounted reserves versus the estimate derived for '''tax purposes'''
|}

:* Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the '''economic impact''' of their assets & liabilities ''(versus the purely statutory impact)''. Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you '''don't''' need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an '''economic calculation'''.

:* But the calculation is different for taxes. The discount rate applied to this $1,000 for '''tax purposes''' is calculated according to the procedure below and probably won't be the same as the discount the company used in their '''economic''' calculation.

This is the final section from chapter 26 of Odomirok and there is a lot of overlap with ''[[Feldblum.Discount]]''. Note however that Feldblum's reading was removed from the syllabus for the 2019-Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. My suggestion is that you get a basic understanding of discounting facts and calculations, but if you are pressed for time, you could consider giving that topic a slightly lower priority versus other topics we know are important.

First, let's recall our earlier discussion of discounting as it related to the ''Fair Value of the Liabilities''. That was discussed in ''[[Odomirok.22-23-GAAP | Chapter 23 Purchase GAAP]]''. Discounting was component #2 of the ''Fair Value of the Liabilities''. As a reminder, component #1 was ''future cash flows'' and component #3 was the ''risk margin''. These components were asked on an exam question in 2017, so make sure you know them.

Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to memorize:

:{| class='wikitable'
|-
| '''Question''': what 3 components are required to calculate discounted loss reserves ''(for tax purposes)''
|}

:* undiscounted loss reserves
:* discount rate for the AY reserves to be discounted ''(use U.S. Treasury rate)''
:* payment pattern

Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.


{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Information regarding the components of discounting has changed.
|}

:{| class='wikitable'
|-
| '''Question''': where do you get these 3 components for discounting ''(for tax purposes)''
|}

:* undiscounted loss reserves:
::    - Schedule P, Part 1
::    - note that Part 1 is net of tabular discount, but gross of nontabular discount ''(means that any tabular discount must first be eliminated to get the true undiscounted reserves)''

:* discount rate:  
::    - '''NEW''': based on the corporate bond yield curve ''(determined by the U.S. Treasury for each accident year)''
::    - ''('''no longer valid''': 60-month moving average of Federal midterm rates for each AY)''

:* payment pattern:
::    - use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
::    - ''('''no longer valid:''' using Schedule P, Part 1 from company data)''

Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discount]] in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)''

:{| class='wikitable'
|-
| '''Question''': why is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3 ''(for tax purposes)''
|}

:* Part 3 may be '''skewed''' because it doesn't include adjusting/other expenses
:* Part 3 is '''not audited''' ''(Part 1 is audited)''
:* Part 1 requires '''no judgment''' for the IRS method

{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Calculating the discount factor using company Schedule P data is no longer covered in the current version of Odomirok and should not be tested.
|}

Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''

Details of discounting calculation from above exam problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf '''''Solution to 2016.Spring #18 (discount calc only)''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

Random practice problems on calculating the discount factor:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf '''''4 discounting practice problems like 2016.Spring #18''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]'''

===A Few Old Exam Problems===

Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:

: [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''

* Part of the solution involves calculating RTI (or TBI).
* The standard formula is: TBI = TBEP + InvInc - TBIL
* You can calculate InvInc using the methods discussed above, but the '''trick''' involves getting the value for TBEP - TBIL
* You are not given TBEP. Instead you are given '''U/W profit'''. Recall the U/W profit formula from ''[[Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29 | Chapter 8]]''.

:: U/W profit = EP - IL
::: so
:: EP = U/W profit + IL

: '''also''': TBEP = EP + 20% x chg(UEP)

: '''and''': TBIL = IL - chg(resv disc)

* Putting this all together gives:

:: TBEP - TBIL
::: = [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
::: = U/W profit + 20% x chg(UEP) + chg(resv disc)

The other piece of RTI is InvInc which is given in the examiner's report as:

: '''==>''' (taxable InvInc) + (realized gains)

Then the rest of the solution isn't too bad, but the part about AMTI or Alternative Minimum Taxable Income is now outdated, as is the part about the dividends received deduction. ''(See examiner's report.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==POP QUIZ ANSWERS==

===Pop Quiz A - Answer===

: '''Situation 1''': potentially subject to BEAT because all conditions are satisfied
: '''Situation 2''': not subject to BEAT because average gross receipts over last 3 years < 500M
: '''Situation 3''': not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company
: '''Situation 4''': not subject to BEAT because foreign company to which tax-deductible payments were made is taxed as a U.S. taxpayer

* <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.26-Taxes

2026-01-27T22:36:17Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 26''' - '''Taxation in the U.S.'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-26-taxes ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO → [https://battleacts6us.ca/video/160_Taxation_General_(v01).mp4 '''(8:15) → Taxation - General Overview''']
   ([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Taxation in the U.S.'''

* Chapter 26 discusses taxation for insurance companies in the U.S., emphasizing the '''impact of federal taxes on insurance pricing''', company valuation, and capital models. The chapter explains how taxable income is derived from statutory accounts, including the adjustment of loss reserves for discounting, and reviews the calculation of tax basis earned premiums and incurred losses.
* The discussion also highlights significant changes from the '''Tax Cuts and Jobs Act of 2017''', such as the reduction in the corporate tax rate, updated proration rules, and the introduction of the Base Erosion and Anti-Abuse Tax (BEAT). The chapter concludes with a discussion on discounting loss reserves for taxes and the transitional adjustments required under the new tax law.

|}

==Pop Quiz==

==Study Tips==

The new version of Odomirok from 2019 incorporates the new tax law passed by Congress effective for tax-year 2018. This represents a significant change from the prior version.

This chapter on taxes is one of the easier chapters. There was a big change for 2021-Spring that made one of the difficult calculation problems much simpler. ''(The old version required you to calculate the tax implication of dividends which was a messy calculation.)''

Under the Tax Cut and Jobs Act of 2017 (TCJA) there is a '''new calculation''' called the BEAT (Base Erosion and Anti-Abuse Tax) but it's pretty easy. It has to do with U.S. companies that make tax-deductible payments to foreign companies as a way to reduce their U.S. taxes.

{| class='wikitable' style='background-color: yellow;"
|-
|| Altogether, there were 4 important changes for '''2021-Spring''' due to the TCJA (Tax Cut and Jobs Act of 2017):
|}

* decrease in the corporate tax rate
* cannot use company-specific data to determine payment patterns for discounting
* change how the interest rate is determined
* BEAT calculation (Base Erosion and Anti-Abuse Tax)   ← ''this is probably the most testable of the new information''

{| class='wikitable' style='background-color: yellow;"
|-
|| For changes in the discounting procedure, click ''[[Odomirok.26-Taxes#Discounting_Loss_Reserves_for_Taxes | Discounting Loss Reserves for Taxes]]'' and look for the yellow boxes.
|}

'''Estimated study time''': 1 day ''(not including subsequent review)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* '''SAP income''' calculation, both pre-tax and post-tax
* tax basis income, tax rates, discounting loss reserves for tax purposes
* ('''income tax''' calculation  ← ''no longer important so don't panic if you see it on past published exams.'')

 '''Outdated'''   → ''questions highlighted in orange are at least partially outdated because they refer to AMIT (Alternative Minimum Income Tax)''.

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 195px;" | part (a) !! style="width: 195px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''
|| '''tax basis income''': - calculate '''5'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(19).pdf E] '''(2016.Fall #19)'''
|| '''tax rate''': - various income types '''3'''
|| '''taxable income''': - from SAP income
| style='background-color: orange;' | '''income tax:''' - calculate
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''
| style='background-color: orange;' | '''discounting reserves''': - for tax purposes '''2'''
|| '''SAP income:''' - calculate pre-tax value
|| '''federal tax''': - identify missing info
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''
| style='background-color: orange;' | '''income tax:''' - calculate '''1'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(18).pdf E] '''(2013.Fall #18)'''
|| '''SAP income:''' - calculate '''4'''
|| '''bond/stock allocation''': - considerations
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' There's a little trick in this problem that's glossed over in the examiner's report. See ''[[Odomirok.26-Taxes#A_Few_Old_Exam_Problems | A Few Old Exam Problems]]'' at the bottom of this article for an explanation. (Parts of this problem are outdated, specifically the AMTI calculation and the 'dividends received' deduction. The proration provision has also changed from 15% to 25%.)
: '''2''' Part (a) of this problem is outdated because under the TCJA (Tax Cut and Jobs Act of 2017) it's no longer permissible for a company to use it's own Schedule P data to derive a payment pattern for discounting.
: '''3''' This problem is partly outdated because the corporate tax rate changed from 35% to 21%, but you can still do parts (ii), (iii), and (iv) based on the new version of the source text. Part (i) on the 'dividends received' deduction is definitely outdated as this is no longer discussed on the source text.
: '''4''' Click for an ''[https://www.battleacts6us.ca/Excel/2013-Fall-Q18-(updated)_v01.xlsx updated solution to 2013-Fall-Q18]''
: '''5''' Click for ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/581/2018s-14#latest comments regarding discounting in this problem]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==In Plain English!==

===Tax-Basis Income===

Let's start by looking at the following exam problem. It demonstrates a few of the important formulas and it isn't too hard. It asks you to calculate the tax-basis income. Don't try to solve it for now - Alice's solution is presented in the next section.

: [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(14).pdf E] '''(2018.Spring #14)'''

The first question that popped into my mind was:

:{| class='wikitable'
|-
| '''Question''': what is tax-basis income and how is it different from "normal" SAP income
|}

:* tax-basis income is SAP or statutory income with a few adjustments:
::    ==> EP is adjusted with a '''revenue-offset'''
::    ==> losses ''(or reserves)'' are '''discounted'''

The concept of ''discounting'' is already familiar, but let's take a closer look at the revenue-offset term. ''(If you want, you can glance ahead at the '''TBEP formula''' which is given in the next section.)''

:{| class='wikitable'
|-
| '''Question''': briefly describe the IRS's revenue offset procedure as it applies to tax-basis income
|}

:* in SAP, acquisition costs are not deferred so the insurer would incur a loss (because these costs are expensed immediately)
:* the insurer would then be entitled to a future tax refund on this loss
:* '''but the IRS wanted to simplify the process:''' instead of a refund, the IRS reduces UEP liability by 20% for all insurers
:: ''(assumes the acquisition cost ratio is 20% for all lines for all insurers)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Calculating the Tax-Basis Income (Version 1)===

Note that the formula provided below for TBI (Tax-Basis Income) is based on past exam problems and does not include quantities that were not provided in the exam problems. In particular, the quantity TBI may include terms such as U/W expense and policyholder dividends but these are not generally provided in typical exam problems on calculating TBI. There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/52/2015-spring-17#latest brief forum post]'' mentioning this.

Let

: '''TBI''' = Tax-Basis Income
: '''TBEP''' = Tax-Basis EP
: '''InvInc''' = Investment Income
:: ''(Strictly speaking, InvInc refers to the taxable portion of InvInc but for this version of the problem, where it's just the compound interest earned on EP, we assume all of this InvInc is taxable.)''
: '''TBIL''' = Tax-Basis Incurred Loss

then

:{| class='wikitable' style='background-color: lightgreen;'
|-
|    '''TBI'''    =    TBEP    +    InvInc    –    TBIL
|}

where the right-hand-side terms TBEP and TBIL can each be calculated two different ways:

Let

: '''PL''' = Paid Loss ''(during year)''
: '''IL''' = Incurred Loss ''(during year)''
: '''LD''' = Loss reserves after Discounting
: '''D''' = Discount amount ''(= difference between undiscounted and discounted loss reserves)''

Then

:{| class='wikitable'
|-
|    '''TBEP'''    '''='''    EP    +    20% x chg(UEP)    '''='''    WP    –    80% x chg(UEP)
|}

:{| class='wikitable'
|-
|    '''TBIL'''    '''='''    PL    +    chg(LD)    '''='''    IL    –    chg(D)
|}

'''Side Note''':

: The formula for TBEP doesn't look like it matches the above description of ''revenue-offset'', but it amounts to the same thing:

:: ==> the TBEP formula increases the statutory EP by 20% of the chg(UEP)

'''Alice's solution to''' '''(2018.Spring #14)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14).pdf '''''Solution to 2018.Spring #14''''']  ← ''see [https://www.battleacts6us.ca/vanillaforum6us/discussion/454/2nd-year-inv-inc this forum post] for an alternate way to compute investment income

And here's a practice problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(18S.14)_practice_01.pdf '''''1 practice problem like 2018.Spring #14''''']

The quiz has a practice template for this problem. ''(In the next section, we'll look at a slightly harder version of calculating TBI.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Calculating the Tax-Basis Income (Version 2)===

We're going to build on the formulas from the previous section. The following exam problem used to be quite hard but because of a change in the Exam 6-US syllabus for 2021-Spring, it's now much easier. The reason it's easier is that the tax implication of '''dividend income''' is no longer covered in the Odomirok source text. Take a quick look at the problem the way it was in 2017 but you can ignore the details on dividend income both in the statement of the problem and in the solution.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(21).pdf E] '''(2017.Fall #21)'''

There were 2 things that made this problem harder:

* the calculation of '''InvInc''' ''(Investment Income)'' required you to know details of how certain bonds are taxed
:    → remember that in these problems, InvInc refers only to the taxable portion of investment income
* you were asked to calculate '''IT''' ''(Income tax)'' which is an extra step ''(the previous problem asked only for '''TBI''', the Tax-Basis Income, not the actual tax)''

We'll examine these 2 items below, but first note the basic corporate tax rate of 21%. This percentage is applied directly to '''TBI''' ''(if TBI = $100 then IT = $21)'' but there are many, many adjustments. Most of these are not discussed in Odomirok.

First, you should know that in this context, the term proration means to increase taxable income by reducing the deduction for losses incurred by a percentage of certain types of income.

:{| class='wikitable'
|-
| '''Question''': describe the tax adjustments to bonds
|}

:* proration of tax-exempt municipal bonds
::    ==> add 25% of interest income to TBI
::    ==> taxable amounts are then multiplied by the standard corporate tax rate of 21% to obtain the actual tax.

For the exam problem mentioned at the beginning of this section, Alice's solution lays out all the formulas you need. '''Side note''': The solution involves something called RIT ''(Regular Income Tax)'' which is the tax obtained by multiplying TBI ''(Tax-Basis Income)'' by the standard corporate tax rate of 21%. It is no longer required to calculate AMTI ''(Alternative Minimum Taxable Income)'' or AMIT ''(Alternative Minimum Income Tax)''

'''Alice's solution to''' '''(2017.Fall #21)''':

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_2021.Spring.pdf '''''Solution to 2017.Fall #21 (updated for 2021-Spring)''''']

And here are 2 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(17F.21)_practice_01ab_2021.Spring_v2.pdf '''''2 practice problems like 2017.Fall #21 (2021-Spring version)''''']

===BEAT or Base Erosion and Anti-Abuse TAX===

BEAT is a new tax under the Tax Cuts and Jobs Act of 2017.

:{| class='wikitable'
|-
|| '''Question''': what is the purpose of BEAT
|}

:* BEAT limits the ability of multinational corporations to shift profits from the United States
:: ''(previously, corporations could shift profits by making tax-deductible payments to affiliates in low-tax countries)''

:{| class='wikitable'
|-
|| '''Question''': how does BEAT work
|}

:# the corporation calculates its regular tax ''(as a percentage of taxable income, currently 21%)''
:# the corporation calculates its alternative tax ''(as a percentage of gross income, currently 10%)''
:# if alternative tax > regular tax then the corporation must pay the difference ''(BEAT = this difference)''

Another way of describing BEAT is that it is a minimum tax add-on. Here's an example to illustrate the concept:

* ''Suppose for the years 2020-2022, a US corporation has $600 million of gross taxable income per year. For tax year 2022, the corporation also pays $400 million in tax-deductible royalties to a foreign affiliate. The corporation’s regular tax liability is ($600 - $400) x 21% = $42 million. Its alternative tax is $600 x 10% = $60 million. The corporation must then pay $60 million to the United States (regular tax of $42 million plus the BEAT of $18 million.)''

Not all U.S. corporations are subject to BEAT however. The following conditions must be satisfied for a corporation to be potentially subject to BEAT:

* insurer is part of a U.S. group of companies with average gross receipts in the past three years ≥ $500M
* insurer makes base erosion payments ≥ 3% of the total deductions taken by the U.S. group on its current tax return.

Again, BEAT is a type of minimum tax that is added to the regular tax liability. Note however that if the '''foreign company''' to which tax-deductible payments have been made has elected to be '''taxed as a U.S. taxpayer''' then the U.S. corporation or insurer is '''not''' subject to BEAT. That seems like a little trick they might throw at you on the exam. So pay attention! ''(Maybe they'll give you information on 2 companies that made foreign payments but where only 1 of them is subject to BEAT because the other doesn't satisfy the conditions described above.)''

: {| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:    In which of the following situations would the insurer be potentially subject to BEAT:

:: '''Situation 1''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 2''':
::* average gross receipts in past 3 years is $400 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 3''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 2% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is not taxed as a U.S. taxpayer

:: '''Situation 4''':
::* average gross receipts in past 3 years is $550 million
::* insurer makes base erosion payments of 4% of the total deductions taken by the U.S. group on its current tax return
::* base erosion payments were to a foreign company that is taxed as a U.S. taxpayer

:    ''[[Odomirok.26-Taxes#Pop_Quiz_A_-_Answer |Click for Answer]]'' 
Below is the example from the text. It's very easy. ''(And below that are a couple of practice problems.)''

{| class='wikitable'
|-
|| Here's the problem...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_problem.png]]

{| class='wikitable'
|-
|| Here's the solution...
|}

: [[File: Odomirok.Ch26_(Excel)_BEAT_example_solution.png]]

Here are a couple of really easy practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(text)_BEAT_practice_01_02.pdf '''''2 BEAT problems (taxes)''''']

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]'''

===Discounting Loss Reserves for Taxes===

Let's start with a very important distinction regarding discounting:

:{| class='wikitable'
|-
| '''Question''': explain the difference between a '''company's''' own estimate of discounted reserves versus the estimate derived for '''tax purposes'''
|}

:* Even though reserves are reported at their nominal value on the balance sheet, every company is primarily interested in the '''economic impact''' of their assets & liabilities ''(versus the purely statutory impact)''. Obviously the company wants to ensure that its assets are sufficient to support its liabilities, but if you know you have $1,000 of liabilities due in 1 year, you '''don't''' need to set aside $1,000 of assets at the beginning of the year. If you think your assets will earn 10%, then you only need to set aside $1,000/1.1 = $909. This is an '''economic calculation'''.

:* But the calculation is different for taxes. The discount rate applied to this $1,000 for '''tax purposes''' is calculated according to the procedure below and probably won't be the same as the discount the company used in their '''economic''' calculation.

This is the final section from chapter 26 of Odomirok and there is a lot of overlap with ''[[Feldblum.Discount]]''. Note however that Feldblum's reading was removed from the syllabus for the 2019-Fall sitting. Does this mean the topic of discounting is less important than it was? In other words, do you still have to study this topic? Well, there's no way to predict. My suggestion is that you get a basic understanding of discounting facts and calculations, but if you are pressed for time, you could consider giving that topic a slightly lower priority versus other topics we know are important.

First, let's recall our earlier discussion of discounting as it related to the ''Fair Value of the Liabilities''. That was discussed in ''[[Odomirok.22-23-GAAP | Chapter 23 Purchase GAAP]]''. Discounting was component #2 of the ''Fair Value of the Liabilities''. As a reminder, component #1 was ''future cash flows'' and component #3 was the ''risk margin''. These components were asked on an exam question in 2017, so make sure you know them.

Anyway, the first paragraph in the discounting section in chapter 26 has another bullet point list you have to memorize:

:{| class='wikitable'
|-
| '''Question''': what 3 components are required to calculate discounted loss reserves ''(for tax purposes)''
|}

:* undiscounted loss reserves
:* discount rate for the AY reserves to be discounted ''(use U.S. Treasury rate)''
:* payment pattern

Actually, that list is pretty obvious. If you simply know how to calculate the discounted reserves, you could come up with those components. We'll cover the calculations below, but there are a few more dull facts you have to know.


{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Information regarding the components of discounting has changed.
|}

:{| class='wikitable'
|-
| '''Question''': where do you get these 3 components for discounting ''(for tax purposes)''
|}

:* undiscounted loss reserves:
::    - Schedule P, Part 1
::    - note that Part 1 is net of tabular discount, but gross of nontabular discount ''(means that any tabular discount must first be eliminated to get the true undiscounted reserves)''

:* discount rate:  
::    - '''NEW''': based on the corporate bond yield curve ''(determined by the U.S. Treasury for each accident year)''
::    - ''('''no longer valid''': 60-month moving average of Federal midterm rates for each AY)''

:* payment pattern:
::    - use Schedule P, Part 1 from '''industry data''' ''(IRS does the calcs for you. Thanks IRS!)''
::    - ''('''no longer valid:''' using Schedule P, Part 1 from company data)''

Aside from the actual discounting calculation, there's only 1 more thing that you might want to look at ''(then you can pretty much just skim [[Feldblum.Discount]] in about 5 minutes. There is no real content, only a couple of old exam problems you might want to glance at. I didn't remove Feldblum completely because it overlaps so much with the tax chapter from Odomirok.)''

:{| class='wikitable'
|-
| '''Question''': why is the payment pattern derived from Schedule P, Part 1 ''instead of'' Part 3 ''(for tax purposes)''
|}

:* Part 3 may be '''skewed''' because it doesn't include adjusting/other expenses
:* Part 3 is '''not audited''' ''(Part 1 is audited)''
:* Part 1 requires '''no judgment''' for the IRS method

{| class='wikitable' style='background-color: yellow;>
|-
|| '''2021-Spring''': Calculating the discount factor using company Schedule P data is no longer covered in the current version of Odomirok and should not be tested.
|}

Ok, we're finally at the fun part where we calculate the discount factor from Schedule P, Part 1 data. On the exam, this calculation is usually part of a bigger problem but the other parts of the problem are covered elsewhere so we'll focus here on the discount factor calculation. Once you have the discount factor, say it's 80.2% or something, you just multiply it by the undiscounted reserves, say that was $1,000, to get the discounted reserves of $802. Anyway, here's an exam problem where you have to calculate the discount factor. Below that, Alice has provided her own solution to the discounting calculation and then a few random practice problems.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(18).pdf E] '''(2016.Spring #18)'''

Details of discounting calculation from above exam problem:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting.pdf '''''Solution to 2016.Spring #18 (discount calc only)''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

Random practice problems on calculating the discount factor:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch26_(16S.18)_discounting_practice_01_04.pdf '''''4 discounting practice problems like 2016.Spring #18''''']   ← ''as of 2021-Spring, this calculation should no longer be tested''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]'''

===A Few Old Exam Problems===

Here are a a few remaining exam problems for extra practice, but first here's a quick explanation of the trick in:

: [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(17).pdf E] '''(2015.Spring #17)'''

* Part of the solution involves calculating RTI (or TBI).
* The standard formula is: TBI = TBEP + InvInc - TBIL
* You can calculate InvInc using the methods discussed above, but the '''trick''' involves getting the value for TBEP - TBIL
* You are not given TBEP. Instead you are given '''U/W profit'''. Recall the U/W profit formula from ''[[Odomirok.8-9-IS#Statutory_Income_.282018.Spring_.2310a.29 | Chapter 8]]''.

:: U/W profit = EP - IL
::: so
:: EP = U/W profit + IL

: '''also''': TBEP = EP + 20% x chg(UEP)

: '''and''': TBIL = IL - chg(resv disc)

* Putting this all together gives:

:: TBEP - TBIL
::: = [ U/W profit + IL + 20% x chg(UEP) ] - [ IL - chg(resv disc) ]
::: = U/W profit + 20% x chg(UEP) + chg(resv disc)

The other piece of RTI is InvInc which is given in the examiner's report as:

: '''==>''' (taxable InvInc) + (realized gains)

Then the rest of the solution isn't too bad, but the part about AMTI or Alternative Minimum Taxable Income is now outdated, as is the part about the dividends received deduction. ''(See examiner's report.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=26-Taxes&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-26-taxes/186'''Forum''']

==POP QUIZ ANSWERS==

===Pop Quiz A - Answer===

: '''Situation 1''': potentially subject to BEAT because all conditions are satisfied
: '''Situation 2''': not subject to BEAT because average gross receipts over last 3 years < 500M
: '''Situation 3''': not subject to BEAT because base erosion payments < 3% of tax-deductible payments to foreign company
: '''Situation 4''': not subject to BEAT because foreign company to which tax-deductible payments were made is taxed as a U.S. taxpayer

* <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.19-RBC

2026-01-27T22:34:33Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 19''' - '''Risk-Based Capital'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-19-rbc ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/060_RBC_General_(v01).mp4 '''(6:15) → RBC - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Risk-Based Capital (RBC)'''

* This chapter discusses the Risk-Based Capital (RBC) system, which was developed by the National Association of Insurance Commissioners (NAIC) in 1994 to help '''detect insurance company insolvencies early'''.

* The RBC system includes a '''formula''' to determine the minimum required capital (authorized control level) for insurance companies, reflecting the risks they face, and a model act that empowers state regulators to take action when a company's RBC ratio falls below certain thresholds.

* The chapter explains the RBC formula's application to property/casualty insurance companies, detailing the different risk categories such as '''asset risk''', '''underwriting risk''', and '''catastrophe risk'''.

* It also describes the '''covariance adjustment''' used in the RBC calculation to account for diversification among risk categories, and the basic operational risk charge introduced in 2018.

* The RBC report is filed annually with the NAIC and includes both the formula calculations and management's analysis of the results, though detailed calculations are confidential.

|}

==Pop Quiz==

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (1st Battle Card in mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: peachpuff; width: 1050px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, please let her know in the ''[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176 RBC Discussion Forum]'' and we'll send you a BattleActs coffee mug.
|}

: [[File: mug.png | 200px]]

{| class='wikitable' style='background-color: lightgreen;'
|-
|| '''Updates for 2021.Spring are COMPLETE:'''   There were significant changes. (There were no changes for 2021.Fall.)
|}

For candidates who attempted Exam 6 prior to 2021.Spring, there are some new things you have to learn regarding the RBC calculation: ''(Details are contained in the wiki article.)''

* '''new risk category''': catastrophe risk
* '''new risk category''': operational risk
* '''new RBC formula''': includes catastrophe risk and operational risk
* '''new R0 calculation''': this isn't too hard
* '''new R3 calculation''': the portion of the R3 RBC charge for reinsurance recoverables is different

There are also '''minor changes''' to the '''R1''' and '''R2''' material but the text examples and old exam problems on those topics were not affected. There were '''no changes''' to the '''R4''' and '''R5''' calculations.

For all candidates, some exam problems published prior to 2021.Spring are outdated. These include problems regarding:

* total RBC charge or RBC ratio
* RBC charges for R3

The new RBC formula affects many old exam problems but they are still solvable if you assume that both the catastrophe charge Rcat and the operational risk charge equal 0. The previous edition of Odomirok did not cover the details of the R0 calculation so there are no old exam problems for that. Any problems on R3 that involve reinsurance recoverables will not be completely solvable anymore but there are only 2 of those: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)''' and [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''.

And remember → you can generate an infinite number of web-based practice problems for a broad range of RBC problem types so you don't need to rely solely on old exam problems for practice.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Here are the "regular" study tips:'''
|}

The RBC chapter is like Schedule P in that the questions are mostly calculation, but RBC has more different '''types''' of calculations. This wiki article includes lots of problems for you to practice on and it's going to take a lot of time to go through them all. In addition to the problems provided in pdf format within the wiki, and in Excel format ''[[Excel_Practice_Problems | available here]]'', you should do the randomly generated web-based problems from the quizzes until you consistently get the right answer. Since this is a Top 6 reading, you should also do as many of the old exam problems as you can, keeping in mind the above comments regarding changes to the RBC formula.

The source text ''(Chapter 19 of Odomirok)'', which is 60+ pages, includes all kinds of insanely detailed information that you almost certainly don't need to know for the exam. Just learning how to do all the web-based problems will take you long enough. Alice-the-Actuary has kindly curated the source text so the wiki covers everything that's likely to appear on the exam. That includes the overall calculation of the RBC ratio, the various regulator action levels, and details on calculating the individual risk charges R1, R2, R3, R4, R5. Examples and practice for the R0 and Rcat calculation are provided in the wiki and are easy compared to the others. Yay!

'''Estimated Study Time''': 1 week ''(not including subsequent review time)''
[[#BondSizeFactorNote]]
{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''. For a little more on this click on ''[[Using the Source Material]]''.
|}

==BattleTable==

Based on past exams and Alice's expert judgment, the '''main things''' you need to know ''(in rough order of importance)'' are:

* calculating RBC charges R0,1,2,3,4,5,cat, operational risk & RBC-ratio
* identifying action level based on RBC ratio & subsequent regulator/company actions
* strategies for reducing RBC charges
* comparison to IRIS ratios

The RBC questions from 2012 appear to be at least partially outdated and are highlighted in tan. Portions of questions from 2013-2019 may also be partially outdated as explained in the ''[[Odomirok.19-RBC#Study_Tips | Study Tips]]' section.

{| class='wikitable'
|-
| Questions held out from Fall 2019 exam: '''#5, 18, 19'''. ''(Skip these now to have a fresh exam to practice on later. For links to these questions, see [[Exam Summaries]].)''
|}

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 175px;" | part (a) !! style="width: 175px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(13)_v2.pdf E] '''(2019.Spring #13)'''
|| '''identify''': - RBC action level + actions
|| '''materiality standard''': - propose a standard
|| '''calculate''': - R4
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''
|| '''calculate''': - R5 '''7''','''8'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(18).pdf E] '''(2018.Fall #18)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level + actions
|| [[NAIC.IRIS]]
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)'''
|| '''calculate''': - change in RBC charge '''7'''
|| '''rapid premium growth''': - impact on RBC
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''
|| '''calculate''': - RBC ratio '''a'''
|| '''identify''': - RBC action level + actions
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''
|| '''financial health''': - use of RBC ratios'''9'''
|| '''R0 RBC charge''': - difference vs R1,2,3,4,5
|| '''RBC vs IRIS''': - similarity & difference
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''
|| '''calculate''': - total RBC'''1'''
|| '''calculate''': - RBC RAL'''2'''
|| '''RAL actions''': - insurer & regulator
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(16).pdf E] '''(2016.Fall #16)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''RBC purpose''': - for regulator
|| '''RBC formula''': advantages/disads'''9'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(17).pdf E] '''(2016.Fall #17)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level
|| '''identify''': - RBC actions
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''
|| see [[Freihaut.Reins]]
|| '''calculate''': - R3, R4 '''5'''
|| see [[Freihaut.Reins]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''
|| '''calculate''': - R1
|| '''calculate''': - R2
|| '''reducing R1''': - identify 2 ways
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(19).pdf E] '''(2015.Fall #19)'''
|| '''calculate''': - ACL & regulator action
|| [[Odomirok.25-Solv2]]
|| [[Odomirok.25-Solv2]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(19).pdf E] '''(2015.Spring #19)'''
|| '''components of RBC''': - describe
|| '''identifying insolvency''': - aspects of RBC
|| '''interpret RBC ratio''': - ratio = 310%
|| '''internal capital model''': - concerns ''(vs RBC)''

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(25).pdf E] '''(2015.Spring #25)'''
|| see [[Freihaut.Reins]]
|| see [[Freihaut.Reins]]
|| '''calculate''': - RBC ratio (R3, R4, R5) '''6'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''
|| '''calculate''': - R5, total RBC '''3'''
|| '''improving RBC ratio''': - reserving practices
| style="background-color: tan;" | '''limitations of RBC''': '''3a''' - for identifying impairment
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
|| '''calculate''': - R3
|| '''calculate''': - RBC
|| '''action level''': - identify action '''4'''
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(21).pdf E] '''(2013.Fall #21)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''calculate''': - RBC ratio
|| '''action level''': - identify
|| '''action''': - describe

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(14).pdf E] '''(2012.Fall #14)'''
|| see [[Odomirok.8-9-IS]]
|| '''reduce RBC asset risk''': - investment changes
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(20).pdf E] '''(2012.Fall #20)'''
|| '''calculate''': - R5
|| see [[NAIC.IRIS]]
|| '''RBC vs IRIS''': - treatment of premium
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(24).pdf E] '''(2012.Fall #24)'''
|| '''solvency-based frameworks''': - create a new one! '''W'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' The examiner's report accepted 10 different answers for this calculation problem, and the first 3 answers are almost certainly wrong. It states "Other non-insurance subsidiaries" could go into R0, R1, or R2, but it can't go into R0; it can only go into R1 or R2. The first 3 sample answers put "Other non-insurance subsidiaries" into R0. The other 7 sample answers show valid combinations based on the given information. ''(This was a poorly exam constructed question.)''
: '''2''' RAL stands for ''Regulatory Action Level''
: '''3''' The statement of this problem contains 2 errors. See examiner's comments in examiner's report.
: '''3a''' Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2014 update of Odomirok. Both these risk are now considered in the RBC formula. 
: '''4''' This problem has a '''trick''' related to tabular discounts for indemnity, which should not be subtracted from surplus to get total adjusted capital. See ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | here]]'' for details.
: '''5''' This was a very nasty problem because they didn't give you the RBC factors. You had to memorize them which is very unreasonable. '''Also''' the 2021 update to the source text changed the test for when to split the reinsurance recoverable RBC charge between R3 and R4. That part of the examiners' report solution is outdated. ''(More on this in [[Odomirok.19-RBC#Week_2:_Day_3_.28R3_with_intro_to_R4.29 | how to calculate R3 & R4]].)''
: '''6''' This is a defective question. See ''[https://battleacts.discourse.group/t/spring-2015-25-c/2506 this forum discussion]'' for more information.
: '''W''' Alice thinks this is a totes weird question. ''(You can look at it, but she thinks it isn't likely to appear again.)''
: '''7''' There is an error in the examiner's report solution to '''2018.Spring #18a'''. The solution uses NWP to calculate the excess growth factor. This calculation should use GWP from the Five Year Historical Exhibit. The solution for '''2019.Spring #15''' does indeed use GWP which is correct.    
: '''8''' This problem requires you to calculate the company average loss and LAE ratio as a 10-year average, but the given ratios are '''capped at 300%''' for each year. Odomirok states: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    
: '''9''' Part of the answer to these problems is outdated in the examiner's report because the new version of the RBC formula ''(for the syllabus starting 2021.Spring)'' now includes operational and catastrophe risk.
: '''a''' Note that this problem uses an outdated version of the RBC formula. For an updated solution, see ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | Alice's 4th Day]]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==In Plain English!==

===Alice's 1st Day (Intro to RBC)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

This wiki article is the "true story" of Alice's early days in her career when she was a summer intern. Alice's "days" don't necessarily correspond to your own study days. Her days are short and you can probably cover more than one of her days in one of your days.

On Alice's first day of work as an actuarial intern, her mean boss dumped a stack of financial statements on her desk and told her to find out whether the company was healthy. But before she could ask him anything, he was already down the hall issuing orders to someone else. ''"What have I gotten myself into?"'' she thought. Poor Alice had no idea what to do. Fortunately the intern in the next cubicle overheard and peeked over the cubicle wall.

: "''Just calculate the RBC ratio,''" her new friend said. "''It's all in Odomirok. The boss likes to haze interns on their first day, but I can help you. We'll '''tackle''' it together.''"

So Alice and Lakshmi spent the day pulling the relevant information from the financial statements and here is what Alice learned:

:{| class="wikitable"
|-
| '''Formula''': RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
|}

:: '''TAC''' = Total Adjusted Capital = 31,024,000
:: '''ACL''' = Authorized Control Level capital = 5,714,839

: ==> RBC ratio = 31,024,000 / 5,714,839 = '''543%'''

Ok, so far so good, but what in the world does 543% mean? Is that good or bad? ''(The following table appears near the end of chapter 19 of Odomirok)''.

: {| class='wikitable' style='background-color: yellow;'
|-
|| This table overlaps with ''[[Porter.12-Insolvency#Levels_of_Regulatory_Action | Levels of Regulatory Action]]'' from ''[[Porter.12-Insolvency | Chapter 12 of the Porter reading]]'' but is not completely consistent. See ''[https://battleacts.discourse.group/t/relationship-to-the-action-levels/2769 this forum discussion]'' for more details.
|}

:{| class="wikitable" style="width: 1000px;"

|-
! style="width: 190px" | action levels ['''CRAM'''] !! style="width: 80px" | RANGE !! style="width: 300px" | insurance dept action !! style="width: 200px" | company action !! Alice's action''

|-
|| '''CAL'''   → Company Action Level
| style="text-align: center; background-color: lightgreen;" | '''150-200%'''
|| none (initially)
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''lose a vacation day'''

|-
|| '''RAL'''   → Regulatory Action Level
| style="text-align: center; background-color: lightblue;" | '''100-150%'''
|| commissioner has the right to issue an order specifying corrective action (not mandatory) '''1'''
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''no bonuses'''

|-
|| '''ACL'''   → Authorized Control Level
| style="text-align: center; background-color: sienna; color: white;" | '''70-100%'''
|| commissioner authorized take control of company (not mandatory)
|| none (initially)
|| '''no raises, no bonuses'''

|-
|| '''MCL'''   → Mandatory Control Level
| style="text-align: center; background-color: red; color: white;" | '''≤ 70%'''
|| commissioner '''must''' rehabilitate or liquidate (mandatory) '''2'''
|| none (initially)
|| '''fire the CEO''' 😢

|}

: '''1''' Commissioner action could include restricting new business.
: '''2''' Insurance commissioner of domiciliary state must take action

If a company's RBC ratio falls below 200%, it's better for the company to take action than for the regulator to step in. A regulator's actions would likely be much more drastic.

:{| class='wikitable'
|-
|| '''Question''': what could be included in a company's action plan for meeting RBC standards
|}

:* explain how to raise needed capital
:* explain how to reduce operations to save money
:* explain how to reduce risks to lower RBC charges

The RBC ratio of '''543%''' for Alice's company is well above the CAL threshold, so it looks like the company is doing really well. ''(Note that the [[Bright Line Indicator Test]] from the SAO material should now make more sense.)'' Anyway, what a great first day of work for Alice. Time to relax.

The RBC test is comprehensive but it doesn't account for every type of insurance company risk. The text states that it doesn't cover risks associated with business plans & strategy, management, internal controls, systems, reserve adequacy, or ability to access capital. ''(It struck me that internal controls should be covered by operational risk, so I'm not sure why the text says risks due to internal controls are not included in the RBC framework.)''

===Alice's 2nd Day (Trend Test & Risk Categories)===

Over morning coffee, Lakshmi pointed out an omission from the above "action table" that Alice learned about yesterday. If the RBC ratio is '''above 200%''' but '''below 300%''', the company is still not in the clear. They would still have to perform the '''trend test'''. Let COR denote Combined Operating Ratio:

:{| class="wikitable"
|-
| '''Trend Test''': If a company's RBC ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the '''CAL action''' from the action table.
|}

: '''Reminder''': The COR ''(Combined Operating Ratio)'' is the sum of:
:* '''L'''oss & LAE ratio   =   (CY net incurred loss & LAE) / NEP
:* '''E'''xpense ratio   =   [ (other U/W expenses) + (aggregate write-ins for underwriting deductions) ] / NWP
:* '''D'''ividend ratio   =   (policyholder dividends) / NEP
: Recall that COR '''does not include''' investment income. And next time you see your CEO in the break room, you can tell him or her to get the '''LED''' out.

Anyway, Alice's new company is well above the 300% threshold so she was ready to report back to her boss that the company is in great shape, but Lakshmi stopped her.
: "''Not so fast,''" Lakshmi said. "''The RBC ratio is only 1 metric. For example, what about the IRIS ratios? It's like if you had 98% in calculus on your report card but were failing physics, English, and history. It isn't ''likely'', but when you report back to the boss, you should qualify your conclusion on the health of the company if the only thing you calculated was the RBC ratio.''"

You can review [[NAIC.IRIS]] for the IRIS ratios, but getting back to the RBC ratio, Alice needs to make sure she understands exactly how the '''543%''' value was calculated. It's a long calculation that involves several different risk components. The '''charge''' for each component represents the amount of capital required to support that particular risk. ''(Each component has its own calculation but we'll come back to that later.)''

{| class='wikitable'
|-
|| '''2019 Edition:''' The description of R0 is different. New risk categories Rcat and Operational Risk were added.

* Click to ''[https://battleacts.discourse.group/t/rbc-mnemonics/2619 go to the forum]'' for '''PK's''' memory trick!
* Great news! Another memory trick has been submitted by '''easylifew'''. Use the same link as above to see it!
* More breaking news!!! Yet another memory trick, this time from '''Comadiroma''', who understands that sillier is better-er! Same link as above!
* News alert! Another memory trick, this time from '''mcanlas94'''. Same link as above! ''(But you might have to scroll down.)''
* And on Feb 28, 2024, '''amberxmc''' got in on the action!
|}

:{| class="wikitable"

|-
! risk category !! risk component [partial hint: '''S-FEC''']!! notation !! risk charge for this company

|- style="border-bottom: 2px solid;"
|| ---- || '''S'''ubsidiary Insurance Companies and Miscellaneous Other Amounts || style="text-align: center;" | R0 || style="text-align: right;" | 0

|-
|| asset risk || '''F'''ixed income risk || style="text-align: center;" | R1 || style="text-align: right;" | 553,398

|-
|| asset risk || '''E'''quity risk || style="text-align: center;" | R2 || style="text-align: right;" | 4,303,948

|- style="border-bottom: 2px solid;"
|| asset risk || '''C'''redit risk || style="text-align: center;" | R3 || style="text-align: right;" | 310,060

|-
|| U/W risk || reserve risk || style="text-align: center;" | R4 || style="text-align: right;" | 9,561,305

|- style="border-bottom: 2px solid;"
|| U/W risk || NWP risk || style="text-align: center;" | R5 || style="text-align: right;" | 3,574,411

|- style="border-bottom: 2px solid;"
|| catastrophe || catastrophe risk || style="text-align: center;" | Rcat || style="text-align: right;" | 130,654

|-
|| operational || operational risk || style="text-align: center;" | * || style="text-align: right;" | 332,903

|}

: * Operational Risk is added as a final step in the calculation after applying the covariance adjustment between other risk types, and does not have a corresponding "R" indicator

You might think you'd sum these charges to find the total required capital, but that isn't how it works. Rather than a simple sum, these risk charges are aggregated using this formula:

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & before operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')'''
|}

This works out to 11,096,774.

The '''operational risk''' is then easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including: [Hint: '''L-PIPE''', as in Lead PIPE. It was Alice with the lead pipe in the break room. Don't ever eat the last donut if Alice is around. 😀 

* '''L'''egal risk
* '''  –'''
* '''P'''ersonnel risk ''(in case you hired a dumb-ass intern)''
* '''I'''nadequacy or failure of internal systems
* '''P'''rocedural risk ''(and/or risk of failure of internal controls)''
* '''E'''xternal risk ''(due to external events)''

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

These offset amounts would have to be provided. Anyway, the final total RBC according to the formula below is 11,429,677 without considering offsets to the basic 3% operational risk charge.

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & after operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' + '''('''operational risk''')'''
|}

The part of the formula with the square root is called the '''covariance adjustment'''. ''(Alice's Canadian cousin told her that in Canada this is called the diversification credit. Risk is reduced by spreading or diversifying the risk over multiple independent categories.)

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Is the covariance adjustment less than, greater than, or equal to the simple sum R1 + R2 + R3 + R4 + R5 + Rcat.

:: '''Answer:''' The covariance adjustment is less than the simple sum. ''(Try testing this with some simple numbers. It's a version the triangle inequality you may be familiar with from calculus.)''

:{| class="wikitable"
|-
| '''Question 1''': what is the reason for the covariance adjustment
|}

:: The reason is that risks R1 through R5 and Rcat are assumed to be '''independent'''. It's unlikely that all these risks would reach their maximum value at the same time. The covariance adjustment reduces the required capital to reflect this assumption of independence. For example, the level of equity risk ''(performance of stocks)'' is likely not related to reserve risk. A company would be unlikely to experience both very bad investment returns and very bad underwriting results at the exact same time.

:{| class="wikitable"
|-
| '''Question 2''': why is R0 excluded from the covariance adjustment
|}

:: Well, R0 is '''not independent''' of the other risks. In other words, R0 is '''correlated''' with the other risks. It represents the charge for an subsidiary company and investment in an subsidiary does not provide a diversification benefit.

Let's end Day 2 by applying the RBC Capital Required formula after operational risk:

* RBC Capital Required = 11,429,677 ''(Note that table 97 in the source text seems to have the wrong total.)''

Anyway, we can now calculate the denominator for the RBC ratio:

:{| class="wikitable"
|-
| '''RBC denominator''': ACL capital = '''50%''' x (RBC Capital Required)
|}

So ACL Capital = '''5,714,839''' ''(See [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Alice's 1st Day]].)'' You might also want to take a quick look at '''part (b)''' of:
: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''

Do the mini BattleQuiz then take a break.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===Alice's 3rd Day (Ranking of Risk Charges)===

Alice arrived early today so I prepared a special pop quiz she could do while eating her morning bear claw. It's easy but you'll need the aggregate industry RBC risk charges for each category:

: [[File: Odomirok.Ch19_(table_076)_aggregate_RBC.png]]

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Based on industry totals, rank the risk charges R1 through R5 according to their relative magnitude. ''(You can find this information on page 244 of Odomirok)''

:: '''Answer:''' [https://www.battleacts6us.ca/vanillaforum6us/discussion/116/risk-magnitude-ranking-tip#latest memory trick]!''

::: {| class="wikitable"
|-
! !! risk !! relative magnitude
|-
|| '''R2''' || ''' asset risk''' - equity || style="text-align: center; background-color: lightgreen;" | 31%
|-
|| '''R4''' || ''' U/W risk''' - reserves || style="text-align: center; background-color: lightgreen;" | 30%
|-
|| '''R5''' || ''' U/W risk''' - NWP || style="text-align: center; background-color: lightgreen;" | 20%
|- style="border-bottom: 2px solid;"
|| '''Rcat''' || catastrophe || style="text-align: center; background-color: lightgreen;" | 14%
|-
|| '''R3''' || ''' asset risk''' - credit || style="text-align: center; background-color: coral;" | 2%
|-
|| '''R1''' || ''' asset risk''' - fixed income || style="text-align: center; background-color: coral;" | 2%
|}

:: Of course, you should also be able to explain ''why'' these rankings are the way they are. Let's start at the bottom and work up.

::* '''''asset risk - fixed income''''': Although fixed-income investments can have risks ''(for example, inflation risk)'' they are generally considered very safe so their RBC charge is very close to 0. An example of a fixed income investment is a ''government bond''. Insurance companies generally have over half of their investments in this category.

::* '''''asset risk - credit''''': Aside from slow-paying customers, a significant portion of credit risk comes from reinsurance, but this can be at least partly controlled with sensible reinsurance arrangements.

:: Now let's consider the "''high-value''" categories:

::* '''''catastrophe risk''''': Catastrophe risk is now separated from U/W risk and consists of 2 items: earthquake and hurricane risk. Hurricanes are an increasingly significant source of risk for insurers, but I'm not sure if climate change affects plate tectonics and earthquakes very much. :-)

::* '''''U/W risk - NWP''''': The total U/W risk, which is the risk associated with writing policies, is the most significant contributor of risk for an insurer. The total U/W risk accounts for 30% + 20% = 50% of the total. Also, the biggest component of liabilities on the balance sheet is the reserves. The intuitive reason the ''NWP'' portion of the UW risk is smaller than the ''reserve'' portion is that NWP risk is related to the unexpired portion of written policies. So if we're dealing with annual terms, the unexpired portion will be less than 1 year. Compare this to the reserves for claims that have actually been incurred: These incurred claims may span '''many''' accident years, so the risk ''(and associated charges)'' should be greater.

::* '''''U/W risk - reserves''''': This is the business of insurance companies and reserves is the biggest liability item on the balance sheet. Insurers have the expertise ''(actuaries!)'' to take on significant risk in this category and manage it for the mutual benefit of both the insurer and society.

::* '''''asset risk - equity''''': The calculation of asset risk depends on risk factors associated with different types of equity risks. We'll cover this in detail further down, but you should note that equity risk ''(stocks, for example)'' is much greater than the risk from fixed income investment ''(government bonds, for example)''

:: Just for fun, go back to the [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | example]] from Alice's 2nd day and calculate how the percentages there compare to the table above. The total, without operational risk, is 18,433,776. ''(Answer: For R1 to R5 and Rcat the percentages are: 3%, 23%, 2%, 52%, 19%, 1%. For that example, R4 has the highest RBC charge and equity risk was a distant second. Alice's company must have either few or less risky equities in their investment portfolio.)''

===Alice's 4th Day (An Exam Problem.)===

Today we're going to cover a calculation problem similar to the following exam problem. Note that this problem uses an outdated version of the RBC formula. For the purposes of this problem, assume Rcat = 0 and that the operational risk factor is 0% rather than 3%.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''

It's a very easy problem and I'm surprised people didn't ace it. ''(According to the examiner's report, exam-takers made a lot of different kinds of mistakes.)''

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:: '''Given:'''
::: {| class="wikitable"
|- style="border-bottom: 2px solid;"
! style="border-right: 2px solid;" | description !! scenario 1 !! scenario 2 !! scenario 3
|-
| style="border-right: 2px solid;" | company net loss & LAE ratio || style="text-align: center;" | 85% || style="text-align: center;" | 85% || style="text-align: center;" | 85%
|-
| style="border-right: 2px solid;" | company expense ratio || style="text-align: center;" | 35% || style="text-align: center;" | 35% || style="text-align: center;" | 35%
|- style="border-bottom: 2px solid;"
| style="border-right: 2px solid;" | policyholder dividend ratio || style="text-align: center;" | 10% || style="text-align: center;" | 10% || style="text-align: center;" | 10%
|- style="border-bottom: 2px solid; background-color: gold;"
| style="text-align: center; border-right: 2px solid;" | '''Total Adjusted Capital''' || style="text-align: right;" | 14,000 || style="text-align: right;" | 8,000 || style="text-align: right;" | 12,000
|-
| style="text-align: center; border-right: 2px solid;" | R0 charge || style="text-align: right;" | 10 || style="text-align: right;" | 20 || style="text-align: right;" | 50
|-
| style="text-align: center; border-right: 2px solid;" | R1 charge || style="text-align: right;" | 700 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R2 charge || style="text-align: right;" | 11,700 || style="text-align: right;" | 3,600 || style="text-align: right;" | 3,900
|-
| style="text-align: center; border-right: 2px solid;" | R3 charge || style="text-align: right;" | 900 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R4 charge || style="text-align: right;" | 12,100 || style="text-align: right;" | 3,000 || style="text-align: right;" | 4,200
|-
| style="text-align: center; border-right: 2px solid;" | R5 charge || style="text-align: right;" | 7,800 || style="text-align: right;" | 2,100 || style="text-align: right;" | 3,100
|-
| style="text-align: center; border-right: 2px solid;" | Rcat charge || style="text-align: right;" | 5,400 || style="text-align: right;" | 1,600 || style="text-align: right;" | 2,200
|}

:: '''For each scenario, find''':
::* RBC ratio
::* RBC action or control level
::* appropriate regulator & company action.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A Answers    :-D'''
|}

:: '''Recall:'''
::* RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
::* ACL capital = '''50%''' x (RBC Capital Required)
::* RBC Capital Required = '''1.03''' x [ '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' ]
::* (The factor of 1.03 accounts for operational risk.)

:: '''Scenario 1''':
::* RBC Capital Required = 19,946
::* ACL capital = 9,973
::* RBC ratio = 14,000 / 9,973 = '''140%'''   ''(first mug-winner: GLC!)''

::: ==> '''action or control level''': '''RAL''' ''(Regulator Action Level)''
::: ==> '''regulator action''': commissioner has the right to issue an order specifying corrective action (not mandatory)
::: ==> '''company action''': must submit '''''action plan''''' within 45 days describing how to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 2''':
::* RBC Capital Required = 5,568
::* ACL capital = 2,784
::* RBC ratio = 8,000 / 2,784 = '''287%'''

::: ==> '''action/control level''': depends on results of [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | trend test]] because RBC ratio is in the 200-300% range
:::* COR = 85% + 35% + 10% = 130% > 120% ==> action level is '''CAL''' ''(Company Action Level)''
::: ==> '''regulator action''': none ''(initially)''
::: ==> '''company action''': must submit '''''action plan''''' within 45 days to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 3''':
::* RBC Capital Required = 7,159
::* ACL capital = 3,580
::* RBC ratio = 12,000 / 3,580 = '''335%'''

::: ==> '''action or control level''': '''none''' ''([[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 |trend test]] not required because RBC ratio > 300%)''
::: ==> '''regulator action''': none
::: ==> '''company action''': none

'''Trick''': In the above problems, I gave you the value of TAC, but sometimes you have to calculate TAC using the formula: [Hint: ''no tabular, no medical'' 
: TAC = PHS - (non-tabular discount) - (tabular discounts on medical reserves)
* That seems easy enough, but keep in mind that tabular discounts can be for ''medical'' or ''indemnity'', and the indemnity portion is not subtracted. You had to know this to correctly solve:
:: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
* The question provided the tabular discount for ''indemnity'' and the examiner's report listed as a '''common mistake''' subtracting this ''indemnity'' discount amount. So just keep that in mind.

'''Tip''': For the practice template in the mini BattleQuiz, I sometimes like to just keep pressing the '''New''' and '''Cheat''' buttons without actually doing the calculation. I find that seeing the answer immediately helps build my intuition on how the RBC ratio corresponds to the action level ''(without having to stop and do the whole calculation every time.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Alice's 5th Day (R0 and Another Exam Problem)===

We covered lots of useful information above about RBC and how to do basic calculations, but we did it in a different order from Odomirok. Let's now take a step back and look at how Odomirok organized the RBC chapter. In the problems we've already done, you were directly given R0 thru R5 and Rcat. Now you have to learn how to ''calculate'' these charges directly from financial statement information.

:{| class="wikitable"
|-
! page !! topic !! comment
|-
| style="text-align: center;" | 236 || Overview || ''covered above''
|-
| style="text-align: center;" | 240 || RBC Formula || ''covered above''
|-
| style="text-align: center;" | 244 || style="text-align: center;" | R0 || detailed calculation: ''investments in affiliates (common stock, preferred stock, alien insurers, off B/S items)''
|-
| style="text-align: center;" | 249 || style="text-align: center;" | R1 || detailed calculation: '''''bond size''''', '''''asset concentration'''''
|-
| style="text-align: center;" | 260 || style="text-align: center;" | R2 || detailed calculation: '''''asset concentration'''''
|-
| style="text-align: center;" | 265 || style="text-align: center;" | R3 || detailed calculation: '''''reinsurance recoverable allocation'''''
|-
| style="text-align: center;" | 268 || style="text-align: center;" | R4 || detailed calculation: '''''excessive premium growth''''', '''''reinsurance recoverable allocation''''', '''''loss-sensitive discount''''', '''''loss concentration'''''
|-
| style="text-align: center;" | 283 || style="text-align: center;" | R5 || detailed calculation: '''''excessive premium growth''''', '''''loss-sensitive discount''''', '''''premium concentration'''''
|-
| style="text-align: center;" | 289 || style="text-align: center;" | Rcat || detailed calculation:
|-
| style="text-align: center;" | 293 || style="text-align: center;" | operational risk || detailed calculation:
|-
| style="text-align: center;" | 294 || RBC Model Act || '''''covered above'''''
|}

As a start, let's look at an old exam problem. I didn't like how the examiner's report explained the solution, so I solved it myself in a way that made more sense to me. You can see what I did in the link below. You could have almost figured it out from what we've already covered, plus a little bit of common sense. '''Note''': This exam problem is actually outdated because it's based on an earlier version of the RBC calculation that did not include catastrophe risk or operational risk. It's still valuable to look at however if you assume that cat risk and operational risk are both 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_v3.pdf '''''Solution to 2017.Spring #19''''']

Now, here are a couple of similar practice problems but with different numbers. Note that you have to assume Rcat and operational risk are 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_practice_01_02_v3.pdf '''''2 practice problems like 2017.Spring #19''''']

And finally, here is the link to the actual exam problem and answer. They accepted '''10 different answers''' because they didn't provide enough information in the statement of the problem. ''(You had to make certain assumptions.)'' Anyway, it might be instructive to take a quick look at some of the alternate answers. Don't spend too long on that though.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''

'''A quick primer on calculating R0''': The most recent version of Odomirok added details regarding the R0 calculation. This is discussed below.

The R0 charge considers the risks associated with investments in subsidiary insurance companies as well as miscellaneous off-balance sheet and other items. Specifically, there are separate RBC charges for:

# common stocks in the subsidiary
# preferred stocks in the subsidiary
# investments in alien insurance company affiliates
# off-balance sheet or other items

Subsidiary and affiliated insurance companies are only considered within R0 if they are U.S. domiciled entities subject to RBC, or if they are alien insurers ''(foreign to the U.S.)''.

There are 5 formulas you need to memorize. The charge for common stock depends on the accounting method the reporting entity uses to report the investment.

:{| class='wikitable'
|-
|| R0 ('''common stocks''') using equity method || = min[ affiliate RBC x ('''ownership%''' of common stock) , value of common stock as recorded by reporting entity ]
|-
|| R0 ('''common stocks''') using market method || = min[ affiliate RBC x ('''ownership%''' of common stock) , (statutory surplus of affiliate) x ('''ownership%''' of common stock) ]
|}

:: '''Note:''' The R0 formula for the market method is potentially more complicated than what's written above, but I think it has zero chance of being asked. If you'd like to see the full formula, see ''[[Expanded R0 Formula for Market Method]].''

The formulas for the other items are:

:{| class='wikitable'
|-
|| R0 ('''preferred stocks''') '''1''' || = min[ (affiliate RBC - total value of common stock) x ('''ownership%''' of preferred stock) , value of preferred stock as recorded by reporting entity ]
|-
|| R0 ('''alien insurance affiliate''') || = 0.5 x (carrying value of company's interest in affiliate)
|-
|| R0 ('''off-balance/sheet items''') || = 1.0% x (value of each off-balance sheet item)
|}

: '''1''' This charge cannot be less than 0. If the formula gives a negative value, just set it = 0 instead.

In the formula for preferred stocks, the quantity ''(affiliate RBC - total value of common stock)'' is referred to a the subsidiary's '''excess RBC'''.

In the formula for off-balance sheet items, the 1.0% risk factor is almost always the appropriate factor.
[https://www.battleacts6us.ca/vanillaforum6us/discussion/385/r0-factor-for-securities-lending-programs memory trick]!)'' This charge would be applied to the following:

* non-controlled assets
* guarantees for the benefit of affiliates
* contingent liabilities
* DTAs (Deferred Tax Assets)

There have not been any published exam questions where you had to calculate R0. If an R0 calculation does appear on the exam it will probably be fairly simple. Here are a few examples:

'''Example 1''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 40% , 100,000 x 40% ]   =   28,000

'''Example 2''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity does not use the equity method of accounting. ''(It uses the market method. For the purposes of this simple example, ignore the "B" component of the charge. See [[Expanded R0 Formula for Market Method]] for a description of B.)''
: → R0 for reporting entity   =   min[ 70,000 x 40% , 60,000 x 40% ]   =   24,000

'''Example 3''': An insurer owns 25,000 of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 25% , 100,000 x 25% ]   =   17,500

'''Example 4''': An insurer has 50% ownership of preferred stock in an insurance subsidiary that has 100,000 in preferred stock. The total RBC charge for the affiliate is 70,000 and the affiliate owns 40,000 of common stock. The accounting method is not relevant when dealing with preferred stocks.
: → R0 for reporting entity   =   min[ (70,000 - 40,000) x 50% , 100,000 x 50% ]   =   15,000   ← ''if < 0, just set = 0'' 

'''Example 5''': Annual Statement carrying value of the company’s interest in the alien insurance affiliate is 120,000. ← ''BA mug winner: VP!''
: → R0 for reporting entity   =   0.5 x 120,000   =   60,000

'''Example 6''': An insurer records a total carrying value of 200,000 for balance sheet assets over which it does not have exclusive control.
: → R0 for reporting entity   =   1.0% x 200,000   =   <s>3.14159265</s>   2,000   ← ''BA mug winner: DB!''

We will cover the detailed calculations for R1 through R5 in Alice's second week on the job.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' '''You must be logged in or this will not work.'''

<hr>

===Week 2: Day 1 (R1)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

Now we're getting down into the weeds of the RBC calculations. There is a lot of detail here. You must practice, practice, practice. This section on R1 is quite long, but the subsequent section on R2 is much shorter because it's similar to R1.

You can click to see a ''[[Odomirok.19-RBC#Summary_for_R1_.26_R2 | summary table for R1 and R2]]''. It might be an idea to take a quick look, but it won't mean much until you've covered the R1 and R2 details.

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk '''''(this is the R1 charge)'''''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk ''(this is the R3 charge)''

In particular, the '''R1 RBC charge''' covers interest rate risk and default risk for fixed income investments in the following 5 categories:

# Bonds
# Off-balance sheet collateral and Schedule DL, Part 1, Assets
# Other long term assets ''(includes mortgage loans, low income housing tax credits, working capital finance investments)''
# Miscellaneous assets ''(includes cash, cash equivalents, other short-term investments, nonadmitted collateral loans)''
# Replication (synthetic asset) transactions and mandatorily convertible securities

Note that the prior version of the RBC formula listed 10 categories including a category for holding companies that is no longer on this list. The text examples were not affected however and the actual calculation of the R1 charge did not change. ''(Since the R1 calculation for holding companies seems to have been removed, calculating R1 should actually be easier than before.)''

In any case, I don't think you have to memorize the above list. If you get an R1 or R2 problem on the exam, I would just assume that all the investments given in the problem are subject to the basic charge. That is, as long as you use only fixed income investments for R1 and equity investments for R2.

The largest contributor to the R1 charge is unaffiliated bonds. Note also that the 'Bond Size Charge' and 'Asset Concentration Charge' together account for a significant portion of R1. Those components are explained further down.

Today we're covering the '''detailed calculations for R1'''. We'll be basing the discussion on the exam problem below from '''2015.Fall'''. It gives you financial statement info on stocks and bonds then asks you to calculate R1 and R2.

: [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''

Anyway, let's get back to R1. Consider a simplified version of the exam problem:

:{| class="wikitable"
|-
! quantity !! notation !! value !! description
|-
| basic R1 charge || -- || '''406''' || ''this is the basic RBC charge for fixed income investments owned by the insurer''
|-
| bond size charge || BSC || '''609''' || ''an extra charge reflecting the level of diversification of the unaffiliated bond portfolio''
|-
| asset concentration charge || ACC || '''379''' || ''reflects increased risk of large concentrations of bonds'' ''(doubles the RBC charge for the 10 largest issuers)''
|}

Given the information in the above format, calculating R1 is trivial:

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

The answer is:

: R1 = 406 + 609 + 379 = '''1,394'''.

But in the exam problem, you are not given these quantities directly - you have to calculate them. If '''BSF''' stands for ''Bond Size Factor'' then here's what you need:

::{| class="wikitable"
|-
! quantity !! formula
|-
| basic || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| BSC || = BSF x (total R1 charges for bonds subject to BSF)
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

We'll cover how to calculate each of these 3 components in the next few subsections. We're going to use portions of the example in Odomirok to demonstrate the calculation and then come back to the exam problem at the end of this section.

====Basic R1 RBC charge====

This part of the calculation is very simple. You just multiply the amount held in each fixed investment category by the RBC factor.

'''Example''':

:{| class='wikitable'

|-
! item !! amount !! RBC factor !! RBC charge = (amount) x (RBC factor)

|-
|| cash & equivalents || style='text-align: right;' | 154,000 || style='text-align: center;' | 0.0030 || style='text-align: center;' | 462

|-
|| mortgage bonds || style='text-align: right;' | 245,000 || style='text-align: center;' | 0.0500 || style='text-align: center;' | 12,250

|-
|| U.S. government bonds || style='text-align: right;' | 6,395,684 || style='text-align: center;' | 0.0000 || style='text-align: center;' | 0

|-
|| Class 02 unaffiliated bonds || style='text-align: right;' | 4,987,460 || style='text-align: center;' | 0.0100 || style='text-align: center;' | 49,875

|}

And assuming these are all the fixed income investments the company has, the '''basic R1 RBC charge''' is just the sum of the last column: '''62,587'''

Notes on the '''RBC charge factor''':

: ==> depends on the category of investment or class of bond
: ==> investments are classified according to their credit-worthiness ''(see also [[Odomirok.6-7-BS#Bonds | bonds]])''
: ==> the exam problem considers only class 02 bonds, which are ''high'' credit quality so the RBC charge is ''relatively low''

====Bond Size Charge (BSC)====

To calculate the bond size charge '''BSC''', you first need to calculate '''BSF''' ''(Bond Size Factor)''. To do this, you need the following table from Odomirok:

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || || 2.5 ||

|-
|| next 50 || || 1.3 ||

|-
|| next 300 || || 1.0 ||

|-
|| > 400 || || 0.9 ||

|- style="border-top: solid 2px;'
|| Total || || ||

|}

'''Example''': If there were 325 issuers then you would fill in the above table as follows ''but counting only issuers of bonds subject to the BSF''.

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || 50 || 2.5 || 125

|-
|| next 50 || 50 || 1.3 || 65

|-
|| next 300 || 225 || 1.0 || 225

|-
|| > 400 || 0 || 0.9 || 0

|- style="border-top: solid 2px;'
|| Total || 325 || || 415

|}

:: Then BSF = 415 / 325 - 1 = 0.277.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz B!    :-o'''
|}

:: Calculate the BSF ''(Bond Size Factor)'' for the following total # of bond issuers: ''[[Odomirok.19-RBC#Pop_Quiz_B_Answers |Click for Answer]]'' 

::: '''(a)''' 10
::: '''(b)''' 85
::: '''(c)''' 120
::: '''(d)''' 575

Notes on '''BSF''':
: ==> only the following bond classes are subject to BSF
::* class 01 → 06 unaffiliated bonds
::: ''(exclude '''U.S.''' government bonds)'' (''shout-out to DS!)''
: ==> BSF decreases as ''bond count'' increases

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''TYPO in new edition of source text:''' The current Odomirok source text states the following:

• The bond size factor is calibrated such that the break-even point where the factor equals 1.0 is set at 1,300 bonds.
 • '''This should be: equals 0.0.'''

 '''CHANGE in new edition of source text:'''

• Portfolios containing 1,300 or more bonds will receive a discount to their RBC charge for bonds.
 • (In the prior version of Odomirok, portfolios containing 1,300 or more bonds did not receive a charge or a discount.)

See also ''[https://battleacts.discourse.group/t/bond-size-factor/2668 this forum thread]''.  ''(shout-out to kulotus, BA MUG winner!)''
|}

'''Warning:''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''

In the text example, ''# of bond issuers'' = 120, which is part (c) above and so BSF = 0.750. The final part of the BSC calculation is to multiply BSF by the ''R1 bond charges that are '''subject to''' the BSF''. In the text example, this value is '''247,319'''. ''(This is highlighted in the next pop quiz and also explained further down when we look at the full R1 exhibit.)''

: '''BSC''' = 0.750 x 247,319 = '''185,490'''.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz C!    :-o'''
|}

:: '''Question''': Sometimes you aren't given a single value for the # of bond issuers. You have to calculate that yourself. Using the data below, calculate:

::: '''(a)''' basic R1 charge
::: '''(b)''' BSF
::: '''(c)''' BSC

:: '''Hint''': To calculate BSC, you don't multiply BSF by bond ''values''. Rather, you multiply BSF by the R1 ''charges'' for bonds that are subject to the BSF. ''[[Odomirok.19-RBC#Pop_Quiz_C_Answers |Click for Answer]]'' 

:::{| class='wikitable' style='text-align: center;'
|-
! fixed income investment !! amount !! RBC factor !! # bond issuers
|-
| style='text-align: left; | U.S. government bonds || 8,000 || 0.0000 || 200
|-
| style='text-align: left; | class 01 unaffiliated bonds || 1,000 || 0.0030 || 70
|-
| style='text-align: left; | class 02 unaffiliated bonds || 2,000 || 0.0100 || 50
|-
| style='text-align: left; | class 06 unaffiliated bonds || 3,000 || 0.3000 || 90
|-
| style='text-align: left; | collateral loans || 5,000 || 0.0500 || 100
|-
| style='text-align: left; | mortgage bonds || 3,500 || 0.0500 || 100
|}

====Asset Concentration Charge (ACC)====

'''Warning:''' Odomirok uses a totally different example to demonstrate the ACC calculation versus the comprehensive R1 calculation. ''(There is a link to the example exhibit further down.)'' For this section, we'll use the data from their example, but the practice problems Alice created will give you 1 set of numbers for the whole R1 calculation. ''You're welcome.'' :-)

Note from the ''[[Odomirok.19-RBC#Alice.27s_5th_Day_.28R0_and_Another_Exam_Problem.29 | RBC charge summary table]]'' that both R1 ''(fixed income investment risk) '' and R2 ''(equity investment risk)'' have an asset concentration charge. Now, I'd like to cover the R1 calculation here and save the R2 calculation for the next section, but you can't completely separate R1 and R2. Why the heck not???!!! Alice will explain below.

The first thing you have to know is which '''fixed income investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated bonds in classes 02 through 05
* collateral loans
* mortgage loans

This list has 3 items for the purposes of sorting ''(see below)'' but each bond class 02 through 05 subsequently receives its own RBC factor.

The first thing you have to know is which '''equity investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated preferred stocks and hybrid securities in classes 02 through 05
* unaffiliated common stock
* investment in real estate
* encumbrances on invested real estate
* schedule BA assets (excluding collateral loans)
* receivable for securities
* aggregate write-ins for invested assets
* derivatives

This list has 8 items for the purposes of sorting ''(see below)'' but each stock class 02 through 05 subsequently receives its own RBC factor. The example from Odomirok, whose link is provided below, uses only the investments in green font from the 2 lists above. ''(And the 2015 exam problem is an even more simplified version of the text example.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_p249_250.pdf '''''Odomirok - ACC example for R1 & R2''''']

'''''Why ACC for R1 & R2 can't be completely separated:'''''

* Note how in the table in the text they sum the fixed & equity investments for each bond issuer then rank the issuers from highest to lowest.
* For this ranking, the fixed investments '''are not separated''' from the equity investments – ''they are all mixed together.''
* This is why you cannot completely separate the ACC calculations for R1 & R2.

If I were going to write a step-by-step procedure for myself on how to calculate ACC, this is how I would do it:

: '''step 1''': gather all fixed income investments and equity investments that are '''subject''' to the ACC ''(see above lists)''
: '''step 2''': sort the list from highest to lowest
: '''step 3''': truncate this list and keep only the '''top 10''' rows of this table

Then these last 2 steps '''are''' done separately for R1 & R2.

: '''step 4''': sum the TOP 10 results in each separate category ''(classes 02 through 05 are treated '''separately''' at this step)''
: '''step 5''': multiply each sum from step 4 by the appropriate RBC factor

Note that for step 4 for the text example, Odomirok assumes all bonds are class 02 and all stocks are class 03. (shout-out to AB!) You can see this in the text table.

'''ACC Concept''': The asset concentration charge basically just doubles the RBC charge for the 10 largest issuers.

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz D!    :-o'''
|}

: For the example in Odomirok, verify that R1 = 95 and R2 = 218. ''(Note that the grand ACC total in text table is listed as 312. But 95 + 218 = 313. Hey Odomirok, do arithmetic much? ← that's an Alice joke.)''

{| class='wikitable'
|-
| '''Question''': what is an ACF or Asset Concentration Factor
|}

* Th ACF was used in the text example from above:
:: '''ACF''' = weighted average of RBC factors for assets subject to the concentration charge
* Therefore, if someone tells you the ACF, you can calculate the ACC very easily with the formula below:
:: '''ACC''' = ACF x (total value of assets subject to the concentration charge)

You should quickly double-check the R1 ACF value of 0.020 and the R2 ACF value of 0.074 from the text table. ''(shout-out to mec06e!)''
: → ''I found all this information hard to keep straight in my head. I had to do a lot of practice problems before I understood clearly how all the different pieces fit together.''

====Full R1 Examples====

So you see that calculating R1 can get messy really quickly. It isn't that the concept is hard. You just have to remember the 3 components.

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

And here is a nice presentation of the full R1 example from Odomirok:

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_251.pdf '''''Odomirok - full R1 example (table 88)'''''] ''← doesn't show details for asset concentration charge''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_mixed_text_examples.pdf '''''Odomirok - full R1 example - combines 2 text examples'''''] ''← my version shows details for the asset concentration charge example from table 86 & 87''

Finally, here is my solution to the exam problem referenced at the top of the R1 section. Note that this exam problem is very simplified because there is only 1 category of fixed income investments ''(unaffiliated bonds)'' and then there is only 1 class of unaffiliated bonds ''(class 2.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_v3.pdf '''''Solution to 2015.Fall #17''''']

And here are a couple of similar practice problems but with different numbers: ''(shout-out to AS!)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_practice_01_02_v4.pdf '''''2 practice problems like 2015.Fall #17''''']

And since Alice is evil, she has created 4 more full R1 practice problems to ruin your day: :-)

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_practice_01_04.pdf '''''4 full R1 practice problems''''']

Just to summarize, here are references to the components of the Odomirok R1 example:

* current edition tables 78-79: calculation of the '''BSF''' ''(Bond Size Factor)''
* current edition tables 80-81: calculation of '''ACC''' ''(Asset Concentration Charge)'' for R1 and R2 for a company with multiple classes of fixed income and equity assets
* current edition table 82: calculation of '''total R1''' for a company that has multiple classes of fixed income and equity assets

===Week 2: Day 2 (R2)===

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk '''''(this is the R2 charge)'''''
: '''C'''redit risk ''(this is the R3 charge)''

R2 includes the charge for risk associated with equity investments in the following categories:

# Affiliated investments
# Unaffiliated stocks ← major contributor to R2 charge
# Real estate
# Schedule BA assets ← major contributor to R2 charge
# Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
# Replication (synthetic asset) transactions and mandatory convertible securities

This list is slightly different from the previous version of Odomirok but the text examples were not affected and the mechanics of calculating the R2 charge did not change.

The asset concentration charge is also a major contributor to the R2 charge. This calculation is similar to the R1 calculation except easier because there's no BSF term ''(Bond Size Factor.)'' The only '''modification''' to the basic charge is the ACC ''(Asset Concentration Charge.)''

If you're given basic charge = 1,365 ''(basic R2 charge)'' and ACC = 1,335 then even ''Ian-the-Intern'' can calculate R2 correctly. :-)

:{| class="wikitable"
|-
| '''Formula''': R2 = basic charge + ACC
|}

The answer is:

: R2 = 1,365 + 1,335 = '''2,700'''.

Of course in the exam problem, you're not given these quantities directly - you have to calculate them. But this too is easy because it's very similar to the calculation for R1. Actually the formulas are the same – they just apply to equity assets instead of fixed income assets.

:{| class="wikitable"
|-
! quantity !! formula
|-
| basic charge || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

Now, calculating R2 can still get messy for the same reasons that R1 gets messy. But it isn't conceptually difficult. One slight complication however is an equity asset under the category of affiliated investments for ''holding companies''. Its RBC calculation is a little different. You don't multiply its value by the RBC factor. Rather you multiply the RBC factor of 0.225 by the holding company value in excess of the carrying value for indirectly owned insurance affiliates calculated in R0. There is an example calculation on the wiki page ''[[RBC for Holding Companies]]''.


:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E!    :-o'''
|}

:: Go back to the practice problems from the previous section and calculate R2. ''(the 2 practice problems like 2015.Fall #17)''

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E Answers!    :-D'''
|}

:: '''practice 01''': R2 = (basic charge) + ACC = (52,600 x 0.15) + (52,600 - 300 - 0) x 0.15 = '''15,735''' '' ← shout-out to meowyadoin!'' '''Note from Alice''': ''I'm purrin fine!!''
:: '''practice 02''': R2 = (basic charge) + ACC = (51,100 x 0.15) + (51,100 - 600 - 500) x 0.15 = '''15,165''' '' ← shout-out to meowyadoin & nraoof & TD!''

Now that we've covered R1 and R2, there's a comment I made in [[Odomirok.19-RBC#Week_2:_Day_1_.28Another_Exam_Problem.29 | Week 2: Day 1]] about allocation of the ACC (''Asset Concentration Charge)'' that should now make more sense. Recall that the exam problem we looked at had '''10 different sample answers''' in the examiner's report. One source of ambiguity was that they didn't tell how to allocate ACC between R1 and R2. You now know that the ACC is calculated separately for R1 and R2, but the exam problem only provided the total ACC. To properly solve the problem, you had to know how much went into R1 and how much went into R2. Since they didn't tell you, you had to make an assumption:

* The examiners accepted '''''any''''' allocation of ACC between R1 and R2.

The simplest thing to do is put it all either in R1 ''or'' R2, and I opted to put it all in R2.

''(shout-out to KB!)''

Here's 1 final follow-up question on the ACC.

:{| class='wikitable'
|-
| '''Question''': in general, which assets are not subject to the ACC ''(Asset Concentration <s>Factor</s> Charge)'' ''← shout-out to PU!''
|}

:* assets deemed to be of low risk ''(like class 01 unaffiliated bonds or preferred stock)''
:* assets that have already received the maximum charge of 0.3000 ''(like class 06 unaffiliated bonds)''

====Summary for R1 & R2====

* ''[https://www.battleacts6us.ca/animations/animation_01_confused_Ian.php Ian-the-Intern kept getting confused]'' when Alice asked him to calculate R1 & R2 so she made him a summary table that helped him keep things going straight ''(or gaily forward, whichever the case may be.)''

''(Note that if you print this, the background colors are not visible. I don't know why.)
 ('''''Update''': Someone astutely pointed out in the forum that if you copy the table and paste into Excel, when you print, it will show the colors. Thanks!)'''''

:{| class='wikitable'

|-
! item !! R1 !! R2

|- style='background-color: palegreen;'
|| '''formula →'''
|| '''R1''' = basic charge + BSC + ACC
|| '''R2''' = basic charge + ACC

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''basic charge'''   = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' basic charge
|| '''fixed income assets'''   [1] Bonds   [2] Off-balance sheet collateral and Schedule DL, Part 1, Assets   [3] Other long term assets   [4] Miscellaneous assets ''(cash, cash equivalents,...)''   [5] Replication transactions, mandatorily convertible securities   • ''see footnote'' '''2'''
|| '''equity assets'''   [1] Affiliated investments   [2] Unaffiliated stocks   [3] Real estate   [4] Schedule BA assets   [5] Miscellaneous assets   [6] Replication transactions, mandatory convertible securities  

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''BSC''' (Bond Size Charge)   = BSF x (total R1 charges for bonds subject to BSF)
|| not applicable

|-
| style='text-align: center;' | types of assets '''subject to''' BSF
|| '''fixed income assets''' '''1'''   - class 01-06 unaffiliated bonds   - non-U.S. government bonds
|| not applicable

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''ACC''' (Asset Concentration Charge)   = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' ACC
|| '''fixed income assets'''   - bonds (class 02-05)   - collateral loans   - mortgage loans   - working capital finance investments – NAIC 02   - low income housing tax credits
|| '''equity assets'''   - unaffiliated preferred stocks & hybrid securities (class 02-05)   - unaffiliated common stock   - real estate   - encumbrances on invested real estate   - schedule BA assets (excluding collateral loans)   - receivable for securities   - aggregate write-ins for invested assets   - derivatives

|}

: '''1''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''
: '''2''' The 2019 edition of Odomirok has a discrepancy in the RBC factor for '''Schedule BA assets'''. In Table 81 on page 258, the factor is listed as 0.05, but on page 264 the factor is listed as 0.2. ''(shout-out to pb!)

Here are 2 problems that combine the calculation of R1 & R2.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R1R2)_practice_01_02.pdf '''''2 practice problems for R1 & R2''''']

And here's a quiz that covers both the R1 and R2 calculation.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' '''You must be logged in or this will not work.'''

===Week 2: Day 3 (R3 with intro to R4)===

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk '''''(this is the R3 charge)'''''

Below is a link to a problem from way back in 2014 where you have to calculate R3. It's pretty easy ''(aside from 1 small trick)'' because they explicitly tell you which financial statement amounts relate to credit risk '''''and''''' they give you the associated RBC factors.

Without even studying this section, you could guess that '''to calculate R3''' you have to multiply ''credit-related amounts'' by the corresponding ''RBC factors''. You'd probably get half the points just doing that. But to get full points, you'd have to know the trick:

: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''

If you looked at the solution, you'll see that after multiplying the ''credit-related amounts'' by the ''RBC factors'' they made an adjustment for reinsurance. That's the trick.

:{| class="wikitable"
|-
| '''R3 Trick''': The RBC charge for reinsurance recoverable is split 50/50 between R3 and R4 '''1'''
|}

:: '''1''' Use this split only if:

::: '''unpaid loss & LAE component of R4'''   >   (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)     ''(shout-out to luohuasheng! )''

:: Note that R3 is always greater than the ''right-hand-side'' of this inequality since the ''right-hand-side'' contains only 2 of the 3 components of R3. The 3 components of R3 are ''(see [[Odomirok.19-RBC#Assets_subject_to_R3 | Assets subject to R3]])'': ''non-invested assets, reinsurance recoverables, health credit risk.''

:: Remember that R4 ''(30% of industry-wide RBC charges)'' should almost always be greater than R3 ''(2% of industry-wide RBC charges)''. Therefore, this inequality should '''virtually always''' be true. And in fact, the examiner's report never even checked – they just went ahead and did the 50/50 allocation. ''(If by some freak occurrence this inequality were false, then 100% of the charge for reinsurance recoverable would go to R3. This could happen in the case of "limited net reserves" because then R4 could be small enough relative to R3. This reserve RBC limitation exists so the company cannot diversify away a portion of its credit risk in that situation. thx PA!)''

In this problem you also have to '''calculate R4''' but it's very easy because they give you all the components. You just have to recognize them:

* basic loss reserving RBC charge: '''400,000'''
* excessive growth charge/penalty for loss reserves: '''75,000'''

Just add them up then throw in the 50% allocation for the reinsurance recoverable charge. ''(See the R3 trick above.)''

We'll cover the detailed calculations for R4 and R5 in further down. They are hard problems.

====Assets subject to R3====

I would have said what we covered above this is very likely all you need to know about R3, but Alice reminded me about '''part (b)''' of the following rather unfair problem:

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''   ←   calculation of RBC charge for reinsurance recoverables is outdated - see the practice problem further down for the current calculation

The reason it's unfair is that you had know the ''RBC factors'' for the components of R3. In one of the previous quizzes, there was a practice template on calculating total RBC. To solve it, you had to know which of the financial statement items are '''subject to''' the R3 charge, but in that problem I gave you the factors. Let's step back for a moment and list all the possible R3 items. ''(Items in green relate to this exam problem.)''

: '''1. Non-Invested Assets''':
:* Investment income due and accrued ''(factor = 0.01)''
:* Amounts Receivable related to uninsured plans ''(0.05)''
:* Federal income tax recoverable ''(0.05)''   ←   removed from calculation for the most recent version of the RBC formula
:* Guaranty funds receivable or on deposit ''(0.05)''
:* Recoverable (parent/subs/affiliates) ''(0.05)''
:* Aggregate Write-ins for other than Invested Assets ''(0.05)''
: '''2. Reinsurance recoverable''' ''(0.1)''   ← ''for more information [https://battleacts.discourse.group/t/r3-calculation-question/2611 click to see this forum discussion]''
: '''3. Health Credit Risk''' ''(accounts for 0% of P&C insurer risk)''

Now, in '''(2016.Spring #26)''', you weren't given the actual RBC ''charges'', you were given the financial statement amounts. To get the charges you had to multiply each by the correct ''RBC factor'', which was not given. ''(The correct factors are in parentheses in the above list.)'' In other words, they expected you to memorize these factors. If you didn't memorize these factors, my advice would be to make up something reasonable like 0.05 ''(shout-out to PA!)'' and just use that across the board. Technically you'd get the wrong answer but it would let you complete the problem and if you did everything else correctly you would still get most of the points. ''(Alice thinks it was ridiculous to expect you to memorize the RBC factors. Don't get her started!)

'''R3 trick''': The solution in the examiner's report explicitly checked the inequality for the R3 trick. I wonder if they deducted points for not checking, even if you correctly did the 50/50 allocation. They didn't mention it.

Here are a couple of practice problems on R3 that I think are self-explanatory. They aren't hard. Here's what you do:

* calculate the basic charges for ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''. You do this simply by multiplying the given amounts by the RBC factors.

* the RBC charge for reinsurance recoverables comes directly from '''Schedule F, Part 3, Columns (35) & (36)''':
:: '''Column (35)''': Credit Risk on Collateralized Recoverables
:: '''Column (36)''': Credit Risk on Uncollateralized Recoverables

* check the allocation of the RBC charge for reinsurance provision using the TRICK mentioned above
* then just sum the final charges for the 3 categories: ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''

Here are a few R3 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R3)_practice_01_02_v03.pdf '''''2 practice problems for R3''''']

There is a practice template for R3 in the quiz at the end of the next section.

===Week 2: Day 4 (R4)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk '''''(this is the R4 charge)'''''
* NWP risk ''(this is the R5 charge)''

Recall that R4 is a significant contributor of risk to a company. The calculations for R4 are quite involved but do not often appear on the exam. Nonetheless, Alice has created some practice problems for you and there is a practice template in the quiz at the end of the next section.

There are 4 components to the R4 charge, the first 3 of which you should probably know how to calculate. The last one, ''health stabilization'', is not discussed in any detail in Odomirok.

: '''   8%''' of the R4 charge: '''reinsurance recoverables''' ''(reinsurance RBC that was part of the R3 calculation)''
: '''91%''' of the R4 charge: '''unpaid loss & LAE reserve'''
: '''   1%''' of the R4 '''excessive premium growth RBC'''
: '''   0%''' of the R4 charge: health stabilization RBC

Most of the section on R4 in Odomirok is about calculating the RBC for ''unpaid loss & LAE reserve''. The component for ''excessive premium growth RBC'' is almost exactly the same as for R5 and is discussed in the next section.

'''Before charging ahead, let's take a step back''':

* Remember how you did the RBC calculations for R1, R2, and R3? In each case, you had to know which financial statement amounts were '''subject to''' each charge. You use fixed income assets for R1, equity assets for R2, and credit-related items for R3.
* Then you calculated the '''basic charge''' by multiplying those amounts by the appropriate '''RBC factor'''. This RBC factor might be high or low depending on whether the asset is high-risk or low-risk.
* Then you made various adjustments to these basic charges to get the final RBC charge. For example, the ''bond size charge'' and ''asset concentration charge'' for R1.

It's the same idea for the R4 reserve component but at first it didn't look like it, at least it didn't for me. The reason was that Alice's practice problems don't provide any RBC factors.

* For the R4 reserve component, you have to calculate the RBC factor yourself. ''(The RBC factor is the quantity [[(C+1) x A] -1]. This is explained below and in the practice problem.)''
* And there is only 1 financial statement amount that's subject to this charge, net loss & LAE reserves. ''(Note however that the basic R4 charge for reserves is calculated separately for each line of business.)''

:{| class='wikitable'
|-
| '''Company RBC%''': This is the C-value in the formula [[(C+1) x A] -1].
|}

:: → The ''Company RBC%'' is derived from the corresponding ''Industry RBC%'' by applying a company-specific adjustment.
:: → The adjustment factor = (company L+LAE LDF)/(industry L+LAE LDF).
:: → The LDFs are calculated as the (current reserve for 9 prior AYs)/(initial reserves for those AYs).   ← ''capped at 400%''
:: → ''A'' is an adjustment for investment income and ''A<1''.

And there are then 2 further adjustments that are made to the basic R4 reserve charge:

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* LCF or ''Loss Concentration Factor'', which is a multiplicative adjustment

Once you've got all that, you can add in the reinsurance recoverable RBC and the excessive growth charge. We'll just assume the health stabilization charge is 0 since it is rarely a material amount for P&C insurers. ''(Recall that the reinsurance recoverable RBC is usually, but not always, split evenly between R3 & R4. See the section on R3 to review the details.)''

Here's an example of the R4 calculation from Odomirok. It's interesting because it also provides the annual statement locations for the various amounts that are needed for the calculation. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_271_(R4_example)_v03.pdf '''''Odomirok - R4 example''''']

{| class='wikitable' style='background-color: aqua;'
|-
| '''Now you're ready to tackle a full R4 problem!'''
|}

The problem is based on a similar problem for R5 that has appeared several times on past exams. Don't freak out when you see it. If you practice it several times, it will make more sense. It just has a lot of moving parts and you have to memorize the formulas that put all the different parts together to get the final answer. There is also a practice template in the quiz at the end of the next section on R5

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R4)_practice_01_04.pdf '''''4 practice problems for R4''''']

→ tubaguy has a good ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/95/memorization-tip-r4-vs-r5-formula-for-base-rbc memory trick]'' for the R4 and R5 formulas. thx tubaguy!

''And now for the nightmare scenario of an infinite number of practice problems... and you cannot stop until you get them all right''...    :-O

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

===Week 2: Day 5 (R5)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk ''(this is the R4 charge)''
* NWP risk '''''(this is the R5 charge)'''''

The calculations for R5 are complicated and unfortunately there have been exam problems that test the gory details. You can see this in the BattleTable at the top of this wiki article. The problems from '''2014''' and '''2012''' are fairly similar except for the reference to the ''claims-made'' discount in the 2012 problem. The syllabus has changed since 2012 and that problem is no longer relevant. Alice's advice is to ignore the problem from '''2012'''. The 2014 problem covers the major details of the R5 calculation so if you know how to do it, you should be prepared for any kind of R5 question you might get on the exam.

There are 4 components to the R5 charge, but you only need to worry about the calculations for the first two.
: '''99%''' of the R5 charge: '''written premium RBC'''
: '''   1%''' of the R5 charge: '''excessive premium growth RBC'''
: '''   1%''' of the R5 charge: health premium RBC
: '''   0%''' of the R5 charge: health stabilization RBC

Odomirok says this adds up to 100%, but the given percentages obviously add up to 101%. I know it's just rounding, but it confused poor ''Ian-the-Intern''. They could have fixed it by keeping an extra decimal. Anyway, it's not terribly important. Maybe I'm just procrastinating because R5 is such a pain to learn.

Several comments from the R4 section above also apply to R5. You are not given the RBC factor for the NWP component – you have to calculate it. ''(The RBC factor for the R5 NWP component is (CxA)+U-1, and is explained in the practice problem.)'' And there is only 1 financial statement amount that's subject to the R5 charge, net written premium. ''(Note however that the basic R5 charge is calculated separately for each line of business.)''

There are then 2 further adjustments that are made to the basic R5 charge: ''(note the similarity to R4)''

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* PCF or ''Premium Concentration Factor'', which is a multiplicative adjustment

Here's an example of the R5 calculation from Odomirok similar to the R4 example from the previous section. It provides the annual statement locations for the various amounts that are needed for the R5 calculation. It's probably good to scan it. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_279_(R5_example)_v03.pdf '''''Odomirok - R5 example''''']

{| class='wikitable' style='background-color: palegreen;'
|-
| '''Now you're ready to tackle a full R5 problem!'''
|}

Take a quick look at the official statement of the '''2014''' problem before you look at my solution: ''(note there were 2 errors in the statement of the problem - see examiner's report)''

: [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''

''Note that the examiner's report answer to part (c) is now outdated. Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2019 update of Odomirok. Both these risk are now considered in the RBC formula. (shout-out to luo!)''

Anyway, here's my solution to the calculation of R5 for that problem. ''(Once you have R5, calculating the total RBC is easy because they directly give you R0 thru R4.)'' I've included a lot more explanatory details than were in the examiner's report:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18).pdf '''''Solution to 2014.Fall #18''''']

And finally, here are 4 PDFs with practice problems similar to the 2014 exam problem but with different numbers: ''(It should be self-explanatory)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18)_practice_01-04_(v02).pdf '''''4 practice problems like 2014.Fall #18''''']

'''Note 1:''' These 4 problems were generated with random numbers and problem #2 had a negative base RBC charge for WC. This negative charge for WC should probably be set to 0 before combining it with the charges for the other lines.

'''Note 2:''' In the above problems, you were given the $-value for the excessive growth charge, but it's possible you may have to calculate it from the raw data. Recall from the previous section on calculating R4 I said the excessive growth charge for R4 is almost exactly the same as for R5. Well, you can see that clearly in the 2 formulas below:

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R4''') = '''(excess growth)''' x 0.450 x (net loss & LAE reserves)
|}

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R5''') = '''(excess growth)''' x 0.225 x NWP
|}

:: ==> '''(excess growth)''' = '''(average growth over last 3 years)''' – 10%
:: ==> '''(average growth over last 3 years)''' is capped at 40% for each year

The hard part of the calculation ''(and it really isn't that hard)'' is the value for '''(excess growth)'''. Once you have that, the corresponding charge is easy using the above formulas. Here's a pop quiz that shows you how to do it.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F!    :-o'''
|}

:: Given:
:::''(Should use total GWP from the FIVE-YEAR HISTORICAL EXHIBIT discussed in [[Odomirok.12-5yr]] but if only NWP is given, as in [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)''', then use NWP but note the assumption of no reinsurance.)''

:::{| class="wikitable"
|-
! year !! GWP
|-
|| 2016 || 100,000
|-
|| 2017 || 120,000
|-
|| 2018 || 174,000
|-
|| 2019 || 191,400
|}

:: Calculate the NWP excess growth charge.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F Answer!    :-D'''
|}

:: '''(average growth over last 3 years)'''
::: = average (120000/100000 - 1 , 174000/120000 - 1, 191400/174000 - 1)
::: = average (20%, 45%, 10%)      ''(but the growth must be capped at 40%)''
::: ~ average (20%, 40%, 10%)
::: = 23.3%

:: excess growth charge
::: = '''(excess growth)''' x 0.225 x NWP
::: = (23.3% – 10%) x 0.225 x 191,400
::: = '''5,742'''

Note that if the average growth over the last 3 years is less than 10% then the excess growth charge should be set equal to 0. ''(The excess growth charge cannot be negative.)''

There is a web-based practice template for R5 in the next quiz, but here's a good practice problem from an old exam. There are 3 twists in this problem which are explained below.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''

'''Twists'''
# There are 2 lines of business. That means you have to apply equations 4 and 5 separately to each line then calculate the combined total RBC charge using equation 6.
# You have to calculate the excessive growth charge yourself, but it's easy. Just follow the example above
# You have to calculate the company L+LAE 10-year average yourself, which is easy because they give you the 10-year history from Schedule P, '''BUT''' you also have '''cap the L+LAE for each year at 300%'''. As explained in Odomirok: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    ''← shout-out to AU!''

Quiz:

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' '''You must be logged in or this will not work.'''

===Week 3: Day 1 (Catastrophe Risk)===

Calculating the RBC catastrophe risk charge Rcat is the same calculation for earthquake and hurricane. Here's what you need:

* estimated net & ceded losses for 1-in-50 year, 1-in-100 year, 1-in-250 year, 1-in-500 year catastrophe events ''(for filing purposes - see table below)''
: → but only the 1-in-100 year event is used in the Rcat calculation
* net catastrophe risk factor = 1.00 ''(apply to net 1-in-100 year event)''
* contingent credit risk = 0.048 ''(apply to ceded 1-in-100 year event to account for credit risk related to reinsurance recoverables)''

The loss estimates are obtained from catastrophe models but the mechanics of this are beyond the scope of the syllabus. Anyway, once you've got the RBC charge separately for both earthquake and hurricane, the final Rcat charge is:

: [[File: Odomirok.Ch19_(page_290)_cat_formula.png]]

The text has an example for both earthquake and hurricane but the method is exactly the same. If I were solving this problem on an exam, here is how I would do it. You can compare this with the more detailed example from the text further down.

{| class='wikitable'
|-
|| Alice's abbreviated statement of the problem...
|}

: [[File: Odomirok.Ch19_(080)_cat_example_problem.png]]

{| class='wikitable'
|-
|| Alice's abbreviated solution...
|}

: [[File: Odomirok.Ch19_(081)_cat_example_solution.png]]

{| class='wikitable'
|-
|| And here's the more detailed text version of just the hurricane portion...
|}

: [[File: Odomirok.Ch19_(082)_cat_example_text_solution.png]]

The text discusses other details that I would only skim if I were studying for this exam. You can consult the source text for a little more information on these topics but I doubt you need to know more than what I've listed below:

* reporting of projected catastrophe losses: ''can be done on an Aggregate Exceedance Probability (AEP) basis, or Occurrence Exceedance Probability (OEP) basis''
* exemptions from filing catastrophe charges: ''granted when certain conditions are met that indicate a low net catastrophe exposure such as when coverage is less than 10% of policyholder surplus''
* credit risk charge: ''losses ceded to U.S. affiliates and mandatory pools (whether authorized, unauthorized or certified) are not subject to the 0.048 credit risk charge''

Here are a couple of practice problem that shouldn't take you more than just a few minutes:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(Rcat)_practice_01_02.pdf '''''2 RBC catastrophe charge practice problems''''']

===Week 3: Day 2 (Operational Risk)===

This was discussed earlier in the section ''[[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | Trend Test and Risk Categories]]'', but here's a quick review:

'''Operational risk''' is easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

* inadequacy or failure of internal systems
* personnel
* procedures or controls
* external events
* legal risk

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

===Alice's Summer Performance Review (Old Exam Problems)===

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==Pop Quiz B Answers==

: '''(a)''' BSF = 1.500 for 10 issuers
: '''(b)''' BSF = 1.006 for 85 issuers   ← for a hint, ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/852/r1-pop-quiz-b see here]''   ''(shout-out to amberxmc!)''
: '''(c)''' BSF = 0.750 for 120 issuers
: '''(d)''' BSF = 0.126 for 575 issuers

: <html><a href="javascript:history.go(-1)">Go back</a></html>

==Pop Quiz C Answers==

: '''(a)'''
:* basic R1 charge = (8,000 x 0) + (1,000 x 0.003) + (2,000 x 0.01) + (3,000 x 0.3) + (5,000 x 0.05) + (3,500 x 0.05) = '''1,348'''
:: ''(use all items in table)''

: '''(b)''':
:* relevant # of bond issuers = (# class 01 issuers) + (# class 02 issuers) + (# class 06 issuers) = 70 + 50 + 90 = 210
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSF = 300 / 210 - 1 = '''0.429'''

: '''(c)'''
:* (assets subject to BSF) = (1,000 x 0.0030) + (2,000 x 0.0100) + (3,000 x 0.3000) = 923
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSC = 923 x 0.429 = '''396.0'''

: <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.19-RBC

2026-01-27T22:32:11Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 19''' - '''Risk-Based Capital'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-19-rbc ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/060_RBC_General_(v01).mp4 '''(6:15) → RBC - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Risk-Based Capital (RBC)'''

* This chapter discusses the Risk-Based Capital (RBC) system, which was developed by the National Association of Insurance Commissioners (NAIC) in 1994 to help '''detect insurance company insolvencies early'''.

* The RBC system includes a '''formula''' to determine the minimum required capital (authorized control level) for insurance companies, reflecting the risks they face, and a model act that empowers state regulators to take action when a company's RBC ratio falls below certain thresholds.

* The chapter explains the RBC formula's application to property/casualty insurance companies, detailing the different risk categories such as '''asset risk''', '''underwriting risk''', and '''catastrophe risk'''.

* It also describes the '''covariance adjustment''' used in the RBC calculation to account for diversification among risk categories, and the basic operational risk charge introduced in 2018.

* The RBC report is filed annually with the NAIC and includes both the formula calculations and management's analysis of the results, though detailed calculations are confidential.

|}

==Pop Quiz==

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (1st Battle Card in mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: peachpuff; width: 1050px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, please let her know in the ''[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176 RBC Discussion Forum]'' and we'll send you a BattleActs coffee mug.
|}

: [[File: mug.png | 200px]]

{| class='wikitable' style='background-color: lightgreen;'
|-
|| '''Updates for 2021.Spring are COMPLETE:'''   There were significant changes. (There were no changes for 2021.Fall.)
|}

For candidates who attempted Exam 6 prior to 2021.Spring, there are some new things you have to learn regarding the RBC calculation: ''(Details are contained in the wiki article.)''

* '''new risk category''': catastrophe risk
* '''new risk category''': operational risk
* '''new RBC formula''': includes catastrophe risk and operational risk
* '''new R0 calculation''': this isn't too hard
* '''new R3 calculation''': the portion of the R3 RBC charge for reinsurance recoverables is different

There are also '''minor changes''' to the '''R1''' and '''R2''' material but the text examples and old exam problems on those topics were not affected. There were '''no changes''' to the '''R4''' and '''R5''' calculations.

For all candidates, some exam problems published prior to 2021.Spring are outdated. These include problems regarding:

* total RBC charge or RBC ratio
* RBC charges for R3

The new RBC formula affects many old exam problems but they are still solvable if you assume that both the catastrophe charge Rcat and the operational risk charge equal 0. The previous edition of Odomirok did not cover the details of the R0 calculation so there are no old exam problems for that. Any problems on R3 that involve reinsurance recoverables will not be completely solvable anymore but there are only 2 of those: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)''' and [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''.

And remember → you can generate an infinite number of web-based practice problems for a broad range of RBC problem types so you don't need to rely solely on old exam problems for practice.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Here are the "regular" study tips:'''
|}

The RBC chapter is like Schedule P in that the questions are mostly calculation, but RBC has more different '''types''' of calculations. This wiki article includes lots of problems for you to practice on and it's going to take a lot of time to go through them all. In addition to the problems provided in pdf format within the wiki, and in Excel format ''[[Excel_Practice_Problems | available here]]'', you should do the randomly generated web-based problems from the quizzes until you consistently get the right answer. Since this is a Top 6 reading, you should also do as many of the old exam problems as you can, keeping in mind the above comments regarding changes to the RBC formula.

The source text ''(Chapter 19 of Odomirok)'', which is 60+ pages, includes all kinds of insanely detailed information that you almost certainly don't need to know for the exam. Just learning how to do all the web-based problems will take you long enough. Alice-the-Actuary has kindly curated the source text so the wiki covers everything that's likely to appear on the exam. That includes the overall calculation of the RBC ratio, the various regulator action levels, and details on calculating the individual risk charges R1, R2, R3, R4, R5. Examples and practice for the R0 and Rcat calculation are provided in the wiki and are easy compared to the others. Yay!

'''Estimated Study Time''': 1 week ''(not including subsequent review time)''
[[#BondSizeFactorNote]]
{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''. For a little more on this click on ''[[Using the Source Material]]''.
|}

==BattleTable==

Based on past exams and Alice's expert judgment, the '''main things''' you need to know ''(in rough order of importance)'' are:

* calculating RBC charges R0,1,2,3,4,5,cat, operational risk & RBC-ratio
* identifying action level based on RBC ratio & subsequent regulator/company actions
* strategies for reducing RBC charges
* comparison to IRIS ratios

The RBC questions from 2012 appear to be at least partially outdated and are highlighted in tan. Portions of questions from 2013-2019 may also be partially outdated as explained in the ''[[Odomirok.19-RBC#Study_Tips | Study Tips]]' section.

{| class='wikitable'
|-
| Questions held out from Fall 2019 exam: '''#5, 18, 19'''. ''(Skip these now to have a fresh exam to practice on later. For links to these questions, see [[Exam Summaries]].)''
|}

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 175px;" | part (a) !! style="width: 175px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(13)_v2.pdf E] '''(2019.Spring #13)'''
|| '''identify''': - RBC action level + actions
|| '''materiality standard''': - propose a standard
|| '''calculate''': - R4
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''
|| '''calculate''': - R5 '''7''','''8'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(18).pdf E] '''(2018.Fall #18)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level + actions
|| [[NAIC.IRIS]]
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)'''
|| '''calculate''': - change in RBC charge '''7'''
|| '''rapid premium growth''': - impact on RBC
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''
|| '''calculate''': - RBC ratio '''a'''
|| '''identify''': - RBC action level + actions
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''
|| '''financial health''': - use of RBC ratios'''9'''
|| '''R0 RBC charge''': - difference vs R1,2,3,4,5
|| '''RBC vs IRIS''': - similarity & difference
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''
|| '''calculate''': - total RBC'''1'''
|| '''calculate''': - RBC RAL'''2'''
|| '''RAL actions''': - insurer & regulator
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(16).pdf E] '''(2016.Fall #16)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''RBC purpose''': - for regulator
|| '''RBC formula''': advantages/disads'''9'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(17).pdf E] '''(2016.Fall #17)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level
|| '''identify''': - RBC actions
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''
|| see [[Freihaut.Reins]]
|| '''calculate''': - R3, R4 '''5'''
|| see [[Freihaut.Reins]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''
|| '''calculate''': - R1
|| '''calculate''': - R2
|| '''reducing R1''': - identify 2 ways
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(19).pdf E] '''(2015.Fall #19)'''
|| '''calculate''': - ACL & regulator action
|| [[Odomirok.25-Solv2]]
|| [[Odomirok.25-Solv2]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(19).pdf E] '''(2015.Spring #19)'''
|| '''components of RBC''': - describe
|| '''identifying insolvency''': - aspects of RBC
|| '''interpret RBC ratio''': - ratio = 310%
|| '''internal capital model''': - concerns ''(vs RBC)''

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(25).pdf E] '''(2015.Spring #25)'''
|| see [[Freihaut.Reins]]
|| see [[Freihaut.Reins]]
|| '''calculate''': - RBC ratio (R3, R4, R5) '''6'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''
|| '''calculate''': - R5, total RBC '''3'''
|| '''improving RBC ratio''': - reserving practices
| style="background-color: tan;" | '''limitations of RBC''': '''3a''' - for identifying impairment
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
|| '''calculate''': - R3
|| '''calculate''': - RBC
|| '''action level''': - identify action '''4'''
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(21).pdf E] '''(2013.Fall #21)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''calculate''': - RBC ratio
|| '''action level''': - identify
|| '''action''': - describe

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(14).pdf E] '''(2012.Fall #14)'''
|| see [[Odomirok.8-9-IS]]
|| '''reduce RBC asset risk''': - investment changes
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(20).pdf E] '''(2012.Fall #20)'''
|| '''calculate''': - R5
|| see [[NAIC.IRIS]]
|| '''RBC vs IRIS''': - treatment of premium
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(24).pdf E] '''(2012.Fall #24)'''
|| '''solvency-based frameworks''': - create a new one! '''W'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' The examiner's report accepted 10 different answers for this calculation problem, and the first 3 answers are almost certainly wrong. It states "Other non-insurance subsidiaries" could go into R0, R1, or R2, but it can't go into R0; it can only go into R1 or R2. The first 3 sample answers put "Other non-insurance subsidiaries" into R0. The other 7 sample answers show valid combinations based on the given information. ''(This was a poorly exam constructed question.)''
: '''2''' RAL stands for ''Regulatory Action Level''
: '''3''' The statement of this problem contains 2 errors. See examiner's comments in examiner's report.
: '''3a''' Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2014 update of Odomirok. Both these risk are now considered in the RBC formula. 
: '''4''' This problem has a '''trick''' related to tabular discounts for indemnity, which should not be subtracted from surplus to get total adjusted capital. See ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | here]]'' for details.
: '''5''' This was a very nasty problem because they didn't give you the RBC factors. You had to memorize them which is very unreasonable. '''Also''' the 2021 update to the source text changed the test for when to split the reinsurance recoverable RBC charge between R3 and R4. That part of the examiners' report solution is outdated. ''(More on this in [[Odomirok.19-RBC#Week_2:_Day_3_.28R3_with_intro_to_R4.29 | how to calculate R3 & R4]].)''
: '''6''' This is a defective question. See ''[https://battleacts.discourse.group/t/spring-2015-25-c/2506 this forum discussion]'' for more information.
: '''W''' Alice thinks this is a totes weird question. ''(You can look at it, but she thinks it isn't likely to appear again.)''
: '''7''' There is an error in the examiner's report solution to '''2018.Spring #18a'''. The solution uses NWP to calculate the excess growth factor. This calculation should use GWP from the Five Year Historical Exhibit. The solution for '''2019.Spring #15''' does indeed use GWP which is correct.    
: '''8''' This problem requires you to calculate the company average loss and LAE ratio as a 10-year average, but the given ratios are '''capped at 300%''' for each year. Odomirok states: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    
: '''9''' Part of the answer to these problems is outdated in the examiner's report because the new version of the RBC formula ''(for the syllabus starting 2021.Spring)'' now includes operational and catastrophe risk.
: '''a''' Note that this problem uses an outdated version of the RBC formula. For an updated solution, see ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | Alice's 4th Day]]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==In Plain English!==

===Alice's 1st Day (Intro to RBC)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

This wiki article is the "true story" of Alice's early days in her career when she was a summer intern. Alice's "days" don't necessarily correspond to your own study days. Her days are short and you can probably cover more than one of her days in one of your days.

On Alice's first day of work as an actuarial intern, her mean boss dumped a stack of financial statements on her desk and told her to find out whether the company was healthy. But before she could ask him anything, he was already down the hall issuing orders to someone else. ''"What have I gotten myself into?"'' she thought. Poor Alice had no idea what to do. Fortunately the intern in the next cubicle overheard and peeked over the cubicle wall.

: "''Just calculate the RBC ratio,''" her new friend said. "''It's all in Odomirok. The boss likes to haze interns on their first day, but I can help you. We'll '''tackle''' it together.''"

So Alice and Lakshmi spent the day pulling the relevant information from the financial statements and here is what Alice learned:

:{| class="wikitable"
|-
| '''Formula''': RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
|}

:: '''TAC''' = Total Adjusted Capital = 31,024,000
:: '''ACL''' = Authorized Control Level capital = 5,714,839

: ==> RBC ratio = 31,024,000 / 5,714,839 = '''543%'''

Ok, so far so good, but what in the world does 543% mean? Is that good or bad? ''(The following table appears near the end of chapter 19 of Odomirok)''.

: {| class='wikitable' style='background-color: yellow;'
|-
|| This table overlaps with ''[[Porter.12-Insolvency#Levels_of_Regulatory_Action | Levels of Regulatory Action]]'' from ''[[Porter.12-Insolvency | Chapter 12 of the Porter reading]]'' but is not completely consistent. See ''[https://battleacts.discourse.group/t/relationship-to-the-action-levels/2769 this forum discussion]'' for more details.
|}

:{| class="wikitable" style="width: 1000px;"

|-
! style="width: 190px" | action levels ['''CRAM'''] !! style="width: 80px" | RANGE !! style="width: 300px" | insurance dept action !! style="width: 200px" | company action !! Alice's action''

|-
|| '''CAL'''   → Company Action Level
| style="text-align: center; background-color: lightgreen;" | '''150-200%'''
|| none (initially)
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''lose a vacation day'''

|-
|| '''RAL'''   → Regulatory Action Level
| style="text-align: center; background-color: lightblue;" | '''100-150%'''
|| commissioner has the right to issue an order specifying corrective action (not mandatory) '''1'''
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''no bonuses'''

|-
|| '''ACL'''   → Authorized Control Level
| style="text-align: center; background-color: sienna; color: white;" | '''70-100%'''
|| commissioner authorized take control of company (not mandatory)
|| none (initially)
|| '''no raises, no bonuses'''

|-
|| '''MCL'''   → Mandatory Control Level
| style="text-align: center; background-color: red; color: white;" | '''≤ 70%'''
|| commissioner '''must''' rehabilitate or liquidate (mandatory) '''2'''
|| none (initially)
|| '''fire the CEO''' 😢

|}

: '''1''' Commissioner action could include restricting new business.
: '''2''' Insurance commissioner of domiciliary state must take action

If a company's RBC ratio falls below 200%, it's better for the company to take action than for the regulator to step in. A regulator's actions would likely be much more drastic.

:{| class='wikitable'
|-
|| '''Question''': what could be included in a company's action plan for meeting RBC standards
|}

:* explain how to raise needed capital
:* explain how to reduce operations to save money
:* explain how to reduce risks to lower RBC charges

The RBC ratio of '''543%''' for Alice's company is well above the CAL threshold, so it looks like the company is doing really well. ''(Note that the [[Bright Line Indicator Test]] from the SAO material should now make more sense.)'' Anyway, what a great first day of work for Alice. Time to relax.

The RBC test is comprehensive but it doesn't account for every type of insurance company risk. The text states that it doesn't cover risks associated with business plans & strategy, management, internal controls, systems, reserve adequacy, or ability to access capital. ''(It struck me that internal controls should be covered by operational risk, so I'm not sure why the text says risks due to internal controls are not included in the RBC framework.)''

===Alice's 2nd Day (Trend Test & Risk Categories)===

Over morning coffee, Lakshmi pointed out an omission from the above "action table" that Alice learned about yesterday. If the RBC ratio is '''above 200%''' but '''below 300%''', the company is still not in the clear. They would still have to perform the '''trend test'''. Let COR denote Combined Operating Ratio:

:{| class="wikitable"
|-
| '''Trend Test''': If a company's RBC ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the '''CAL action''' from the action table.
|}

: '''Reminder''': The COR ''(Combined Operating Ratio)'' is the sum of:
:* '''L'''oss & LAE ratio   =   (CY net incurred loss & LAE) / NEP
:* '''E'''xpense ratio   =   [ (other U/W expenses) + (aggregate write-ins for underwriting deductions) ] / NWP
:* '''D'''ividend ratio   =   (policyholder dividends) / NEP
: Recall that COR '''does not include''' investment income. And next time you see your CEO in the break room, you can tell him or her to get the '''LED''' out.

Anyway, Alice's new company is well above the 300% threshold so she was ready to report back to her boss that the company is in great shape, but Lakshmi stopped her.
: "''Not so fast,''" Lakshmi said. "''The RBC ratio is only 1 metric. For example, what about the IRIS ratios? It's like if you had 98% in calculus on your report card but were failing physics, English, and history. It isn't ''likely'', but when you report back to the boss, you should qualify your conclusion on the health of the company if the only thing you calculated was the RBC ratio.''"

You can review [[NAIC.IRIS]] for the IRIS ratios, but getting back to the RBC ratio, Alice needs to make sure she understands exactly how the '''543%''' value was calculated. It's a long calculation that involves several different risk components. The '''charge''' for each component represents the amount of capital required to support that particular risk. ''(Each component has its own calculation but we'll come back to that later.)''

{| class='wikitable'
|-
|| '''2019 Edition:''' The description of R0 is different. New risk categories Rcat and Operational Risk were added.

* Click to ''[https://battleacts.discourse.group/t/rbc-mnemonics/2619 go to the forum]'' for '''PK's''' memory trick!
* Great news! Another memory trick has been submitted by '''easylifew'''. Use the same link as above to see it!
* More breaking news!!! Yet another memory trick, this time from '''Comadiroma''', who understands that sillier is better-er! Same link as above!
* News alert! Another memory trick, this time from '''mcanlas94'''. Same link as above! ''(But you might have to scroll down.)''
* And on Feb 28, 2024, '''amberxmc''' got in on the action!
|}

:{| class="wikitable"

|-
! risk category !! risk component [partial hint: '''S-FEC''']!! notation !! risk charge for this company

|- style="border-bottom: 2px solid;"
|| ---- || '''S'''ubsidiary Insurance Companies and Miscellaneous Other Amounts || style="text-align: center;" | R0 || style="text-align: right;" | 0

|-
|| asset risk || '''F'''ixed income risk || style="text-align: center;" | R1 || style="text-align: right;" | 553,398

|-
|| asset risk || '''E'''quity risk || style="text-align: center;" | R2 || style="text-align: right;" | 4,303,948

|- style="border-bottom: 2px solid;"
|| asset risk || '''C'''redit risk || style="text-align: center;" | R3 || style="text-align: right;" | 310,060

|-
|| U/W risk || reserve risk || style="text-align: center;" | R4 || style="text-align: right;" | 9,561,305

|- style="border-bottom: 2px solid;"
|| U/W risk || NWP risk || style="text-align: center;" | R5 || style="text-align: right;" | 3,574,411

|- style="border-bottom: 2px solid;"
|| catastrophe || catastrophe risk || style="text-align: center;" | Rcat || style="text-align: right;" | 130,654

|-
|| operational || operational risk || style="text-align: center;" | * || style="text-align: right;" | 332,903

|}

: * Operational Risk is added as a final step in the calculation after applying the covariance adjustment between other risk types, and does not have a corresponding "R" indicator

You might think you'd sum these charges to find the total required capital, but that isn't how it works. Rather than a simple sum, these risk charges are aggregated using this formula:

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & before operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')'''
|}

This works out to 11,096,774.

The '''operational risk''' is then easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including: [Hint: '''L-PIPE''', as in Lead PIPE. It was Alice with the lead pipe in the break room. Don't ever eat the last donut if Alice is around. 😀 

* '''L'''egal risk
* '''  –'''
* '''P'''ersonnel risk ''(in case you hired a dumb-ass intern)''
* '''I'''nadequacy or failure of internal systems
* '''P'''rocedural risk ''(and/or risk of failure of internal controls)''
* '''E'''xternal risk ''(due to external events)''

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

These offset amounts would have to be provided. Anyway, the final total RBC according to the formula below is 11,429,677 without considering offsets to the basic 3% operational risk charge.

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & after operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' + '''('''operational risk''')'''
|}

The part of the formula with the square root is called the '''covariance adjustment'''. ''(Alice's Canadian cousin told her that in Canada this is called the diversification credit. Risk is reduced by spreading or diversifying the risk over multiple independent categories.)

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Is the covariance adjustment less than, greater than, or equal to the simple sum R1 + R2 + R3 + R4 + R5 + Rcat.

:: '''Answer:''' The covariance adjustment is less than the simple sum. ''(Try testing this with some simple numbers. It's a version the triangle inequality you may be familiar with from calculus.)''

:{| class="wikitable"
|-
| '''Question 1''': what is the reason for the covariance adjustment
|}

:: The reason is that risks R1 through R5 and Rcat are assumed to be '''independent'''. It's unlikely that all these risks would reach their maximum value at the same time. The covariance adjustment reduces the required capital to reflect this assumption of independence. For example, the level of equity risk ''(performance of stocks)'' is likely not related to reserve risk. A company would be unlikely to experience both very bad investment returns and very bad underwriting results at the exact same time.

:{| class="wikitable"
|-
| '''Question 2''': why is R0 excluded from the covariance adjustment
|}

:: Well, R0 is '''not independent''' of the other risks. In other words, R0 is '''correlated''' with the other risks. It represents the charge for an subsidiary company and investment in an subsidiary does not provide a diversification benefit.

Let's end Day 2 by applying the RBC Capital Required formula after operational risk:

* RBC Capital Required = 11,429,677 ''(Note that table 97 in the source text seems to have the wrong total.)''

Anyway, we can now calculate the denominator for the RBC ratio:

:{| class="wikitable"
|-
| '''RBC denominator''': ACL capital = '''50%''' x (RBC Capital Required)
|}

So ACL Capital = '''5,714,839''' ''(See [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Alice's 1st Day]].)'' You might also want to take a quick look at '''part (b)''' of:
: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''

Do the mini BattleQuiz then take a break.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===Alice's 3rd Day (Ranking of Risk Charges)===

Alice arrived early today so I prepared a special pop quiz she could do while eating her morning bear claw. It's easy but you'll need the aggregate industry RBC risk charges for each category:

: [[File: Odomirok.Ch19_(table_076)_aggregate_RBC.png]]

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Based on industry totals, rank the risk charges R1 through R5 according to their relative magnitude. ''(You can find this information on page 244 of Odomirok)''

:: '''Answer:''' [https://www.battleacts6us.ca/vanillaforum6us/discussion/116/risk-magnitude-ranking-tip#latest memory trick]!''

::: {| class="wikitable"
|-
! !! risk !! relative magnitude
|-
|| '''R2''' || ''' asset risk''' - equity || style="text-align: center; background-color: lightgreen;" | 31%
|-
|| '''R4''' || ''' U/W risk''' - reserves || style="text-align: center; background-color: lightgreen;" | 30%
|-
|| '''R5''' || ''' U/W risk''' - NWP || style="text-align: center; background-color: lightgreen;" | 20%
|- style="border-bottom: 2px solid;"
|| '''Rcat''' || catastrophe || style="text-align: center; background-color: lightgreen;" | 14%
|-
|| '''R3''' || ''' asset risk''' - credit || style="text-align: center; background-color: coral;" | 2%
|-
|| '''R1''' || ''' asset risk''' - fixed income || style="text-align: center; background-color: coral;" | 2%
|}

:: Of course, you should also be able to explain ''why'' these rankings are the way they are. Let's start at the bottom and work up.

::* '''''asset risk - fixed income''''': Although fixed-income investments can have risks ''(for example, inflation risk)'' they are generally considered very safe so their RBC charge is very close to 0. An example of a fixed income investment is a ''government bond''. Insurance companies generally have over half of their investments in this category.

::* '''''asset risk - credit''''': Aside from slow-paying customers, a significant portion of credit risk comes from reinsurance, but this can be at least partly controlled with sensible reinsurance arrangements.

:: Now let's consider the "''high-value''" categories:

::* '''''catastrophe risk''''': Catastrophe risk is now separated from U/W risk and consists of 2 items: earthquake and hurricane risk. Hurricanes are an increasingly significant source of risk for insurers, but I'm not sure if climate change affects plate tectonics and earthquakes very much. :-)

::* '''''U/W risk - NWP''''': The total U/W risk, which is the risk associated with writing policies, is the most significant contributor of risk for an insurer. The total U/W risk accounts for 30% + 20% = 50% of the total. Also, the biggest component of liabilities on the balance sheet is the reserves. The intuitive reason the ''NWP'' portion of the UW risk is smaller than the ''reserve'' portion is that NWP risk is related to the unexpired portion of written policies. So if we're dealing with annual terms, the unexpired portion will be less than 1 year. Compare this to the reserves for claims that have actually been incurred: These incurred claims may span '''many''' accident years, so the risk ''(and associated charges)'' should be greater.

::* '''''U/W risk - reserves''''': This is the business of insurance companies and reserves is the biggest liability item on the balance sheet. Insurers have the expertise ''(actuaries!)'' to take on significant risk in this category and manage it for the mutual benefit of both the insurer and society.

::* '''''asset risk - equity''''': The calculation of asset risk depends on risk factors associated with different types of equity risks. We'll cover this in detail further down, but you should note that equity risk ''(stocks, for example)'' is much greater than the risk from fixed income investment ''(government bonds, for example)''

:: Just for fun, go back to the [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | example]] from Alice's 2nd day and calculate how the percentages there compare to the table above. The total, without operational risk, is 18,433,776. ''(Answer: For R1 to R5 and Rcat the percentages are: 3%, 23%, 2%, 52%, 19%, 1%. For that example, R4 has the highest RBC charge and equity risk was a distant second. Alice's company must have either few or less risky equities in their investment portfolio.)''

===Alice's 4th Day (An Exam Problem.)===

Today we're going to cover a calculation problem similar to the following exam problem. Note that this problem uses an outdated version of the RBC formula. For the purposes of this problem, assume Rcat = 0 and that the operational risk factor is 0% rather than 3%.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''

It's a very easy problem and I'm surprised people didn't ace it. ''(According to the examiner's report, exam-takers made a lot of different kinds of mistakes.)''

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:: '''Given:'''
::: {| class="wikitable"
|- style="border-bottom: 2px solid;"
! style="border-right: 2px solid;" | description !! scenario 1 !! scenario 2 !! scenario 3
|-
| style="border-right: 2px solid;" | company net loss & LAE ratio || style="text-align: center;" | 85% || style="text-align: center;" | 85% || style="text-align: center;" | 85%
|-
| style="border-right: 2px solid;" | company expense ratio || style="text-align: center;" | 35% || style="text-align: center;" | 35% || style="text-align: center;" | 35%
|- style="border-bottom: 2px solid;"
| style="border-right: 2px solid;" | policyholder dividend ratio || style="text-align: center;" | 10% || style="text-align: center;" | 10% || style="text-align: center;" | 10%
|- style="border-bottom: 2px solid; background-color: gold;"
| style="text-align: center; border-right: 2px solid;" | '''Total Adjusted Capital''' || style="text-align: right;" | 14,000 || style="text-align: right;" | 8,000 || style="text-align: right;" | 12,000
|-
| style="text-align: center; border-right: 2px solid;" | R0 charge || style="text-align: right;" | 10 || style="text-align: right;" | 20 || style="text-align: right;" | 50
|-
| style="text-align: center; border-right: 2px solid;" | R1 charge || style="text-align: right;" | 700 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R2 charge || style="text-align: right;" | 11,700 || style="text-align: right;" | 3,600 || style="text-align: right;" | 3,900
|-
| style="text-align: center; border-right: 2px solid;" | R3 charge || style="text-align: right;" | 900 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R4 charge || style="text-align: right;" | 12,100 || style="text-align: right;" | 3,000 || style="text-align: right;" | 4,200
|-
| style="text-align: center; border-right: 2px solid;" | R5 charge || style="text-align: right;" | 7,800 || style="text-align: right;" | 2,100 || style="text-align: right;" | 3,100
|-
| style="text-align: center; border-right: 2px solid;" | Rcat charge || style="text-align: right;" | 5,400 || style="text-align: right;" | 1,600 || style="text-align: right;" | 2,200
|}

:: '''For each scenario, find''':
::* RBC ratio
::* RBC action or control level
::* appropriate regulator & company action.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A Answers    :-D'''
|}

:: '''Recall:'''
::* RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
::* ACL capital = '''50%''' x (RBC Capital Required)
::* RBC Capital Required = '''1.03''' x [ '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' ]
::* (The factor of 1.03 accounts for operational risk.)

:: '''Scenario 1''':
::* RBC Capital Required = 19,946
::* ACL capital = 9,973
::* RBC ratio = 14,000 / 9,973 = '''140%'''   ''(first mug-winner: GLC!)''

::: ==> '''action or control level''': '''RAL''' ''(Regulator Action Level)''
::: ==> '''regulator action''': commissioner has the right to issue an order specifying corrective action (not mandatory)
::: ==> '''company action''': must submit '''''action plan''''' within 45 days describing how to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 2''':
::* RBC Capital Required = 5,568
::* ACL capital = 2,784
::* RBC ratio = 8,000 / 2,784 = '''287%'''

::: ==> '''action/control level''': depends on results of [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | trend test]] because RBC ratio is in the 200-300% range
:::* COR = 85% + 35% + 10% = 130% > 120% ==> action level is '''CAL''' ''(Company Action Level)''
::: ==> '''regulator action''': none ''(initially)''
::: ==> '''company action''': must submit '''''action plan''''' within 45 days to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 3''':
::* RBC Capital Required = 7,159
::* ACL capital = 3,580
::* RBC ratio = 12,000 / 3,580 = '''335%'''

::: ==> '''action or control level''': '''none''' ''([[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 |trend test]] not required because RBC ratio > 300%)''
::: ==> '''regulator action''': none
::: ==> '''company action''': none

'''Trick''': In the above problems, I gave you the value of TAC, but sometimes you have to calculate TAC using the formula: [Hint: ''no tabular, no medical'' 
: TAC = PHS - (non-tabular discount) - (tabular discounts on medical reserves)
* That seems easy enough, but keep in mind that tabular discounts can be for ''medical'' or ''indemnity'', and the indemnity portion is not subtracted. You had to know this to correctly solve:
:: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
* The question provided the tabular discount for ''indemnity'' and the examiner's report listed as a '''common mistake''' subtracting this ''indemnity'' discount amount. So just keep that in mind.

'''Tip''': For the practice template in the mini BattleQuiz, I sometimes like to just keep pressing the '''New''' and '''Cheat''' buttons without actually doing the calculation. I find that seeing the answer immediately helps build my intuition on how the RBC ratio corresponds to the action level ''(without having to stop and do the whole calculation every time.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Alice's 5th Day (R0 and Another Exam Problem)===

We covered lots of useful information above about RBC and how to do basic calculations, but we did it in a different order from Odomirok. Let's now take a step back and look at how Odomirok organized the RBC chapter. In the problems we've already done, you were directly given R0 thru R5 and Rcat. Now you have to learn how to ''calculate'' these charges directly from financial statement information.

:{| class="wikitable"
|-
! page !! topic !! comment
|-
| style="text-align: center;" | 236 || Overview || ''covered above''
|-
| style="text-align: center;" | 240 || RBC Formula || ''covered above''
|-
| style="text-align: center;" | 244 || style="text-align: center;" | R0 || detailed calculation: ''investments in affiliates (common stock, preferred stock, alien insurers, off B/S items)''
|-
| style="text-align: center;" | 249 || style="text-align: center;" | R1 || detailed calculation: '''''bond size''''', '''''asset concentration'''''
|-
| style="text-align: center;" | 260 || style="text-align: center;" | R2 || detailed calculation: '''''asset concentration'''''
|-
| style="text-align: center;" | 265 || style="text-align: center;" | R3 || detailed calculation: '''''reinsurance recoverable allocation'''''
|-
| style="text-align: center;" | 268 || style="text-align: center;" | R4 || detailed calculation: '''''excessive premium growth''''', '''''reinsurance recoverable allocation''''', '''''loss-sensitive discount''''', '''''loss concentration'''''
|-
| style="text-align: center;" | 283 || style="text-align: center;" | R5 || detailed calculation: '''''excessive premium growth''''', '''''loss-sensitive discount''''', '''''premium concentration'''''
|-
| style="text-align: center;" | 289 || style="text-align: center;" | Rcat || detailed calculation:
|-
| style="text-align: center;" | 293 || style="text-align: center;" | operational risk || detailed calculation:
|-
| style="text-align: center;" | 294 || RBC Model Act || '''''covered above'''''
|}

As a start, let's look at an old exam problem. I didn't like how the examiner's report explained the solution, so I solved it myself in a way that made more sense to me. You can see what I did in the link below. You could have almost figured it out from what we've already covered, plus a little bit of common sense. '''Note''': This exam problem is actually outdated because it's based on an earlier version of the RBC calculation that did not include catastrophe risk or operational risk. It's still valuable to look at however if you assume that cat risk and operational risk are both 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_v3.pdf '''''Solution to 2017.Spring #19''''']

Now, here are a couple of similar practice problems but with different numbers. Note that you have to assume Rcat and operational risk are 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_practice_01_02_v3.pdf '''''2 practice problems like 2017.Spring #19''''']

And finally, here is the link to the actual exam problem and answer. They accepted '''10 different answers''' because they didn't provide enough information in the statement of the problem. ''(You had to make certain assumptions.)'' Anyway, it might be instructive to take a quick look at some of the alternate answers. Don't spend too long on that though.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''

'''A quick primer on calculating R0''': The most recent version of Odomirok added details regarding the R0 calculation. This is discussed below.

The R0 charge considers the risks associated with investments in subsidiary insurance companies as well as miscellaneous off-balance sheet and other items. Specifically, there are separate RBC charges for:

# common stocks in the subsidiary
# preferred stocks in the subsidiary
# investments in alien insurance company affiliates
# off-balance sheet or other items

Subsidiary and affiliated insurance companies are only considered within R0 if they are U.S. domiciled entities subject to RBC, or if they are alien insurers ''(foreign to the U.S.)''.

There are 5 formulas you need to memorize. The charge for common stock depends on the accounting method the reporting entity uses to report the investment.

:{| class='wikitable'
|-
|| R0 ('''common stocks''') using equity method || = min[ affiliate RBC x ('''ownership%''' of common stock) , value of common stock as recorded by reporting entity ]
|-
|| R0 ('''common stocks''') using market method || = min[ affiliate RBC x ('''ownership%''' of common stock) , (statutory surplus of affiliate) x ('''ownership%''' of common stock) ]
|}

:: '''Note:''' The R0 formula for the market method is potentially more complicated than what's written above, but I think it has zero chance of being asked. If you'd like to see the full formula, see ''[[Expanded R0 Formula for Market Method]].''

The formulas for the other items are:

:{| class='wikitable'
|-
|| R0 ('''preferred stocks''') '''1''' || = min[ (affiliate RBC - total value of common stock) x ('''ownership%''' of preferred stock) , value of preferred stock as recorded by reporting entity ]
|-
|| R0 ('''alien insurance affiliate''') || = 0.5 x (carrying value of company's interest in affiliate)
|-
|| R0 ('''off-balance/sheet items''') || = 1.0% x (value of each off-balance sheet item)
|}

: '''1''' This charge cannot be less than 0. If the formula gives a negative value, just set it = 0 instead.

In the formula for preferred stocks, the quantity ''(affiliate RBC - total value of common stock)'' is referred to a the subsidiary's '''excess RBC'''.

In the formula for off-balance sheet items, the 1.0% risk factor is almost always the appropriate factor.
[https://www.battleacts6us.ca/vanillaforum6us/discussion/385/r0-factor-for-securities-lending-programs memory trick]!)'' This charge would be applied to the following:

* non-controlled assets
* guarantees for the benefit of affiliates
* contingent liabilities
* DTAs (Deferred Tax Assets)

There have not been any published exam questions where you had to calculate R0. If an R0 calculation does appear on the exam it will probably be fairly simple. Here are a few examples:

'''Example 1''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 40% , 100,000 x 40% ]   =   28,000

'''Example 2''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity does not use the equity method of accounting. ''(It uses the market method. For the purposes of this simple example, ignore the "B" component of the charge. See [[Expanded R0 Formula for Market Method]] for a description of B.)''
: → R0 for reporting entity   =   min[ 70,000 x 40% , 60,000 x 40% ]   =   24,000

'''Example 3''': An insurer owns 25,000 of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 25% , 100,000 x 25% ]   =   17,500

'''Example 4''': An insurer has 50% ownership of preferred stock in an insurance subsidiary that has 100,000 in preferred stock. The total RBC charge for the affiliate is 70,000 and the affiliate owns 40,000 of common stock. The accounting method is not relevant when dealing with preferred stocks.
: → R0 for reporting entity   =   min[ (70,000 - 40,000) x 50% , 100,000 x 50% ]   =   15,000   ← ''if < 0, just set = 0'' 

'''Example 5''': Annual Statement carrying value of the company’s interest in the alien insurance affiliate is 120,000. ← ''BA mug winner: VP!''
: → R0 for reporting entity   =   0.5 x 120,000   =   60,000

'''Example 6''': An insurer records a total carrying value of 200,000 for balance sheet assets over which it does not have exclusive control.
: → R0 for reporting entity   =   1.0% x 200,000   =   <s>3.14159265</s>   2,000   ← ''BA mug winner: DB!''

We will cover the detailed calculations for R1 through R5 in Alice's second week on the job.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' '''You must be logged in or this will not work.'''

<hr>

===Week 2: Day 1 (R1)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

Now we're getting down into the weeds of the RBC calculations. There is a lot of detail here. You must practice, practice, practice. This section on R1 is quite long, but the subsequent section on R2 is much shorter because it's similar to R1.

You can click to see a ''[[Odomirok.19-RBC#Summary_for_R1_.26_R2 | summary table for R1 and R2]]''. It might be an idea to take a quick look, but it won't mean much until you've covered the R1 and R2 details.

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk '''''(this is the R1 charge)'''''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk ''(this is the R3 charge)''

In particular, the '''R1 RBC charge''' covers interest rate risk and default risk for fixed income investments in the following 5 categories:

# Bonds
# Off-balance sheet collateral and Schedule DL, Part 1, Assets
# Other long term assets ''(includes mortgage loans, low income housing tax credits, working capital finance investments)''
# Miscellaneous assets ''(includes cash, cash equivalents, other short-term investments, nonadmitted collateral loans)''
# Replication (synthetic asset) transactions and mandatorily convertible securities

Note that the prior version of the RBC formula listed 10 categories including a category for holding companies that is no longer on this list. The text examples were not affected however and the actual calculation of the R1 charge did not change. ''(Since the R1 calculation for holding companies seems to have been removed, calculating R1 should actually be easier than before.)''

In any case, I don't think you have to memorize the above list. If you get an R1 or R2 problem on the exam, I would just assume that all the investments given in the problem are subject to the basic charge. That is, as long as you use only fixed income investments for R1 and equity investments for R2.

The largest contributor to the R1 charge is unaffiliated bonds. Note also that the 'Bond Size Charge' and 'Asset Concentration Charge' together account for a significant portion of R1. Those components are explained further down.

Today we're covering the '''detailed calculations for R1'''. We'll be basing the discussion on the exam problem below from '''2015.Fall'''. It gives you financial statement info on stocks and bonds then asks you to calculate R1 and R2.

: [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''

Anyway, let's get back to R1. Consider a simplified version of the exam problem:

:{| class="wikitable"
|-
! quantity !! notation !! value !! description
|-
| basic R1 charge || -- || '''406''' || ''this is the basic RBC charge for fixed income investments owned by the insurer''
|-
| bond size charge || BSC || '''609''' || ''an extra charge reflecting the level of diversification of the unaffiliated bond portfolio''
|-
| asset concentration charge || ACC || '''379''' || ''reflects increased risk of large concentrations of bonds'' ''(doubles the RBC charge for the 10 largest issuers)''
|}

Given the information in the above format, calculating R1 is trivial:

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

The answer is:

: R1 = 406 + 609 + 379 = '''1,394'''.

But in the exam problem, you are not given these quantities directly - you have to calculate them. If '''BSF''' stands for ''Bond Size Factor'' then here's what you need:

::{| class="wikitable"
|-
! quantity !! formula
|-
| basic || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| BSC || = BSF x (total R1 charges for bonds subject to BSF)
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

We'll cover how to calculate each of these 3 components in the next few subsections. We're going to use portions of the example in Odomirok to demonstrate the calculation and then come back to the exam problem at the end of this section.

====Basic R1 RBC charge====

This part of the calculation is very simple. You just multiply the amount held in each fixed investment category by the RBC factor.

'''Example''':

:{| class='wikitable'

|-
! item !! amount !! RBC factor !! RBC charge = (amount) x (RBC factor)

|-
|| cash & equivalents || style='text-align: right;' | 154,000 || style='text-align: center;' | 0.0030 || style='text-align: center;' | 462

|-
|| mortgage bonds || style='text-align: right;' | 245,000 || style='text-align: center;' | 0.0500 || style='text-align: center;' | 12,250

|-
|| U.S. government bonds || style='text-align: right;' | 6,395,684 || style='text-align: center;' | 0.0000 || style='text-align: center;' | 0

|-
|| Class 02 unaffiliated bonds || style='text-align: right;' | 4,987,460 || style='text-align: center;' | 0.0100 || style='text-align: center;' | 49,875

|}

And assuming these are all the fixed income investments the company has, the '''basic R1 RBC charge''' is just the sum of the last column: '''62,587'''

Notes on the '''RBC charge factor''':

: ==> depends on the category of investment or class of bond
: ==> investments are classified according to their credit-worthiness ''(see also [[Odomirok.6-7-BS#Bonds | bonds]])''
: ==> the exam problem considers only class 02 bonds, which are ''high'' credit quality so the RBC charge is ''relatively low''

====Bond Size Charge (BSC)====

To calculate the bond size charge '''BSC''', you first need to calculate '''BSF''' ''(Bond Size Factor)''. To do this, you need the following table from Odomirok:

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || || 2.5 ||

|-
|| next 50 || || 1.3 ||

|-
|| next 300 || || 1.0 ||

|-
|| > 400 || || 0.9 ||

|- style="border-top: solid 2px;'
|| Total || || ||

|}

'''Example''': If there were 325 issuers then you would fill in the above table as follows ''but counting only issuers of bonds subject to the BSF''.

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || 50 || 2.5 || 125

|-
|| next 50 || 50 || 1.3 || 65

|-
|| next 300 || 225 || 1.0 || 225

|-
|| > 400 || 0 || 0.9 || 0

|- style="border-top: solid 2px;'
|| Total || 325 || || 415

|}

:: Then BSF = 415 / 325 - 1 = 0.277.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz B!    :-o'''
|}

:: Calculate the BSF ''(Bond Size Factor)'' for the following total # of bond issuers: ''[[Odomirok.19-RBC#Pop_Quiz_B_Answers |Click for Answer]]'' 

::: '''(a)''' 10
::: '''(b)''' 85
::: '''(c)''' 120
::: '''(d)''' 575

Notes on '''BSF''':
: ==> only the following bond classes are subject to BSF
::* class 01 → 06 unaffiliated bonds
::: ''(exclude '''U.S.''' government bonds)'' (''shout-out to DS!)''
: ==> BSF decreases as ''bond count'' increases

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''TYPO in new edition of source text:''' The current Odomirok source text states the following:

• The bond size factor is calibrated such that the break-even point where the factor equals 1.0 is set at 1,300 bonds.
 • '''This should be: equals 0.0.'''

 '''CHANGE in new edition of source text:'''

• Portfolios containing 1,300 or more bonds will receive a discount to their RBC charge for bonds.
 • (In the prior version of Odomirok, portfolios containing 1,300 or more bonds did not receive a charge or a discount.)

See also ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/283/bond-size-factor this forum thread]''.  ''(shout-out to kulotus, BA MUG winner!)''
|}

'''Warning:''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''

In the text example, ''# of bond issuers'' = 120, which is part (c) above and so BSF = 0.750. The final part of the BSC calculation is to multiply BSF by the ''R1 bond charges that are '''subject to''' the BSF''. In the text example, this value is '''247,319'''. ''(This is highlighted in the next pop quiz and also explained further down when we look at the full R1 exhibit.)''

: '''BSC''' = 0.750 x 247,319 = '''185,490'''.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz C!    :-o'''
|}

:: '''Question''': Sometimes you aren't given a single value for the # of bond issuers. You have to calculate that yourself. Using the data below, calculate:

::: '''(a)''' basic R1 charge
::: '''(b)''' BSF
::: '''(c)''' BSC

:: '''Hint''': To calculate BSC, you don't multiply BSF by bond ''values''. Rather, you multiply BSF by the R1 ''charges'' for bonds that are subject to the BSF. ''[[Odomirok.19-RBC#Pop_Quiz_C_Answers |Click for Answer]]'' 

:::{| class='wikitable' style='text-align: center;'
|-
! fixed income investment !! amount !! RBC factor !! # bond issuers
|-
| style='text-align: left; | U.S. government bonds || 8,000 || 0.0000 || 200
|-
| style='text-align: left; | class 01 unaffiliated bonds || 1,000 || 0.0030 || 70
|-
| style='text-align: left; | class 02 unaffiliated bonds || 2,000 || 0.0100 || 50
|-
| style='text-align: left; | class 06 unaffiliated bonds || 3,000 || 0.3000 || 90
|-
| style='text-align: left; | collateral loans || 5,000 || 0.0500 || 100
|-
| style='text-align: left; | mortgage bonds || 3,500 || 0.0500 || 100
|}

====Asset Concentration Charge (ACC)====

'''Warning:''' Odomirok uses a totally different example to demonstrate the ACC calculation versus the comprehensive R1 calculation. ''(There is a link to the example exhibit further down.)'' For this section, we'll use the data from their example, but the practice problems Alice created will give you 1 set of numbers for the whole R1 calculation. ''You're welcome.'' :-)

Note from the ''[[Odomirok.19-RBC#Alice.27s_5th_Day_.28R0_and_Another_Exam_Problem.29 | RBC charge summary table]]'' that both R1 ''(fixed income investment risk) '' and R2 ''(equity investment risk)'' have an asset concentration charge. Now, I'd like to cover the R1 calculation here and save the R2 calculation for the next section, but you can't completely separate R1 and R2. Why the heck not???!!! Alice will explain below.

The first thing you have to know is which '''fixed income investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated bonds in classes 02 through 05
* collateral loans
* mortgage loans

This list has 3 items for the purposes of sorting ''(see below)'' but each bond class 02 through 05 subsequently receives its own RBC factor.

The first thing you have to know is which '''equity investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated preferred stocks and hybrid securities in classes 02 through 05
* unaffiliated common stock
* investment in real estate
* encumbrances on invested real estate
* schedule BA assets (excluding collateral loans)
* receivable for securities
* aggregate write-ins for invested assets
* derivatives

This list has 8 items for the purposes of sorting ''(see below)'' but each stock class 02 through 05 subsequently receives its own RBC factor. The example from Odomirok, whose link is provided below, uses only the investments in green font from the 2 lists above. ''(And the 2015 exam problem is an even more simplified version of the text example.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_p249_250.pdf '''''Odomirok - ACC example for R1 & R2''''']

'''''Why ACC for R1 & R2 can't be completely separated:'''''

* Note how in the table in the text they sum the fixed & equity investments for each bond issuer then rank the issuers from highest to lowest.
* For this ranking, the fixed investments '''are not separated''' from the equity investments – ''they are all mixed together.''
* This is why you cannot completely separate the ACC calculations for R1 & R2.

If I were going to write a step-by-step procedure for myself on how to calculate ACC, this is how I would do it:

: '''step 1''': gather all fixed income investments and equity investments that are '''subject''' to the ACC ''(see above lists)''
: '''step 2''': sort the list from highest to lowest
: '''step 3''': truncate this list and keep only the '''top 10''' rows of this table

Then these last 2 steps '''are''' done separately for R1 & R2.

: '''step 4''': sum the TOP 10 results in each separate category ''(classes 02 through 05 are treated '''separately''' at this step)''
: '''step 5''': multiply each sum from step 4 by the appropriate RBC factor

Note that for step 4 for the text example, Odomirok assumes all bonds are class 02 and all stocks are class 03. (shout-out to AB!) You can see this in the text table.

'''ACC Concept''': The asset concentration charge basically just doubles the RBC charge for the 10 largest issuers.

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz D!    :-o'''
|}

: For the example in Odomirok, verify that R1 = 95 and R2 = 218. ''(Note that the grand ACC total in text table is listed as 312. But 95 + 218 = 313. Hey Odomirok, do arithmetic much? ← that's an Alice joke.)''

{| class='wikitable'
|-
| '''Question''': what is an ACF or Asset Concentration Factor
|}

* Th ACF was used in the text example from above:
:: '''ACF''' = weighted average of RBC factors for assets subject to the concentration charge
* Therefore, if someone tells you the ACF, you can calculate the ACC very easily with the formula below:
:: '''ACC''' = ACF x (total value of assets subject to the concentration charge)

You should quickly double-check the R1 ACF value of 0.020 and the R2 ACF value of 0.074 from the text table. ''(shout-out to mec06e!)''
: → ''I found all this information hard to keep straight in my head. I had to do a lot of practice problems before I understood clearly how all the different pieces fit together.''

====Full R1 Examples====

So you see that calculating R1 can get messy really quickly. It isn't that the concept is hard. You just have to remember the 3 components.

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

And here is a nice presentation of the full R1 example from Odomirok:

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_251.pdf '''''Odomirok - full R1 example (table 88)'''''] ''← doesn't show details for asset concentration charge''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_mixed_text_examples.pdf '''''Odomirok - full R1 example - combines 2 text examples'''''] ''← my version shows details for the asset concentration charge example from table 86 & 87''

Finally, here is my solution to the exam problem referenced at the top of the R1 section. Note that this exam problem is very simplified because there is only 1 category of fixed income investments ''(unaffiliated bonds)'' and then there is only 1 class of unaffiliated bonds ''(class 2.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_v3.pdf '''''Solution to 2015.Fall #17''''']

And here are a couple of similar practice problems but with different numbers: ''(shout-out to AS!)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_practice_01_02_v4.pdf '''''2 practice problems like 2015.Fall #17''''']

And since Alice is evil, she has created 4 more full R1 practice problems to ruin your day: :-)

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_practice_01_04.pdf '''''4 full R1 practice problems''''']

Just to summarize, here are references to the components of the Odomirok R1 example:

* current edition tables 78-79: calculation of the '''BSF''' ''(Bond Size Factor)''
* current edition tables 80-81: calculation of '''ACC''' ''(Asset Concentration Charge)'' for R1 and R2 for a company with multiple classes of fixed income and equity assets
* current edition table 82: calculation of '''total R1''' for a company that has multiple classes of fixed income and equity assets

===Week 2: Day 2 (R2)===

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk '''''(this is the R2 charge)'''''
: '''C'''redit risk ''(this is the R3 charge)''

R2 includes the charge for risk associated with equity investments in the following categories:

# Affiliated investments
# Unaffiliated stocks ← major contributor to R2 charge
# Real estate
# Schedule BA assets ← major contributor to R2 charge
# Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
# Replication (synthetic asset) transactions and mandatory convertible securities

This list is slightly different from the previous version of Odomirok but the text examples were not affected and the mechanics of calculating the R2 charge did not change.

The asset concentration charge is also a major contributor to the R2 charge. This calculation is similar to the R1 calculation except easier because there's no BSF term ''(Bond Size Factor.)'' The only '''modification''' to the basic charge is the ACC ''(Asset Concentration Charge.)''

If you're given basic charge = 1,365 ''(basic R2 charge)'' and ACC = 1,335 then even ''Ian-the-Intern'' can calculate R2 correctly. :-)

:{| class="wikitable"
|-
| '''Formula''': R2 = basic charge + ACC
|}

The answer is:

: R2 = 1,365 + 1,335 = '''2,700'''.

Of course in the exam problem, you're not given these quantities directly - you have to calculate them. But this too is easy because it's very similar to the calculation for R1. Actually the formulas are the same – they just apply to equity assets instead of fixed income assets.

:{| class="wikitable"
|-
! quantity !! formula
|-
| basic charge || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

Now, calculating R2 can still get messy for the same reasons that R1 gets messy. But it isn't conceptually difficult. One slight complication however is an equity asset under the category of affiliated investments for ''holding companies''. Its RBC calculation is a little different. You don't multiply its value by the RBC factor. Rather you multiply the RBC factor of 0.225 by the holding company value in excess of the carrying value for indirectly owned insurance affiliates calculated in R0. There is an example calculation on the wiki page ''[[RBC for Holding Companies]]''.


:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E!    :-o'''
|}

:: Go back to the practice problems from the previous section and calculate R2. ''(the 2 practice problems like 2015.Fall #17)''

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E Answers!    :-D'''
|}

:: '''practice 01''': R2 = (basic charge) + ACC = (52,600 x 0.15) + (52,600 - 300 - 0) x 0.15 = '''15,735''' '' ← shout-out to meowyadoin!'' '''Note from Alice''': ''I'm purrin fine!!''
:: '''practice 02''': R2 = (basic charge) + ACC = (51,100 x 0.15) + (51,100 - 600 - 500) x 0.15 = '''15,165''' '' ← shout-out to meowyadoin & nraoof & TD!''

Now that we've covered R1 and R2, there's a comment I made in [[Odomirok.19-RBC#Week_2:_Day_1_.28Another_Exam_Problem.29 | Week 2: Day 1]] about allocation of the ACC (''Asset Concentration Charge)'' that should now make more sense. Recall that the exam problem we looked at had '''10 different sample answers''' in the examiner's report. One source of ambiguity was that they didn't tell how to allocate ACC between R1 and R2. You now know that the ACC is calculated separately for R1 and R2, but the exam problem only provided the total ACC. To properly solve the problem, you had to know how much went into R1 and how much went into R2. Since they didn't tell you, you had to make an assumption:

* The examiners accepted '''''any''''' allocation of ACC between R1 and R2.

The simplest thing to do is put it all either in R1 ''or'' R2, and I opted to put it all in R2.

''(shout-out to KB!)''

Here's 1 final follow-up question on the ACC.

:{| class='wikitable'
|-
| '''Question''': in general, which assets are not subject to the ACC ''(Asset Concentration <s>Factor</s> Charge)'' ''← shout-out to PU!''
|}

:* assets deemed to be of low risk ''(like class 01 unaffiliated bonds or preferred stock)''
:* assets that have already received the maximum charge of 0.3000 ''(like class 06 unaffiliated bonds)''

====Summary for R1 & R2====

* ''[https://www.battleacts6us.ca/animations/animation_01_confused_Ian.php Ian-the-Intern kept getting confused]'' when Alice asked him to calculate R1 & R2 so she made him a summary table that helped him keep things going straight ''(or gaily forward, whichever the case may be.)''

''(Note that if you print this, the background colors are not visible. I don't know why.)
 ('''''Update''': Someone astutely pointed out in the forum that if you copy the table and paste into Excel, when you print, it will show the colors. Thanks!)'''''

:{| class='wikitable'

|-
! item !! R1 !! R2

|- style='background-color: palegreen;'
|| '''formula →'''
|| '''R1''' = basic charge + BSC + ACC
|| '''R2''' = basic charge + ACC

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''basic charge'''   = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' basic charge
|| '''fixed income assets'''   [1] Bonds   [2] Off-balance sheet collateral and Schedule DL, Part 1, Assets   [3] Other long term assets   [4] Miscellaneous assets ''(cash, cash equivalents,...)''   [5] Replication transactions, mandatorily convertible securities   • ''see footnote'' '''2'''
|| '''equity assets'''   [1] Affiliated investments   [2] Unaffiliated stocks   [3] Real estate   [4] Schedule BA assets   [5] Miscellaneous assets   [6] Replication transactions, mandatory convertible securities  

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''BSC''' (Bond Size Charge)   = BSF x (total R1 charges for bonds subject to BSF)
|| not applicable

|-
| style='text-align: center;' | types of assets '''subject to''' BSF
|| '''fixed income assets''' '''1'''   - class 01-06 unaffiliated bonds   - non-U.S. government bonds
|| not applicable

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''ACC''' (Asset Concentration Charge)   = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' ACC
|| '''fixed income assets'''   - bonds (class 02-05)   - collateral loans   - mortgage loans   - working capital finance investments – NAIC 02   - low income housing tax credits
|| '''equity assets'''   - unaffiliated preferred stocks & hybrid securities (class 02-05)   - unaffiliated common stock   - real estate   - encumbrances on invested real estate   - schedule BA assets (excluding collateral loans)   - receivable for securities   - aggregate write-ins for invested assets   - derivatives

|}

: '''1''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''
: '''2''' The 2019 edition of Odomirok has a discrepancy in the RBC factor for '''Schedule BA assets'''. In Table 81 on page 258, the factor is listed as 0.05, but on page 264 the factor is listed as 0.2. ''(shout-out to pb!)

Here are 2 problems that combine the calculation of R1 & R2.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R1R2)_practice_01_02.pdf '''''2 practice problems for R1 & R2''''']

And here's a quiz that covers both the R1 and R2 calculation.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' '''You must be logged in or this will not work.'''

===Week 2: Day 3 (R3 with intro to R4)===

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk '''''(this is the R3 charge)'''''

Below is a link to a problem from way back in 2014 where you have to calculate R3. It's pretty easy ''(aside from 1 small trick)'' because they explicitly tell you which financial statement amounts relate to credit risk '''''and''''' they give you the associated RBC factors.

Without even studying this section, you could guess that '''to calculate R3''' you have to multiply ''credit-related amounts'' by the corresponding ''RBC factors''. You'd probably get half the points just doing that. But to get full points, you'd have to know the trick:

: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''

If you looked at the solution, you'll see that after multiplying the ''credit-related amounts'' by the ''RBC factors'' they made an adjustment for reinsurance. That's the trick.

:{| class="wikitable"
|-
| '''R3 Trick''': The RBC charge for reinsurance recoverable is split 50/50 between R3 and R4 '''1'''
|}

:: '''1''' Use this split only if:

::: '''unpaid loss & LAE component of R4'''   >   (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)     ''(shout-out to luohuasheng! )''

:: Note that R3 is always greater than the ''right-hand-side'' of this inequality since the ''right-hand-side'' contains only 2 of the 3 components of R3. The 3 components of R3 are ''(see [[Odomirok.19-RBC#Assets_subject_to_R3 | Assets subject to R3]])'': ''non-invested assets, reinsurance recoverables, health credit risk.''

:: Remember that R4 ''(30% of industry-wide RBC charges)'' should almost always be greater than R3 ''(2% of industry-wide RBC charges)''. Therefore, this inequality should '''virtually always''' be true. And in fact, the examiner's report never even checked – they just went ahead and did the 50/50 allocation. ''(If by some freak occurrence this inequality were false, then 100% of the charge for reinsurance recoverable would go to R3. This could happen in the case of "limited net reserves" because then R4 could be small enough relative to R3. This reserve RBC limitation exists so the company cannot diversify away a portion of its credit risk in that situation. thx PA!)''

In this problem you also have to '''calculate R4''' but it's very easy because they give you all the components. You just have to recognize them:

* basic loss reserving RBC charge: '''400,000'''
* excessive growth charge/penalty for loss reserves: '''75,000'''

Just add them up then throw in the 50% allocation for the reinsurance recoverable charge. ''(See the R3 trick above.)''

We'll cover the detailed calculations for R4 and R5 in further down. They are hard problems.

====Assets subject to R3====

I would have said what we covered above this is very likely all you need to know about R3, but Alice reminded me about '''part (b)''' of the following rather unfair problem:

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''   ←   calculation of RBC charge for reinsurance recoverables is outdated - see the practice problem further down for the current calculation

The reason it's unfair is that you had know the ''RBC factors'' for the components of R3. In one of the previous quizzes, there was a practice template on calculating total RBC. To solve it, you had to know which of the financial statement items are '''subject to''' the R3 charge, but in that problem I gave you the factors. Let's step back for a moment and list all the possible R3 items. ''(Items in green relate to this exam problem.)''

: '''1. Non-Invested Assets''':
:* Investment income due and accrued ''(factor = 0.01)''
:* Amounts Receivable related to uninsured plans ''(0.05)''
:* Federal income tax recoverable ''(0.05)''   ←   removed from calculation for the most recent version of the RBC formula
:* Guaranty funds receivable or on deposit ''(0.05)''
:* Recoverable (parent/subs/affiliates) ''(0.05)''
:* Aggregate Write-ins for other than Invested Assets ''(0.05)''
: '''2. Reinsurance recoverable''' ''(0.1)''   ← ''for more information [https://www.battleacts6us.ca/vanillaforum6us/discussion/223/r3-calculation-question#latest click to see this forum discussion]''
: '''3. Health Credit Risk''' ''(accounts for 0% of P&C insurer risk)''

Now, in '''(2016.Spring #26)''', you weren't given the actual RBC ''charges'', you were given the financial statement amounts. To get the charges you had to multiply each by the correct ''RBC factor'', which was not given. ''(The correct factors are in parentheses in the above list.)'' In other words, they expected you to memorize these factors. If you didn't memorize these factors, my advice would be to make up something reasonable like 0.05 ''(shout-out to PA!)'' and just use that across the board. Technically you'd get the wrong answer but it would let you complete the problem and if you did everything else correctly you would still get most of the points. ''(Alice thinks it was ridiculous to expect you to memorize the RBC factors. Don't get her started!)

'''R3 trick''': The solution in the examiner's report explicitly checked the inequality for the R3 trick. I wonder if they deducted points for not checking, even if you correctly did the 50/50 allocation. They didn't mention it.

Here are a couple of practice problems on R3 that I think are self-explanatory. They aren't hard. Here's what you do:

* calculate the basic charges for ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''. You do this simply by multiplying the given amounts by the RBC factors.

* the RBC charge for reinsurance recoverables comes directly from '''Schedule F, Part 3, Columns (35) & (36)''':
:: '''Column (35)''': Credit Risk on Collateralized Recoverables
:: '''Column (36)''': Credit Risk on Uncollateralized Recoverables

* check the allocation of the RBC charge for reinsurance provision using the TRICK mentioned above
* then just sum the final charges for the 3 categories: ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''

Here are a few R3 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R3)_practice_01_02_v03.pdf '''''2 practice problems for R3''''']

There is a practice template for R3 in the quiz at the end of the next section.

===Week 2: Day 4 (R4)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk '''''(this is the R4 charge)'''''
* NWP risk ''(this is the R5 charge)''

Recall that R4 is a significant contributor of risk to a company. The calculations for R4 are quite involved but do not often appear on the exam. Nonetheless, Alice has created some practice problems for you and there is a practice template in the quiz at the end of the next section.

There are 4 components to the R4 charge, the first 3 of which you should probably know how to calculate. The last one, ''health stabilization'', is not discussed in any detail in Odomirok.

: '''   8%''' of the R4 charge: '''reinsurance recoverables''' ''(reinsurance RBC that was part of the R3 calculation)''
: '''91%''' of the R4 charge: '''unpaid loss & LAE reserve'''
: '''   1%''' of the R4 '''excessive premium growth RBC'''
: '''   0%''' of the R4 charge: health stabilization RBC

Most of the section on R4 in Odomirok is about calculating the RBC for ''unpaid loss & LAE reserve''. The component for ''excessive premium growth RBC'' is almost exactly the same as for R5 and is discussed in the next section.

'''Before charging ahead, let's take a step back''':

* Remember how you did the RBC calculations for R1, R2, and R3? In each case, you had to know which financial statement amounts were '''subject to''' each charge. You use fixed income assets for R1, equity assets for R2, and credit-related items for R3.
* Then you calculated the '''basic charge''' by multiplying those amounts by the appropriate '''RBC factor'''. This RBC factor might be high or low depending on whether the asset is high-risk or low-risk.
* Then you made various adjustments to these basic charges to get the final RBC charge. For example, the ''bond size charge'' and ''asset concentration charge'' for R1.

It's the same idea for the R4 reserve component but at first it didn't look like it, at least it didn't for me. The reason was that Alice's practice problems don't provide any RBC factors.

* For the R4 reserve component, you have to calculate the RBC factor yourself. ''(The RBC factor is the quantity [[(C+1) x A] -1]. This is explained below and in the practice problem.)''
* And there is only 1 financial statement amount that's subject to this charge, net loss & LAE reserves. ''(Note however that the basic R4 charge for reserves is calculated separately for each line of business.)''

:{| class='wikitable'
|-
| '''Company RBC%''': This is the C-value in the formula [[(C+1) x A] -1].
|}

:: → The ''Company RBC%'' is derived from the corresponding ''Industry RBC%'' by applying a company-specific adjustment.
:: → The adjustment factor = (company L+LAE LDF)/(industry L+LAE LDF).
:: → The LDFs are calculated as the (current reserve for 9 prior AYs)/(initial reserves for those AYs).   ← ''capped at 400%''
:: → ''A'' is an adjustment for investment income and ''A<1''.

And there are then 2 further adjustments that are made to the basic R4 reserve charge:

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* LCF or ''Loss Concentration Factor'', which is a multiplicative adjustment

Once you've got all that, you can add in the reinsurance recoverable RBC and the excessive growth charge. We'll just assume the health stabilization charge is 0 since it is rarely a material amount for P&C insurers. ''(Recall that the reinsurance recoverable RBC is usually, but not always, split evenly between R3 & R4. See the section on R3 to review the details.)''

Here's an example of the R4 calculation from Odomirok. It's interesting because it also provides the annual statement locations for the various amounts that are needed for the calculation. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_271_(R4_example)_v03.pdf '''''Odomirok - R4 example''''']

{| class='wikitable' style='background-color: aqua;'
|-
| '''Now you're ready to tackle a full R4 problem!'''
|}

The problem is based on a similar problem for R5 that has appeared several times on past exams. Don't freak out when you see it. If you practice it several times, it will make more sense. It just has a lot of moving parts and you have to memorize the formulas that put all the different parts together to get the final answer. There is also a practice template in the quiz at the end of the next section on R5

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R4)_practice_01_04.pdf '''''4 practice problems for R4''''']

→ tubaguy has a good ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/95/memorization-tip-r4-vs-r5-formula-for-base-rbc memory trick]'' for the R4 and R5 formulas. thx tubaguy!

''And now for the nightmare scenario of an infinite number of practice problems... and you cannot stop until you get them all right''...    :-O

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

===Week 2: Day 5 (R5)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk ''(this is the R4 charge)''
* NWP risk '''''(this is the R5 charge)'''''

The calculations for R5 are complicated and unfortunately there have been exam problems that test the gory details. You can see this in the BattleTable at the top of this wiki article. The problems from '''2014''' and '''2012''' are fairly similar except for the reference to the ''claims-made'' discount in the 2012 problem. The syllabus has changed since 2012 and that problem is no longer relevant. Alice's advice is to ignore the problem from '''2012'''. The 2014 problem covers the major details of the R5 calculation so if you know how to do it, you should be prepared for any kind of R5 question you might get on the exam.

There are 4 components to the R5 charge, but you only need to worry about the calculations for the first two.
: '''99%''' of the R5 charge: '''written premium RBC'''
: '''   1%''' of the R5 charge: '''excessive premium growth RBC'''
: '''   1%''' of the R5 charge: health premium RBC
: '''   0%''' of the R5 charge: health stabilization RBC

Odomirok says this adds up to 100%, but the given percentages obviously add up to 101%. I know it's just rounding, but it confused poor ''Ian-the-Intern''. They could have fixed it by keeping an extra decimal. Anyway, it's not terribly important. Maybe I'm just procrastinating because R5 is such a pain to learn.

Several comments from the R4 section above also apply to R5. You are not given the RBC factor for the NWP component – you have to calculate it. ''(The RBC factor for the R5 NWP component is (CxA)+U-1, and is explained in the practice problem.)'' And there is only 1 financial statement amount that's subject to the R5 charge, net written premium. ''(Note however that the basic R5 charge is calculated separately for each line of business.)''

There are then 2 further adjustments that are made to the basic R5 charge: ''(note the similarity to R4)''

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* PCF or ''Premium Concentration Factor'', which is a multiplicative adjustment

Here's an example of the R5 calculation from Odomirok similar to the R4 example from the previous section. It provides the annual statement locations for the various amounts that are needed for the R5 calculation. It's probably good to scan it. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_279_(R5_example)_v03.pdf '''''Odomirok - R5 example''''']

{| class='wikitable' style='background-color: palegreen;'
|-
| '''Now you're ready to tackle a full R5 problem!'''
|}

Take a quick look at the official statement of the '''2014''' problem before you look at my solution: ''(note there were 2 errors in the statement of the problem - see examiner's report)''

: [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''

''Note that the examiner's report answer to part (c) is now outdated. Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2019 update of Odomirok. Both these risk are now considered in the RBC formula. (shout-out to luo!)''

Anyway, here's my solution to the calculation of R5 for that problem. ''(Once you have R5, calculating the total RBC is easy because they directly give you R0 thru R4.)'' I've included a lot more explanatory details than were in the examiner's report:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18).pdf '''''Solution to 2014.Fall #18''''']

And finally, here are 4 PDFs with practice problems similar to the 2014 exam problem but with different numbers: ''(It should be self-explanatory)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18)_practice_01-04_(v02).pdf '''''4 practice problems like 2014.Fall #18''''']

'''Note 1:''' These 4 problems were generated with random numbers and problem #2 had a negative base RBC charge for WC. This negative charge for WC should probably be set to 0 before combining it with the charges for the other lines.

'''Note 2:''' In the above problems, you were given the $-value for the excessive growth charge, but it's possible you may have to calculate it from the raw data. Recall from the previous section on calculating R4 I said the excessive growth charge for R4 is almost exactly the same as for R5. Well, you can see that clearly in the 2 formulas below:

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R4''') = '''(excess growth)''' x 0.450 x (net loss & LAE reserves)
|}

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R5''') = '''(excess growth)''' x 0.225 x NWP
|}

:: ==> '''(excess growth)''' = '''(average growth over last 3 years)''' – 10%
:: ==> '''(average growth over last 3 years)''' is capped at 40% for each year

The hard part of the calculation ''(and it really isn't that hard)'' is the value for '''(excess growth)'''. Once you have that, the corresponding charge is easy using the above formulas. Here's a pop quiz that shows you how to do it.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F!    :-o'''
|}

:: Given:
:::''(Should use total GWP from the FIVE-YEAR HISTORICAL EXHIBIT discussed in [[Odomirok.12-5yr]] but if only NWP is given, as in [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)''', then use NWP but note the assumption of no reinsurance.)''

:::{| class="wikitable"
|-
! year !! GWP
|-
|| 2016 || 100,000
|-
|| 2017 || 120,000
|-
|| 2018 || 174,000
|-
|| 2019 || 191,400
|}

:: Calculate the NWP excess growth charge.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F Answer!    :-D'''
|}

:: '''(average growth over last 3 years)'''
::: = average (120000/100000 - 1 , 174000/120000 - 1, 191400/174000 - 1)
::: = average (20%, 45%, 10%)      ''(but the growth must be capped at 40%)''
::: ~ average (20%, 40%, 10%)
::: = 23.3%

:: excess growth charge
::: = '''(excess growth)''' x 0.225 x NWP
::: = (23.3% – 10%) x 0.225 x 191,400
::: = '''5,742'''

Note that if the average growth over the last 3 years is less than 10% then the excess growth charge should be set equal to 0. ''(The excess growth charge cannot be negative.)''

There is a web-based practice template for R5 in the next quiz, but here's a good practice problem from an old exam. There are 3 twists in this problem which are explained below.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''

'''Twists'''
# There are 2 lines of business. That means you have to apply equations 4 and 5 separately to each line then calculate the combined total RBC charge using equation 6.
# You have to calculate the excessive growth charge yourself, but it's easy. Just follow the example above
# You have to calculate the company L+LAE 10-year average yourself, which is easy because they give you the 10-year history from Schedule P, '''BUT''' you also have '''cap the L+LAE for each year at 300%'''. As explained in Odomirok: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    ''← shout-out to AU!''

Quiz:

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' '''You must be logged in or this will not work.'''

===Week 3: Day 1 (Catastrophe Risk)===

Calculating the RBC catastrophe risk charge Rcat is the same calculation for earthquake and hurricane. Here's what you need:

* estimated net & ceded losses for 1-in-50 year, 1-in-100 year, 1-in-250 year, 1-in-500 year catastrophe events ''(for filing purposes - see table below)''
: → but only the 1-in-100 year event is used in the Rcat calculation
* net catastrophe risk factor = 1.00 ''(apply to net 1-in-100 year event)''
* contingent credit risk = 0.048 ''(apply to ceded 1-in-100 year event to account for credit risk related to reinsurance recoverables)''

The loss estimates are obtained from catastrophe models but the mechanics of this are beyond the scope of the syllabus. Anyway, once you've got the RBC charge separately for both earthquake and hurricane, the final Rcat charge is:

: [[File: Odomirok.Ch19_(page_290)_cat_formula.png]]

The text has an example for both earthquake and hurricane but the method is exactly the same. If I were solving this problem on an exam, here is how I would do it. You can compare this with the more detailed example from the text further down.

{| class='wikitable'
|-
|| Alice's abbreviated statement of the problem...
|}

: [[File: Odomirok.Ch19_(080)_cat_example_problem.png]]

{| class='wikitable'
|-
|| Alice's abbreviated solution...
|}

: [[File: Odomirok.Ch19_(081)_cat_example_solution.png]]

{| class='wikitable'
|-
|| And here's the more detailed text version of just the hurricane portion...
|}

: [[File: Odomirok.Ch19_(082)_cat_example_text_solution.png]]

The text discusses other details that I would only skim if I were studying for this exam. You can consult the source text for a little more information on these topics but I doubt you need to know more than what I've listed below:

* reporting of projected catastrophe losses: ''can be done on an Aggregate Exceedance Probability (AEP) basis, or Occurrence Exceedance Probability (OEP) basis''
* exemptions from filing catastrophe charges: ''granted when certain conditions are met that indicate a low net catastrophe exposure such as when coverage is less than 10% of policyholder surplus''
* credit risk charge: ''losses ceded to U.S. affiliates and mandatory pools (whether authorized, unauthorized or certified) are not subject to the 0.048 credit risk charge''

Here are a couple of practice problem that shouldn't take you more than just a few minutes:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(Rcat)_practice_01_02.pdf '''''2 RBC catastrophe charge practice problems''''']

===Week 3: Day 2 (Operational Risk)===

This was discussed earlier in the section ''[[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | Trend Test and Risk Categories]]'', but here's a quick review:

'''Operational risk''' is easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

* inadequacy or failure of internal systems
* personnel
* procedures or controls
* external events
* legal risk

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

===Alice's Summer Performance Review (Old Exam Problems)===

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==Pop Quiz B Answers==

: '''(a)''' BSF = 1.500 for 10 issuers
: '''(b)''' BSF = 1.006 for 85 issuers   ← for a hint, ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/852/r1-pop-quiz-b see here]''   ''(shout-out to amberxmc!)''
: '''(c)''' BSF = 0.750 for 120 issuers
: '''(d)''' BSF = 0.126 for 575 issuers

: <html><a href="javascript:history.go(-1)">Go back</a></html>

==Pop Quiz C Answers==

: '''(a)'''
:* basic R1 charge = (8,000 x 0) + (1,000 x 0.003) + (2,000 x 0.01) + (3,000 x 0.3) + (5,000 x 0.05) + (3,500 x 0.05) = '''1,348'''
:: ''(use all items in table)''

: '''(b)''':
:* relevant # of bond issuers = (# class 01 issuers) + (# class 02 issuers) + (# class 06 issuers) = 70 + 50 + 90 = 210
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSF = 300 / 210 - 1 = '''0.429'''

: '''(c)'''
:* (assets subject to BSF) = (1,000 x 0.0030) + (2,000 x 0.0100) + (3,000 x 0.3000) = 923
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSC = 923 x 0.429 = '''396.0'''

: <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.19-RBC

2026-01-27T22:29:43Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 19''' - '''Risk-Based Capital'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-19-rbc ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/060_RBC_General_(v01).mp4 '''(6:15) → RBC - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Risk-Based Capital (RBC)'''

* This chapter discusses the Risk-Based Capital (RBC) system, which was developed by the National Association of Insurance Commissioners (NAIC) in 1994 to help '''detect insurance company insolvencies early'''.

* The RBC system includes a '''formula''' to determine the minimum required capital (authorized control level) for insurance companies, reflecting the risks they face, and a model act that empowers state regulators to take action when a company's RBC ratio falls below certain thresholds.

* The chapter explains the RBC formula's application to property/casualty insurance companies, detailing the different risk categories such as '''asset risk''', '''underwriting risk''', and '''catastrophe risk'''.

* It also describes the '''covariance adjustment''' used in the RBC calculation to account for diversification among risk categories, and the basic operational risk charge introduced in 2018.

* The RBC report is filed annually with the NAIC and includes both the formula calculations and management's analysis of the results, though detailed calculations are confidential.

|}

==Pop Quiz==

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (1st Battle Card in mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: peachpuff; width: 1050px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, please let her know in the ''[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176 RBC Discussion Forum]'' and we'll send you a BattleActs coffee mug.
|}

: [[File: mug.png | 200px]]

{| class='wikitable' style='background-color: lightgreen;'
|-
|| '''Updates for 2021.Spring are COMPLETE:'''   There were significant changes. (There were no changes for 2021.Fall.)
|}

For candidates who attempted Exam 6 prior to 2021.Spring, there are some new things you have to learn regarding the RBC calculation: ''(Details are contained in the wiki article.)''

* '''new risk category''': catastrophe risk
* '''new risk category''': operational risk
* '''new RBC formula''': includes catastrophe risk and operational risk
* '''new R0 calculation''': this isn't too hard
* '''new R3 calculation''': the portion of the R3 RBC charge for reinsurance recoverables is different

There are also '''minor changes''' to the '''R1''' and '''R2''' material but the text examples and old exam problems on those topics were not affected. There were '''no changes''' to the '''R4''' and '''R5''' calculations.

For all candidates, some exam problems published prior to 2021.Spring are outdated. These include problems regarding:

* total RBC charge or RBC ratio
* RBC charges for R3

The new RBC formula affects many old exam problems but they are still solvable if you assume that both the catastrophe charge Rcat and the operational risk charge equal 0. The previous edition of Odomirok did not cover the details of the R0 calculation so there are no old exam problems for that. Any problems on R3 that involve reinsurance recoverables will not be completely solvable anymore but there are only 2 of those: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)''' and [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''.

And remember → you can generate an infinite number of web-based practice problems for a broad range of RBC problem types so you don't need to rely solely on old exam problems for practice.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Here are the "regular" study tips:'''
|}

The RBC chapter is like Schedule P in that the questions are mostly calculation, but RBC has more different '''types''' of calculations. This wiki article includes lots of problems for you to practice on and it's going to take a lot of time to go through them all. In addition to the problems provided in pdf format within the wiki, and in Excel format ''[[Excel_Practice_Problems | available here]]'', you should do the randomly generated web-based problems from the quizzes until you consistently get the right answer. Since this is a Top 6 reading, you should also do as many of the old exam problems as you can, keeping in mind the above comments regarding changes to the RBC formula.

The source text ''(Chapter 19 of Odomirok)'', which is 60+ pages, includes all kinds of insanely detailed information that you almost certainly don't need to know for the exam. Just learning how to do all the web-based problems will take you long enough. Alice-the-Actuary has kindly curated the source text so the wiki covers everything that's likely to appear on the exam. That includes the overall calculation of the RBC ratio, the various regulator action levels, and details on calculating the individual risk charges R1, R2, R3, R4, R5. Examples and practice for the R0 and Rcat calculation are provided in the wiki and are easy compared to the others. Yay!

'''Estimated Study Time''': 1 week ''(not including subsequent review time)''
[[#BondSizeFactorNote]]
{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''. For a little more on this click on ''[[Using the Source Material]]''.
|}

==BattleTable==

Based on past exams and Alice's expert judgment, the '''main things''' you need to know ''(in rough order of importance)'' are:

* calculating RBC charges R0,1,2,3,4,5,cat, operational risk & RBC-ratio
* identifying action level based on RBC ratio & subsequent regulator/company actions
* strategies for reducing RBC charges
* comparison to IRIS ratios

The RBC questions from 2012 appear to be at least partially outdated and are highlighted in tan. Portions of questions from 2013-2019 may also be partially outdated as explained in the ''[[Odomirok.19-RBC#Study_Tips | Study Tips]]' section.

{| class='wikitable'
|-
| Questions held out from Fall 2019 exam: '''#5, 18, 19'''. ''(Skip these now to have a fresh exam to practice on later. For links to these questions, see [[Exam Summaries]].)''
|}

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 175px;" | part (a) !! style="width: 175px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(13)_v2.pdf E] '''(2019.Spring #13)'''
|| '''identify''': - RBC action level + actions
|| '''materiality standard''': - propose a standard
|| '''calculate''': - R4
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''
|| '''calculate''': - R5 '''7''','''8'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(18).pdf E] '''(2018.Fall #18)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level + actions
|| [[NAIC.IRIS]]
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)'''
|| '''calculate''': - change in RBC charge '''7'''
|| '''rapid premium growth''': - impact on RBC
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''
|| '''calculate''': - RBC ratio '''a'''
|| '''identify''': - RBC action level + actions
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''
|| '''financial health''': - use of RBC ratios'''9'''
|| '''R0 RBC charge''': - difference vs R1,2,3,4,5
|| '''RBC vs IRIS''': - similarity & difference
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''
|| '''calculate''': - total RBC'''1'''
|| '''calculate''': - RBC RAL'''2'''
|| '''RAL actions''': - insurer & regulator
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(16).pdf E] '''(2016.Fall #16)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''RBC purpose''': - for regulator
|| '''RBC formula''': advantages/disads'''9'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(17).pdf E] '''(2016.Fall #17)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level
|| '''identify''': - RBC actions
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''
|| see [[Freihaut.Reins]]
|| '''calculate''': - R3, R4 '''5'''
|| see [[Freihaut.Reins]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''
|| '''calculate''': - R1
|| '''calculate''': - R2
|| '''reducing R1''': - identify 2 ways
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(19).pdf E] '''(2015.Fall #19)'''
|| '''calculate''': - ACL & regulator action
|| [[Odomirok.25-Solv2]]
|| [[Odomirok.25-Solv2]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(19).pdf E] '''(2015.Spring #19)'''
|| '''components of RBC''': - describe
|| '''identifying insolvency''': - aspects of RBC
|| '''interpret RBC ratio''': - ratio = 310%
|| '''internal capital model''': - concerns ''(vs RBC)''

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(25).pdf E] '''(2015.Spring #25)'''
|| see [[Freihaut.Reins]]
|| see [[Freihaut.Reins]]
|| '''calculate''': - RBC ratio (R3, R4, R5) '''6'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''
|| '''calculate''': - R5, total RBC '''3'''
|| '''improving RBC ratio''': - reserving practices
| style="background-color: tan;" | '''limitations of RBC''': '''3a''' - for identifying impairment
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
|| '''calculate''': - R3
|| '''calculate''': - RBC
|| '''action level''': - identify action '''4'''
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(21).pdf E] '''(2013.Fall #21)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''calculate''': - RBC ratio
|| '''action level''': - identify
|| '''action''': - describe

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(14).pdf E] '''(2012.Fall #14)'''
|| see [[Odomirok.8-9-IS]]
|| '''reduce RBC asset risk''': - investment changes
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(20).pdf E] '''(2012.Fall #20)'''
|| '''calculate''': - R5
|| see [[NAIC.IRIS]]
|| '''RBC vs IRIS''': - treatment of premium
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(24).pdf E] '''(2012.Fall #24)'''
|| '''solvency-based frameworks''': - create a new one! '''W'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' The examiner's report accepted 10 different answers for this calculation problem, and the first 3 answers are almost certainly wrong. It states "Other non-insurance subsidiaries" could go into R0, R1, or R2, but it can't go into R0; it can only go into R1 or R2. The first 3 sample answers put "Other non-insurance subsidiaries" into R0. The other 7 sample answers show valid combinations based on the given information. ''(This was a poorly exam constructed question.)''
: '''2''' RAL stands for ''Regulatory Action Level''
: '''3''' The statement of this problem contains 2 errors. See examiner's comments in examiner's report.
: '''3a''' Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2014 update of Odomirok. Both these risk are now considered in the RBC formula. 
: '''4''' This problem has a '''trick''' related to tabular discounts for indemnity, which should not be subtracted from surplus to get total adjusted capital. See ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | here]]'' for details.
: '''5''' This was a very nasty problem because they didn't give you the RBC factors. You had to memorize them which is very unreasonable. '''Also''' the 2021 update to the source text changed the test for when to split the reinsurance recoverable RBC charge between R3 and R4. That part of the examiners' report solution is outdated. ''(More on this in [[Odomirok.19-RBC#Week_2:_Day_3_.28R3_with_intro_to_R4.29 | how to calculate R3 & R4]].)''
: '''6''' This is a defective question. See ''[https://battleacts.discourse.group/t/spring-2015-25-c/2506 this forum discussion]'' for more information.
: '''W''' Alice thinks this is a totes weird question. ''(You can look at it, but she thinks it isn't likely to appear again.)''
: '''7''' There is an error in the examiner's report solution to '''2018.Spring #18a'''. The solution uses NWP to calculate the excess growth factor. This calculation should use GWP from the Five Year Historical Exhibit. The solution for '''2019.Spring #15''' does indeed use GWP which is correct.    
: '''8''' This problem requires you to calculate the company average loss and LAE ratio as a 10-year average, but the given ratios are '''capped at 300%''' for each year. Odomirok states: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    
: '''9''' Part of the answer to these problems is outdated in the examiner's report because the new version of the RBC formula ''(for the syllabus starting 2021.Spring)'' now includes operational and catastrophe risk.
: '''a''' Note that this problem uses an outdated version of the RBC formula. For an updated solution, see ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | Alice's 4th Day]]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==In Plain English!==

===Alice's 1st Day (Intro to RBC)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

This wiki article is the "true story" of Alice's early days in her career when she was a summer intern. Alice's "days" don't necessarily correspond to your own study days. Her days are short and you can probably cover more than one of her days in one of your days.

On Alice's first day of work as an actuarial intern, her mean boss dumped a stack of financial statements on her desk and told her to find out whether the company was healthy. But before she could ask him anything, he was already down the hall issuing orders to someone else. ''"What have I gotten myself into?"'' she thought. Poor Alice had no idea what to do. Fortunately the intern in the next cubicle overheard and peeked over the cubicle wall.

: "''Just calculate the RBC ratio,''" her new friend said. "''It's all in Odomirok. The boss likes to haze interns on their first day, but I can help you. We'll '''tackle''' it together.''"

So Alice and Lakshmi spent the day pulling the relevant information from the financial statements and here is what Alice learned:

:{| class="wikitable"
|-
| '''Formula''': RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
|}

:: '''TAC''' = Total Adjusted Capital = 31,024,000
:: '''ACL''' = Authorized Control Level capital = 5,714,839

: ==> RBC ratio = 31,024,000 / 5,714,839 = '''543%'''

Ok, so far so good, but what in the world does 543% mean? Is that good or bad? ''(The following table appears near the end of chapter 19 of Odomirok)''.

: {| class='wikitable' style='background-color: yellow;'
|-
|| This table overlaps with ''[[Porter.12-Insolvency#Levels_of_Regulatory_Action | Levels of Regulatory Action]]'' from ''[[Porter.12-Insolvency | Chapter 12 of the Porter reading]]'' but is not completely consistent. See ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/386/relationship-to-the-action-levels this forum discussion]'' for more details.
|}

:{| class="wikitable" style="width: 1000px;"

|-
! style="width: 190px" | action levels ['''CRAM'''] !! style="width: 80px" | RANGE !! style="width: 300px" | insurance dept action !! style="width: 200px" | company action !! Alice's action''

|-
|| '''CAL'''   → Company Action Level
| style="text-align: center; background-color: lightgreen;" | '''150-200%'''
|| none (initially)
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''lose a vacation day'''

|-
|| '''RAL'''   → Regulatory Action Level
| style="text-align: center; background-color: lightblue;" | '''100-150%'''
|| commissioner has the right to issue an order specifying corrective action (not mandatory) '''1'''
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''no bonuses'''

|-
|| '''ACL'''   → Authorized Control Level
| style="text-align: center; background-color: sienna; color: white;" | '''70-100%'''
|| commissioner authorized take control of company (not mandatory)
|| none (initially)
|| '''no raises, no bonuses'''

|-
|| '''MCL'''   → Mandatory Control Level
| style="text-align: center; background-color: red; color: white;" | '''≤ 70%'''
|| commissioner '''must''' rehabilitate or liquidate (mandatory) '''2'''
|| none (initially)
|| '''fire the CEO''' 😢

|}

: '''1''' Commissioner action could include restricting new business.
: '''2''' Insurance commissioner of domiciliary state must take action

If a company's RBC ratio falls below 200%, it's better for the company to take action than for the regulator to step in. A regulator's actions would likely be much more drastic.

:{| class='wikitable'
|-
|| '''Question''': what could be included in a company's action plan for meeting RBC standards
|}

:* explain how to raise needed capital
:* explain how to reduce operations to save money
:* explain how to reduce risks to lower RBC charges

The RBC ratio of '''543%''' for Alice's company is well above the CAL threshold, so it looks like the company is doing really well. ''(Note that the [[Bright Line Indicator Test]] from the SAO material should now make more sense.)'' Anyway, what a great first day of work for Alice. Time to relax.

The RBC test is comprehensive but it doesn't account for every type of insurance company risk. The text states that it doesn't cover risks associated with business plans & strategy, management, internal controls, systems, reserve adequacy, or ability to access capital. ''(It struck me that internal controls should be covered by operational risk, so I'm not sure why the text says risks due to internal controls are not included in the RBC framework.)''

===Alice's 2nd Day (Trend Test & Risk Categories)===

Over morning coffee, Lakshmi pointed out an omission from the above "action table" that Alice learned about yesterday. If the RBC ratio is '''above 200%''' but '''below 300%''', the company is still not in the clear. They would still have to perform the '''trend test'''. Let COR denote Combined Operating Ratio:

:{| class="wikitable"
|-
| '''Trend Test''': If a company's RBC ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the '''CAL action''' from the action table.
|}

: '''Reminder''': The COR ''(Combined Operating Ratio)'' is the sum of:
:* '''L'''oss & LAE ratio   =   (CY net incurred loss & LAE) / NEP
:* '''E'''xpense ratio   =   [ (other U/W expenses) + (aggregate write-ins for underwriting deductions) ] / NWP
:* '''D'''ividend ratio   =   (policyholder dividends) / NEP
: Recall that COR '''does not include''' investment income. And next time you see your CEO in the break room, you can tell him or her to get the '''LED''' out.

Anyway, Alice's new company is well above the 300% threshold so she was ready to report back to her boss that the company is in great shape, but Lakshmi stopped her.
: "''Not so fast,''" Lakshmi said. "''The RBC ratio is only 1 metric. For example, what about the IRIS ratios? It's like if you had 98% in calculus on your report card but were failing physics, English, and history. It isn't ''likely'', but when you report back to the boss, you should qualify your conclusion on the health of the company if the only thing you calculated was the RBC ratio.''"

You can review [[NAIC.IRIS]] for the IRIS ratios, but getting back to the RBC ratio, Alice needs to make sure she understands exactly how the '''543%''' value was calculated. It's a long calculation that involves several different risk components. The '''charge''' for each component represents the amount of capital required to support that particular risk. ''(Each component has its own calculation but we'll come back to that later.)''

{| class='wikitable'
|-
|| '''2019 Edition:''' The description of R0 is different. New risk categories Rcat and Operational Risk were added.

* Click to ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/231/rbc-mnemonics go to the forum]'' for '''PK's''' memory trick!
* Great news! Another memory trick has been submitted by '''easylifew'''. Use the same link as above to see it!
* More breaking news!!! Yet another memory trick, this time from '''Comadiroma''', who understands that sillier is better-er! Same link as above!
* News alert! Another memory trick, this time from '''mcanlas94'''. Same link as above! ''(But you might have to scroll down.)''
* And on Feb 28, 2024, '''amberxmc''' got in on the action!
|}

:{| class="wikitable"

|-
! risk category !! risk component [partial hint: '''S-FEC''']!! notation !! risk charge for this company

|- style="border-bottom: 2px solid;"
|| ---- || '''S'''ubsidiary Insurance Companies and Miscellaneous Other Amounts || style="text-align: center;" | R0 || style="text-align: right;" | 0

|-
|| asset risk || '''F'''ixed income risk || style="text-align: center;" | R1 || style="text-align: right;" | 553,398

|-
|| asset risk || '''E'''quity risk || style="text-align: center;" | R2 || style="text-align: right;" | 4,303,948

|- style="border-bottom: 2px solid;"
|| asset risk || '''C'''redit risk || style="text-align: center;" | R3 || style="text-align: right;" | 310,060

|-
|| U/W risk || reserve risk || style="text-align: center;" | R4 || style="text-align: right;" | 9,561,305

|- style="border-bottom: 2px solid;"
|| U/W risk || NWP risk || style="text-align: center;" | R5 || style="text-align: right;" | 3,574,411

|- style="border-bottom: 2px solid;"
|| catastrophe || catastrophe risk || style="text-align: center;" | Rcat || style="text-align: right;" | 130,654

|-
|| operational || operational risk || style="text-align: center;" | * || style="text-align: right;" | 332,903

|}

: * Operational Risk is added as a final step in the calculation after applying the covariance adjustment between other risk types, and does not have a corresponding "R" indicator

You might think you'd sum these charges to find the total required capital, but that isn't how it works. Rather than a simple sum, these risk charges are aggregated using this formula:

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & before operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')'''
|}

This works out to 11,096,774.

The '''operational risk''' is then easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including: [Hint: '''L-PIPE''', as in Lead PIPE. It was Alice with the lead pipe in the break room. Don't ever eat the last donut if Alice is around. 😀 

* '''L'''egal risk
* '''  –'''
* '''P'''ersonnel risk ''(in case you hired a dumb-ass intern)''
* '''I'''nadequacy or failure of internal systems
* '''P'''rocedural risk ''(and/or risk of failure of internal controls)''
* '''E'''xternal risk ''(due to external events)''

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

These offset amounts would have to be provided. Anyway, the final total RBC according to the formula below is 11,429,677 without considering offsets to the basic 3% operational risk charge.

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & after operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' + '''('''operational risk''')'''
|}

The part of the formula with the square root is called the '''covariance adjustment'''. ''(Alice's Canadian cousin told her that in Canada this is called the diversification credit. Risk is reduced by spreading or diversifying the risk over multiple independent categories.)

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Is the covariance adjustment less than, greater than, or equal to the simple sum R1 + R2 + R3 + R4 + R5 + Rcat.

:: '''Answer:''' The covariance adjustment is less than the simple sum. ''(Try testing this with some simple numbers. It's a version the triangle inequality you may be familiar with from calculus.)''

:{| class="wikitable"
|-
| '''Question 1''': what is the reason for the covariance adjustment
|}

:: The reason is that risks R1 through R5 and Rcat are assumed to be '''independent'''. It's unlikely that all these risks would reach their maximum value at the same time. The covariance adjustment reduces the required capital to reflect this assumption of independence. For example, the level of equity risk ''(performance of stocks)'' is likely not related to reserve risk. A company would be unlikely to experience both very bad investment returns and very bad underwriting results at the exact same time.

:{| class="wikitable"
|-
| '''Question 2''': why is R0 excluded from the covariance adjustment
|}

:: Well, R0 is '''not independent''' of the other risks. In other words, R0 is '''correlated''' with the other risks. It represents the charge for an subsidiary company and investment in an subsidiary does not provide a diversification benefit.

Let's end Day 2 by applying the RBC Capital Required formula after operational risk:

* RBC Capital Required = 11,429,677 ''(Note that table 97 in the source text seems to have the wrong total.)''

Anyway, we can now calculate the denominator for the RBC ratio:

:{| class="wikitable"
|-
| '''RBC denominator''': ACL capital = '''50%''' x (RBC Capital Required)
|}

So ACL Capital = '''5,714,839''' ''(See [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Alice's 1st Day]].)'' You might also want to take a quick look at '''part (b)''' of:
: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''

Do the mini BattleQuiz then take a break.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===Alice's 3rd Day (Ranking of Risk Charges)===

Alice arrived early today so I prepared a special pop quiz she could do while eating her morning bear claw. It's easy but you'll need the aggregate industry RBC risk charges for each category:

: [[File: Odomirok.Ch19_(table_076)_aggregate_RBC.png]]

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Based on industry totals, rank the risk charges R1 through R5 according to their relative magnitude. ''(You can find this information on page 244 of Odomirok)''

:: '''Answer:''' [https://www.battleacts6us.ca/vanillaforum6us/discussion/116/risk-magnitude-ranking-tip#latest memory trick]!''

::: {| class="wikitable"
|-
! !! risk !! relative magnitude
|-
|| '''R2''' || ''' asset risk''' - equity || style="text-align: center; background-color: lightgreen;" | 31%
|-
|| '''R4''' || ''' U/W risk''' - reserves || style="text-align: center; background-color: lightgreen;" | 30%
|-
|| '''R5''' || ''' U/W risk''' - NWP || style="text-align: center; background-color: lightgreen;" | 20%
|- style="border-bottom: 2px solid;"
|| '''Rcat''' || catastrophe || style="text-align: center; background-color: lightgreen;" | 14%
|-
|| '''R3''' || ''' asset risk''' - credit || style="text-align: center; background-color: coral;" | 2%
|-
|| '''R1''' || ''' asset risk''' - fixed income || style="text-align: center; background-color: coral;" | 2%
|}

:: Of course, you should also be able to explain ''why'' these rankings are the way they are. Let's start at the bottom and work up.

::* '''''asset risk - fixed income''''': Although fixed-income investments can have risks ''(for example, inflation risk)'' they are generally considered very safe so their RBC charge is very close to 0. An example of a fixed income investment is a ''government bond''. Insurance companies generally have over half of their investments in this category.

::* '''''asset risk - credit''''': Aside from slow-paying customers, a significant portion of credit risk comes from reinsurance, but this can be at least partly controlled with sensible reinsurance arrangements.

:: Now let's consider the "''high-value''" categories:

::* '''''catastrophe risk''''': Catastrophe risk is now separated from U/W risk and consists of 2 items: earthquake and hurricane risk. Hurricanes are an increasingly significant source of risk for insurers, but I'm not sure if climate change affects plate tectonics and earthquakes very much. :-)

::* '''''U/W risk - NWP''''': The total U/W risk, which is the risk associated with writing policies, is the most significant contributor of risk for an insurer. The total U/W risk accounts for 30% + 20% = 50% of the total. Also, the biggest component of liabilities on the balance sheet is the reserves. The intuitive reason the ''NWP'' portion of the UW risk is smaller than the ''reserve'' portion is that NWP risk is related to the unexpired portion of written policies. So if we're dealing with annual terms, the unexpired portion will be less than 1 year. Compare this to the reserves for claims that have actually been incurred: These incurred claims may span '''many''' accident years, so the risk ''(and associated charges)'' should be greater.

::* '''''U/W risk - reserves''''': This is the business of insurance companies and reserves is the biggest liability item on the balance sheet. Insurers have the expertise ''(actuaries!)'' to take on significant risk in this category and manage it for the mutual benefit of both the insurer and society.

::* '''''asset risk - equity''''': The calculation of asset risk depends on risk factors associated with different types of equity risks. We'll cover this in detail further down, but you should note that equity risk ''(stocks, for example)'' is much greater than the risk from fixed income investment ''(government bonds, for example)''

:: Just for fun, go back to the [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | example]] from Alice's 2nd day and calculate how the percentages there compare to the table above. The total, without operational risk, is 18,433,776. ''(Answer: For R1 to R5 and Rcat the percentages are: 3%, 23%, 2%, 52%, 19%, 1%. For that example, R4 has the highest RBC charge and equity risk was a distant second. Alice's company must have either few or less risky equities in their investment portfolio.)''

===Alice's 4th Day (An Exam Problem.)===

Today we're going to cover a calculation problem similar to the following exam problem. Note that this problem uses an outdated version of the RBC formula. For the purposes of this problem, assume Rcat = 0 and that the operational risk factor is 0% rather than 3%.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''

It's a very easy problem and I'm surprised people didn't ace it. ''(According to the examiner's report, exam-takers made a lot of different kinds of mistakes.)''

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:: '''Given:'''
::: {| class="wikitable"
|- style="border-bottom: 2px solid;"
! style="border-right: 2px solid;" | description !! scenario 1 !! scenario 2 !! scenario 3
|-
| style="border-right: 2px solid;" | company net loss & LAE ratio || style="text-align: center;" | 85% || style="text-align: center;" | 85% || style="text-align: center;" | 85%
|-
| style="border-right: 2px solid;" | company expense ratio || style="text-align: center;" | 35% || style="text-align: center;" | 35% || style="text-align: center;" | 35%
|- style="border-bottom: 2px solid;"
| style="border-right: 2px solid;" | policyholder dividend ratio || style="text-align: center;" | 10% || style="text-align: center;" | 10% || style="text-align: center;" | 10%
|- style="border-bottom: 2px solid; background-color: gold;"
| style="text-align: center; border-right: 2px solid;" | '''Total Adjusted Capital''' || style="text-align: right;" | 14,000 || style="text-align: right;" | 8,000 || style="text-align: right;" | 12,000
|-
| style="text-align: center; border-right: 2px solid;" | R0 charge || style="text-align: right;" | 10 || style="text-align: right;" | 20 || style="text-align: right;" | 50
|-
| style="text-align: center; border-right: 2px solid;" | R1 charge || style="text-align: right;" | 700 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R2 charge || style="text-align: right;" | 11,700 || style="text-align: right;" | 3,600 || style="text-align: right;" | 3,900
|-
| style="text-align: center; border-right: 2px solid;" | R3 charge || style="text-align: right;" | 900 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R4 charge || style="text-align: right;" | 12,100 || style="text-align: right;" | 3,000 || style="text-align: right;" | 4,200
|-
| style="text-align: center; border-right: 2px solid;" | R5 charge || style="text-align: right;" | 7,800 || style="text-align: right;" | 2,100 || style="text-align: right;" | 3,100
|-
| style="text-align: center; border-right: 2px solid;" | Rcat charge || style="text-align: right;" | 5,400 || style="text-align: right;" | 1,600 || style="text-align: right;" | 2,200
|}

:: '''For each scenario, find''':
::* RBC ratio
::* RBC action or control level
::* appropriate regulator & company action.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A Answers    :-D'''
|}

:: '''Recall:'''
::* RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
::* ACL capital = '''50%''' x (RBC Capital Required)
::* RBC Capital Required = '''1.03''' x [ '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' ]
::* (The factor of 1.03 accounts for operational risk.)

:: '''Scenario 1''':
::* RBC Capital Required = 19,946
::* ACL capital = 9,973
::* RBC ratio = 14,000 / 9,973 = '''140%'''   ''(first mug-winner: GLC!)''

::: ==> '''action or control level''': '''RAL''' ''(Regulator Action Level)''
::: ==> '''regulator action''': commissioner has the right to issue an order specifying corrective action (not mandatory)
::: ==> '''company action''': must submit '''''action plan''''' within 45 days describing how to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 2''':
::* RBC Capital Required = 5,568
::* ACL capital = 2,784
::* RBC ratio = 8,000 / 2,784 = '''287%'''

::: ==> '''action/control level''': depends on results of [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | trend test]] because RBC ratio is in the 200-300% range
:::* COR = 85% + 35% + 10% = 130% > 120% ==> action level is '''CAL''' ''(Company Action Level)''
::: ==> '''regulator action''': none ''(initially)''
::: ==> '''company action''': must submit '''''action plan''''' within 45 days to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 3''':
::* RBC Capital Required = 7,159
::* ACL capital = 3,580
::* RBC ratio = 12,000 / 3,580 = '''335%'''

::: ==> '''action or control level''': '''none''' ''([[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 |trend test]] not required because RBC ratio > 300%)''
::: ==> '''regulator action''': none
::: ==> '''company action''': none

'''Trick''': In the above problems, I gave you the value of TAC, but sometimes you have to calculate TAC using the formula: [Hint: ''no tabular, no medical'' 
: TAC = PHS - (non-tabular discount) - (tabular discounts on medical reserves)
* That seems easy enough, but keep in mind that tabular discounts can be for ''medical'' or ''indemnity'', and the indemnity portion is not subtracted. You had to know this to correctly solve:
:: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
* The question provided the tabular discount for ''indemnity'' and the examiner's report listed as a '''common mistake''' subtracting this ''indemnity'' discount amount. So just keep that in mind.

'''Tip''': For the practice template in the mini BattleQuiz, I sometimes like to just keep pressing the '''New''' and '''Cheat''' buttons without actually doing the calculation. I find that seeing the answer immediately helps build my intuition on how the RBC ratio corresponds to the action level ''(without having to stop and do the whole calculation every time.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Alice's 5th Day (R0 and Another Exam Problem)===

We covered lots of useful information above about RBC and how to do basic calculations, but we did it in a different order from Odomirok. Let's now take a step back and look at how Odomirok organized the RBC chapter. In the problems we've already done, you were directly given R0 thru R5 and Rcat. Now you have to learn how to ''calculate'' these charges directly from financial statement information.

:{| class="wikitable"
|-
! page !! topic !! comment
|-
| style="text-align: center;" | 236 || Overview || ''covered above''
|-
| style="text-align: center;" | 240 || RBC Formula || ''covered above''
|-
| style="text-align: center;" | 244 || style="text-align: center;" | R0 || detailed calculation: ''investments in affiliates (common stock, preferred stock, alien insurers, off B/S items)''
|-
| style="text-align: center;" | 249 || style="text-align: center;" | R1 || detailed calculation: '''''bond size''''', '''''asset concentration'''''
|-
| style="text-align: center;" | 260 || style="text-align: center;" | R2 || detailed calculation: '''''asset concentration'''''
|-
| style="text-align: center;" | 265 || style="text-align: center;" | R3 || detailed calculation: '''''reinsurance recoverable allocation'''''
|-
| style="text-align: center;" | 268 || style="text-align: center;" | R4 || detailed calculation: '''''excessive premium growth''''', '''''reinsurance recoverable allocation''''', '''''loss-sensitive discount''''', '''''loss concentration'''''
|-
| style="text-align: center;" | 283 || style="text-align: center;" | R5 || detailed calculation: '''''excessive premium growth''''', '''''loss-sensitive discount''''', '''''premium concentration'''''
|-
| style="text-align: center;" | 289 || style="text-align: center;" | Rcat || detailed calculation:
|-
| style="text-align: center;" | 293 || style="text-align: center;" | operational risk || detailed calculation:
|-
| style="text-align: center;" | 294 || RBC Model Act || '''''covered above'''''
|}

As a start, let's look at an old exam problem. I didn't like how the examiner's report explained the solution, so I solved it myself in a way that made more sense to me. You can see what I did in the link below. You could have almost figured it out from what we've already covered, plus a little bit of common sense. '''Note''': This exam problem is actually outdated because it's based on an earlier version of the RBC calculation that did not include catastrophe risk or operational risk. It's still valuable to look at however if you assume that cat risk and operational risk are both 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_v3.pdf '''''Solution to 2017.Spring #19''''']

Now, here are a couple of similar practice problems but with different numbers. Note that you have to assume Rcat and operational risk are 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_practice_01_02_v3.pdf '''''2 practice problems like 2017.Spring #19''''']

And finally, here is the link to the actual exam problem and answer. They accepted '''10 different answers''' because they didn't provide enough information in the statement of the problem. ''(You had to make certain assumptions.)'' Anyway, it might be instructive to take a quick look at some of the alternate answers. Don't spend too long on that though.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''

'''A quick primer on calculating R0''': The most recent version of Odomirok added details regarding the R0 calculation. This is discussed below.

The R0 charge considers the risks associated with investments in subsidiary insurance companies as well as miscellaneous off-balance sheet and other items. Specifically, there are separate RBC charges for:

# common stocks in the subsidiary
# preferred stocks in the subsidiary
# investments in alien insurance company affiliates
# off-balance sheet or other items

Subsidiary and affiliated insurance companies are only considered within R0 if they are U.S. domiciled entities subject to RBC, or if they are alien insurers ''(foreign to the U.S.)''.

There are 5 formulas you need to memorize. The charge for common stock depends on the accounting method the reporting entity uses to report the investment.

:{| class='wikitable'
|-
|| R0 ('''common stocks''') using equity method || = min[ affiliate RBC x ('''ownership%''' of common stock) , value of common stock as recorded by reporting entity ]
|-
|| R0 ('''common stocks''') using market method || = min[ affiliate RBC x ('''ownership%''' of common stock) , (statutory surplus of affiliate) x ('''ownership%''' of common stock) ]
|}

:: '''Note:''' The R0 formula for the market method is potentially more complicated than what's written above, but I think it has zero chance of being asked. If you'd like to see the full formula, see ''[[Expanded R0 Formula for Market Method]].''

The formulas for the other items are:

:{| class='wikitable'
|-
|| R0 ('''preferred stocks''') '''1''' || = min[ (affiliate RBC - total value of common stock) x ('''ownership%''' of preferred stock) , value of preferred stock as recorded by reporting entity ]
|-
|| R0 ('''alien insurance affiliate''') || = 0.5 x (carrying value of company's interest in affiliate)
|-
|| R0 ('''off-balance/sheet items''') || = 1.0% x (value of each off-balance sheet item)
|}

: '''1''' This charge cannot be less than 0. If the formula gives a negative value, just set it = 0 instead.

In the formula for preferred stocks, the quantity ''(affiliate RBC - total value of common stock)'' is referred to a the subsidiary's '''excess RBC'''.

In the formula for off-balance sheet items, the 1.0% risk factor is almost always the appropriate factor.
[https://www.battleacts6us.ca/vanillaforum6us/discussion/385/r0-factor-for-securities-lending-programs memory trick]!)'' This charge would be applied to the following:

* non-controlled assets
* guarantees for the benefit of affiliates
* contingent liabilities
* DTAs (Deferred Tax Assets)

There have not been any published exam questions where you had to calculate R0. If an R0 calculation does appear on the exam it will probably be fairly simple. Here are a few examples:

'''Example 1''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 40% , 100,000 x 40% ]   =   28,000

'''Example 2''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity does not use the equity method of accounting. ''(It uses the market method. For the purposes of this simple example, ignore the "B" component of the charge. See [[Expanded R0 Formula for Market Method]] for a description of B.)''
: → R0 for reporting entity   =   min[ 70,000 x 40% , 60,000 x 40% ]   =   24,000

'''Example 3''': An insurer owns 25,000 of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 25% , 100,000 x 25% ]   =   17,500

'''Example 4''': An insurer has 50% ownership of preferred stock in an insurance subsidiary that has 100,000 in preferred stock. The total RBC charge for the affiliate is 70,000 and the affiliate owns 40,000 of common stock. The accounting method is not relevant when dealing with preferred stocks.
: → R0 for reporting entity   =   min[ (70,000 - 40,000) x 50% , 100,000 x 50% ]   =   15,000   ← ''if < 0, just set = 0'' 

'''Example 5''': Annual Statement carrying value of the company’s interest in the alien insurance affiliate is 120,000. ← ''BA mug winner: VP!''
: → R0 for reporting entity   =   0.5 x 120,000   =   60,000

'''Example 6''': An insurer records a total carrying value of 200,000 for balance sheet assets over which it does not have exclusive control.
: → R0 for reporting entity   =   1.0% x 200,000   =   <s>3.14159265</s>   2,000   ← ''BA mug winner: DB!''

We will cover the detailed calculations for R1 through R5 in Alice's second week on the job.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' '''You must be logged in or this will not work.'''

<hr>

===Week 2: Day 1 (R1)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

Now we're getting down into the weeds of the RBC calculations. There is a lot of detail here. You must practice, practice, practice. This section on R1 is quite long, but the subsequent section on R2 is much shorter because it's similar to R1.

You can click to see a ''[[Odomirok.19-RBC#Summary_for_R1_.26_R2 | summary table for R1 and R2]]''. It might be an idea to take a quick look, but it won't mean much until you've covered the R1 and R2 details.

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk '''''(this is the R1 charge)'''''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk ''(this is the R3 charge)''

In particular, the '''R1 RBC charge''' covers interest rate risk and default risk for fixed income investments in the following 5 categories:

# Bonds
# Off-balance sheet collateral and Schedule DL, Part 1, Assets
# Other long term assets ''(includes mortgage loans, low income housing tax credits, working capital finance investments)''
# Miscellaneous assets ''(includes cash, cash equivalents, other short-term investments, nonadmitted collateral loans)''
# Replication (synthetic asset) transactions and mandatorily convertible securities

Note that the prior version of the RBC formula listed 10 categories including a category for holding companies that is no longer on this list. The text examples were not affected however and the actual calculation of the R1 charge did not change. ''(Since the R1 calculation for holding companies seems to have been removed, calculating R1 should actually be easier than before.)''

In any case, I don't think you have to memorize the above list. If you get an R1 or R2 problem on the exam, I would just assume that all the investments given in the problem are subject to the basic charge. That is, as long as you use only fixed income investments for R1 and equity investments for R2.

The largest contributor to the R1 charge is unaffiliated bonds. Note also that the 'Bond Size Charge' and 'Asset Concentration Charge' together account for a significant portion of R1. Those components are explained further down.

Today we're covering the '''detailed calculations for R1'''. We'll be basing the discussion on the exam problem below from '''2015.Fall'''. It gives you financial statement info on stocks and bonds then asks you to calculate R1 and R2.

: [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''

Anyway, let's get back to R1. Consider a simplified version of the exam problem:

:{| class="wikitable"
|-
! quantity !! notation !! value !! description
|-
| basic R1 charge || -- || '''406''' || ''this is the basic RBC charge for fixed income investments owned by the insurer''
|-
| bond size charge || BSC || '''609''' || ''an extra charge reflecting the level of diversification of the unaffiliated bond portfolio''
|-
| asset concentration charge || ACC || '''379''' || ''reflects increased risk of large concentrations of bonds'' ''(doubles the RBC charge for the 10 largest issuers)''
|}

Given the information in the above format, calculating R1 is trivial:

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

The answer is:

: R1 = 406 + 609 + 379 = '''1,394'''.

But in the exam problem, you are not given these quantities directly - you have to calculate them. If '''BSF''' stands for ''Bond Size Factor'' then here's what you need:

::{| class="wikitable"
|-
! quantity !! formula
|-
| basic || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| BSC || = BSF x (total R1 charges for bonds subject to BSF)
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

We'll cover how to calculate each of these 3 components in the next few subsections. We're going to use portions of the example in Odomirok to demonstrate the calculation and then come back to the exam problem at the end of this section.

====Basic R1 RBC charge====

This part of the calculation is very simple. You just multiply the amount held in each fixed investment category by the RBC factor.

'''Example''':

:{| class='wikitable'

|-
! item !! amount !! RBC factor !! RBC charge = (amount) x (RBC factor)

|-
|| cash & equivalents || style='text-align: right;' | 154,000 || style='text-align: center;' | 0.0030 || style='text-align: center;' | 462

|-
|| mortgage bonds || style='text-align: right;' | 245,000 || style='text-align: center;' | 0.0500 || style='text-align: center;' | 12,250

|-
|| U.S. government bonds || style='text-align: right;' | 6,395,684 || style='text-align: center;' | 0.0000 || style='text-align: center;' | 0

|-
|| Class 02 unaffiliated bonds || style='text-align: right;' | 4,987,460 || style='text-align: center;' | 0.0100 || style='text-align: center;' | 49,875

|}

And assuming these are all the fixed income investments the company has, the '''basic R1 RBC charge''' is just the sum of the last column: '''62,587'''

Notes on the '''RBC charge factor''':

: ==> depends on the category of investment or class of bond
: ==> investments are classified according to their credit-worthiness ''(see also [[Odomirok.6-7-BS#Bonds | bonds]])''
: ==> the exam problem considers only class 02 bonds, which are ''high'' credit quality so the RBC charge is ''relatively low''

====Bond Size Charge (BSC)====

To calculate the bond size charge '''BSC''', you first need to calculate '''BSF''' ''(Bond Size Factor)''. To do this, you need the following table from Odomirok:

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || || 2.5 ||

|-
|| next 50 || || 1.3 ||

|-
|| next 300 || || 1.0 ||

|-
|| > 400 || || 0.9 ||

|- style="border-top: solid 2px;'
|| Total || || ||

|}

'''Example''': If there were 325 issuers then you would fill in the above table as follows ''but counting only issuers of bonds subject to the BSF''.

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || 50 || 2.5 || 125

|-
|| next 50 || 50 || 1.3 || 65

|-
|| next 300 || 225 || 1.0 || 225

|-
|| > 400 || 0 || 0.9 || 0

|- style="border-top: solid 2px;'
|| Total || 325 || || 415

|}

:: Then BSF = 415 / 325 - 1 = 0.277.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz B!    :-o'''
|}

:: Calculate the BSF ''(Bond Size Factor)'' for the following total # of bond issuers: ''[[Odomirok.19-RBC#Pop_Quiz_B_Answers |Click for Answer]]'' 

::: '''(a)''' 10
::: '''(b)''' 85
::: '''(c)''' 120
::: '''(d)''' 575

Notes on '''BSF''':
: ==> only the following bond classes are subject to BSF
::* class 01 → 06 unaffiliated bonds
::: ''(exclude '''U.S.''' government bonds)'' (''shout-out to DS!)''
: ==> BSF decreases as ''bond count'' increases

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''TYPO in new edition of source text:''' The current Odomirok source text states the following:

• The bond size factor is calibrated such that the break-even point where the factor equals 1.0 is set at 1,300 bonds.
 • '''This should be: equals 0.0.'''

 '''CHANGE in new edition of source text:'''

• Portfolios containing 1,300 or more bonds will receive a discount to their RBC charge for bonds.
 • (In the prior version of Odomirok, portfolios containing 1,300 or more bonds did not receive a charge or a discount.)

See also ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/283/bond-size-factor this forum thread]''.  ''(shout-out to kulotus, BA MUG winner!)''
|}

'''Warning:''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''

In the text example, ''# of bond issuers'' = 120, which is part (c) above and so BSF = 0.750. The final part of the BSC calculation is to multiply BSF by the ''R1 bond charges that are '''subject to''' the BSF''. In the text example, this value is '''247,319'''. ''(This is highlighted in the next pop quiz and also explained further down when we look at the full R1 exhibit.)''

: '''BSC''' = 0.750 x 247,319 = '''185,490'''.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz C!    :-o'''
|}

:: '''Question''': Sometimes you aren't given a single value for the # of bond issuers. You have to calculate that yourself. Using the data below, calculate:

::: '''(a)''' basic R1 charge
::: '''(b)''' BSF
::: '''(c)''' BSC

:: '''Hint''': To calculate BSC, you don't multiply BSF by bond ''values''. Rather, you multiply BSF by the R1 ''charges'' for bonds that are subject to the BSF. ''[[Odomirok.19-RBC#Pop_Quiz_C_Answers |Click for Answer]]'' 

:::{| class='wikitable' style='text-align: center;'
|-
! fixed income investment !! amount !! RBC factor !! # bond issuers
|-
| style='text-align: left; | U.S. government bonds || 8,000 || 0.0000 || 200
|-
| style='text-align: left; | class 01 unaffiliated bonds || 1,000 || 0.0030 || 70
|-
| style='text-align: left; | class 02 unaffiliated bonds || 2,000 || 0.0100 || 50
|-
| style='text-align: left; | class 06 unaffiliated bonds || 3,000 || 0.3000 || 90
|-
| style='text-align: left; | collateral loans || 5,000 || 0.0500 || 100
|-
| style='text-align: left; | mortgage bonds || 3,500 || 0.0500 || 100
|}

====Asset Concentration Charge (ACC)====

'''Warning:''' Odomirok uses a totally different example to demonstrate the ACC calculation versus the comprehensive R1 calculation. ''(There is a link to the example exhibit further down.)'' For this section, we'll use the data from their example, but the practice problems Alice created will give you 1 set of numbers for the whole R1 calculation. ''You're welcome.'' :-)

Note from the ''[[Odomirok.19-RBC#Alice.27s_5th_Day_.28R0_and_Another_Exam_Problem.29 | RBC charge summary table]]'' that both R1 ''(fixed income investment risk) '' and R2 ''(equity investment risk)'' have an asset concentration charge. Now, I'd like to cover the R1 calculation here and save the R2 calculation for the next section, but you can't completely separate R1 and R2. Why the heck not???!!! Alice will explain below.

The first thing you have to know is which '''fixed income investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated bonds in classes 02 through 05
* collateral loans
* mortgage loans

This list has 3 items for the purposes of sorting ''(see below)'' but each bond class 02 through 05 subsequently receives its own RBC factor.

The first thing you have to know is which '''equity investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated preferred stocks and hybrid securities in classes 02 through 05
* unaffiliated common stock
* investment in real estate
* encumbrances on invested real estate
* schedule BA assets (excluding collateral loans)
* receivable for securities
* aggregate write-ins for invested assets
* derivatives

This list has 8 items for the purposes of sorting ''(see below)'' but each stock class 02 through 05 subsequently receives its own RBC factor. The example from Odomirok, whose link is provided below, uses only the investments in green font from the 2 lists above. ''(And the 2015 exam problem is an even more simplified version of the text example.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_p249_250.pdf '''''Odomirok - ACC example for R1 & R2''''']

'''''Why ACC for R1 & R2 can't be completely separated:'''''

* Note how in the table in the text they sum the fixed & equity investments for each bond issuer then rank the issuers from highest to lowest.
* For this ranking, the fixed investments '''are not separated''' from the equity investments – ''they are all mixed together.''
* This is why you cannot completely separate the ACC calculations for R1 & R2.

If I were going to write a step-by-step procedure for myself on how to calculate ACC, this is how I would do it:

: '''step 1''': gather all fixed income investments and equity investments that are '''subject''' to the ACC ''(see above lists)''
: '''step 2''': sort the list from highest to lowest
: '''step 3''': truncate this list and keep only the '''top 10''' rows of this table

Then these last 2 steps '''are''' done separately for R1 & R2.

: '''step 4''': sum the TOP 10 results in each separate category ''(classes 02 through 05 are treated '''separately''' at this step)''
: '''step 5''': multiply each sum from step 4 by the appropriate RBC factor

Note that for step 4 for the text example, Odomirok assumes all bonds are class 02 and all stocks are class 03. (shout-out to AB!) You can see this in the text table.

'''ACC Concept''': The asset concentration charge basically just doubles the RBC charge for the 10 largest issuers.

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz D!    :-o'''
|}

: For the example in Odomirok, verify that R1 = 95 and R2 = 218. ''(Note that the grand ACC total in text table is listed as 312. But 95 + 218 = 313. Hey Odomirok, do arithmetic much? ← that's an Alice joke.)''

{| class='wikitable'
|-
| '''Question''': what is an ACF or Asset Concentration Factor
|}

* Th ACF was used in the text example from above:
:: '''ACF''' = weighted average of RBC factors for assets subject to the concentration charge
* Therefore, if someone tells you the ACF, you can calculate the ACC very easily with the formula below:
:: '''ACC''' = ACF x (total value of assets subject to the concentration charge)

You should quickly double-check the R1 ACF value of 0.020 and the R2 ACF value of 0.074 from the text table. ''(shout-out to mec06e!)''
: → ''I found all this information hard to keep straight in my head. I had to do a lot of practice problems before I understood clearly how all the different pieces fit together.''

====Full R1 Examples====

So you see that calculating R1 can get messy really quickly. It isn't that the concept is hard. You just have to remember the 3 components.

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

And here is a nice presentation of the full R1 example from Odomirok:

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_251.pdf '''''Odomirok - full R1 example (table 88)'''''] ''← doesn't show details for asset concentration charge''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_mixed_text_examples.pdf '''''Odomirok - full R1 example - combines 2 text examples'''''] ''← my version shows details for the asset concentration charge example from table 86 & 87''

Finally, here is my solution to the exam problem referenced at the top of the R1 section. Note that this exam problem is very simplified because there is only 1 category of fixed income investments ''(unaffiliated bonds)'' and then there is only 1 class of unaffiliated bonds ''(class 2.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_v3.pdf '''''Solution to 2015.Fall #17''''']

And here are a couple of similar practice problems but with different numbers: ''(shout-out to AS!)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_practice_01_02_v4.pdf '''''2 practice problems like 2015.Fall #17''''']

And since Alice is evil, she has created 4 more full R1 practice problems to ruin your day: :-)

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_practice_01_04.pdf '''''4 full R1 practice problems''''']

Just to summarize, here are references to the components of the Odomirok R1 example:

* current edition tables 78-79: calculation of the '''BSF''' ''(Bond Size Factor)''
* current edition tables 80-81: calculation of '''ACC''' ''(Asset Concentration Charge)'' for R1 and R2 for a company with multiple classes of fixed income and equity assets
* current edition table 82: calculation of '''total R1''' for a company that has multiple classes of fixed income and equity assets

===Week 2: Day 2 (R2)===

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk '''''(this is the R2 charge)'''''
: '''C'''redit risk ''(this is the R3 charge)''

R2 includes the charge for risk associated with equity investments in the following categories:

# Affiliated investments
# Unaffiliated stocks ← major contributor to R2 charge
# Real estate
# Schedule BA assets ← major contributor to R2 charge
# Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
# Replication (synthetic asset) transactions and mandatory convertible securities

This list is slightly different from the previous version of Odomirok but the text examples were not affected and the mechanics of calculating the R2 charge did not change.

The asset concentration charge is also a major contributor to the R2 charge. This calculation is similar to the R1 calculation except easier because there's no BSF term ''(Bond Size Factor.)'' The only '''modification''' to the basic charge is the ACC ''(Asset Concentration Charge.)''

If you're given basic charge = 1,365 ''(basic R2 charge)'' and ACC = 1,335 then even ''Ian-the-Intern'' can calculate R2 correctly. :-)

:{| class="wikitable"
|-
| '''Formula''': R2 = basic charge + ACC
|}

The answer is:

: R2 = 1,365 + 1,335 = '''2,700'''.

Of course in the exam problem, you're not given these quantities directly - you have to calculate them. But this too is easy because it's very similar to the calculation for R1. Actually the formulas are the same – they just apply to equity assets instead of fixed income assets.

:{| class="wikitable"
|-
! quantity !! formula
|-
| basic charge || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

Now, calculating R2 can still get messy for the same reasons that R1 gets messy. But it isn't conceptually difficult. One slight complication however is an equity asset under the category of affiliated investments for ''holding companies''. Its RBC calculation is a little different. You don't multiply its value by the RBC factor. Rather you multiply the RBC factor of 0.225 by the holding company value in excess of the carrying value for indirectly owned insurance affiliates calculated in R0. There is an example calculation on the wiki page ''[[RBC for Holding Companies]]''.


:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E!    :-o'''
|}

:: Go back to the practice problems from the previous section and calculate R2. ''(the 2 practice problems like 2015.Fall #17)''

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E Answers!    :-D'''
|}

:: '''practice 01''': R2 = (basic charge) + ACC = (52,600 x 0.15) + (52,600 - 300 - 0) x 0.15 = '''15,735''' '' ← shout-out to meowyadoin!'' '''Note from Alice''': ''I'm purrin fine!!''
:: '''practice 02''': R2 = (basic charge) + ACC = (51,100 x 0.15) + (51,100 - 600 - 500) x 0.15 = '''15,165''' '' ← shout-out to meowyadoin & nraoof & TD!''

Now that we've covered R1 and R2, there's a comment I made in [[Odomirok.19-RBC#Week_2:_Day_1_.28Another_Exam_Problem.29 | Week 2: Day 1]] about allocation of the ACC (''Asset Concentration Charge)'' that should now make more sense. Recall that the exam problem we looked at had '''10 different sample answers''' in the examiner's report. One source of ambiguity was that they didn't tell how to allocate ACC between R1 and R2. You now know that the ACC is calculated separately for R1 and R2, but the exam problem only provided the total ACC. To properly solve the problem, you had to know how much went into R1 and how much went into R2. Since they didn't tell you, you had to make an assumption:

* The examiners accepted '''''any''''' allocation of ACC between R1 and R2.

The simplest thing to do is put it all either in R1 ''or'' R2, and I opted to put it all in R2.

''(shout-out to KB!)''

Here's 1 final follow-up question on the ACC.

:{| class='wikitable'
|-
| '''Question''': in general, which assets are not subject to the ACC ''(Asset Concentration <s>Factor</s> Charge)'' ''← shout-out to PU!''
|}

:* assets deemed to be of low risk ''(like class 01 unaffiliated bonds or preferred stock)''
:* assets that have already received the maximum charge of 0.3000 ''(like class 06 unaffiliated bonds)''

====Summary for R1 & R2====

* ''[https://www.battleacts6us.ca/animations/animation_01_confused_Ian.php Ian-the-Intern kept getting confused]'' when Alice asked him to calculate R1 & R2 so she made him a summary table that helped him keep things going straight ''(or gaily forward, whichever the case may be.)''

''(Note that if you print this, the background colors are not visible. I don't know why.)
 ('''''Update''': Someone astutely pointed out in the forum that if you copy the table and paste into Excel, when you print, it will show the colors. Thanks!)'''''

:{| class='wikitable'

|-
! item !! R1 !! R2

|- style='background-color: palegreen;'
|| '''formula →'''
|| '''R1''' = basic charge + BSC + ACC
|| '''R2''' = basic charge + ACC

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''basic charge'''   = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' basic charge
|| '''fixed income assets'''   [1] Bonds   [2] Off-balance sheet collateral and Schedule DL, Part 1, Assets   [3] Other long term assets   [4] Miscellaneous assets ''(cash, cash equivalents,...)''   [5] Replication transactions, mandatorily convertible securities   • ''see footnote'' '''2'''
|| '''equity assets'''   [1] Affiliated investments   [2] Unaffiliated stocks   [3] Real estate   [4] Schedule BA assets   [5] Miscellaneous assets   [6] Replication transactions, mandatory convertible securities  

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''BSC''' (Bond Size Charge)   = BSF x (total R1 charges for bonds subject to BSF)
|| not applicable

|-
| style='text-align: center;' | types of assets '''subject to''' BSF
|| '''fixed income assets''' '''1'''   - class 01-06 unaffiliated bonds   - non-U.S. government bonds
|| not applicable

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''ACC''' (Asset Concentration Charge)   = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' ACC
|| '''fixed income assets'''   - bonds (class 02-05)   - collateral loans   - mortgage loans   - working capital finance investments – NAIC 02   - low income housing tax credits
|| '''equity assets'''   - unaffiliated preferred stocks & hybrid securities (class 02-05)   - unaffiliated common stock   - real estate   - encumbrances on invested real estate   - schedule BA assets (excluding collateral loans)   - receivable for securities   - aggregate write-ins for invested assets   - derivatives

|}

: '''1''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''
: '''2''' The 2019 edition of Odomirok has a discrepancy in the RBC factor for '''Schedule BA assets'''. In Table 81 on page 258, the factor is listed as 0.05, but on page 264 the factor is listed as 0.2. ''(shout-out to pb!)

Here are 2 problems that combine the calculation of R1 & R2.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R1R2)_practice_01_02.pdf '''''2 practice problems for R1 & R2''''']

And here's a quiz that covers both the R1 and R2 calculation.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' '''You must be logged in or this will not work.'''

===Week 2: Day 3 (R3 with intro to R4)===

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk '''''(this is the R3 charge)'''''

Below is a link to a problem from way back in 2014 where you have to calculate R3. It's pretty easy ''(aside from 1 small trick)'' because they explicitly tell you which financial statement amounts relate to credit risk '''''and''''' they give you the associated RBC factors.

Without even studying this section, you could guess that '''to calculate R3''' you have to multiply ''credit-related amounts'' by the corresponding ''RBC factors''. You'd probably get half the points just doing that. But to get full points, you'd have to know the trick:

: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''

If you looked at the solution, you'll see that after multiplying the ''credit-related amounts'' by the ''RBC factors'' they made an adjustment for reinsurance. That's the trick.

:{| class="wikitable"
|-
| '''R3 Trick''': The RBC charge for reinsurance recoverable is split 50/50 between R3 and R4 '''1'''
|}

:: '''1''' Use this split only if:

::: '''unpaid loss & LAE component of R4'''   >   (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)     ''(shout-out to luohuasheng! )''

:: Note that R3 is always greater than the ''right-hand-side'' of this inequality since the ''right-hand-side'' contains only 2 of the 3 components of R3. The 3 components of R3 are ''(see [[Odomirok.19-RBC#Assets_subject_to_R3 | Assets subject to R3]])'': ''non-invested assets, reinsurance recoverables, health credit risk.''

:: Remember that R4 ''(30% of industry-wide RBC charges)'' should almost always be greater than R3 ''(2% of industry-wide RBC charges)''. Therefore, this inequality should '''virtually always''' be true. And in fact, the examiner's report never even checked – they just went ahead and did the 50/50 allocation. ''(If by some freak occurrence this inequality were false, then 100% of the charge for reinsurance recoverable would go to R3. This could happen in the case of "limited net reserves" because then R4 could be small enough relative to R3. This reserve RBC limitation exists so the company cannot diversify away a portion of its credit risk in that situation. thx PA!)''

In this problem you also have to '''calculate R4''' but it's very easy because they give you all the components. You just have to recognize them:

* basic loss reserving RBC charge: '''400,000'''
* excessive growth charge/penalty for loss reserves: '''75,000'''

Just add them up then throw in the 50% allocation for the reinsurance recoverable charge. ''(See the R3 trick above.)''

We'll cover the detailed calculations for R4 and R5 in further down. They are hard problems.

====Assets subject to R3====

I would have said what we covered above this is very likely all you need to know about R3, but Alice reminded me about '''part (b)''' of the following rather unfair problem:

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''   ←   calculation of RBC charge for reinsurance recoverables is outdated - see the practice problem further down for the current calculation

The reason it's unfair is that you had know the ''RBC factors'' for the components of R3. In one of the previous quizzes, there was a practice template on calculating total RBC. To solve it, you had to know which of the financial statement items are '''subject to''' the R3 charge, but in that problem I gave you the factors. Let's step back for a moment and list all the possible R3 items. ''(Items in green relate to this exam problem.)''

: '''1. Non-Invested Assets''':
:* Investment income due and accrued ''(factor = 0.01)''
:* Amounts Receivable related to uninsured plans ''(0.05)''
:* Federal income tax recoverable ''(0.05)''   ←   removed from calculation for the most recent version of the RBC formula
:* Guaranty funds receivable or on deposit ''(0.05)''
:* Recoverable (parent/subs/affiliates) ''(0.05)''
:* Aggregate Write-ins for other than Invested Assets ''(0.05)''
: '''2. Reinsurance recoverable''' ''(0.1)''   ← ''for more information [https://www.battleacts6us.ca/vanillaforum6us/discussion/223/r3-calculation-question#latest click to see this forum discussion]''
: '''3. Health Credit Risk''' ''(accounts for 0% of P&C insurer risk)''

Now, in '''(2016.Spring #26)''', you weren't given the actual RBC ''charges'', you were given the financial statement amounts. To get the charges you had to multiply each by the correct ''RBC factor'', which was not given. ''(The correct factors are in parentheses in the above list.)'' In other words, they expected you to memorize these factors. If you didn't memorize these factors, my advice would be to make up something reasonable like 0.05 ''(shout-out to PA!)'' and just use that across the board. Technically you'd get the wrong answer but it would let you complete the problem and if you did everything else correctly you would still get most of the points. ''(Alice thinks it was ridiculous to expect you to memorize the RBC factors. Don't get her started!)

'''R3 trick''': The solution in the examiner's report explicitly checked the inequality for the R3 trick. I wonder if they deducted points for not checking, even if you correctly did the 50/50 allocation. They didn't mention it.

Here are a couple of practice problems on R3 that I think are self-explanatory. They aren't hard. Here's what you do:

* calculate the basic charges for ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''. You do this simply by multiplying the given amounts by the RBC factors.

* the RBC charge for reinsurance recoverables comes directly from '''Schedule F, Part 3, Columns (35) & (36)''':
:: '''Column (35)''': Credit Risk on Collateralized Recoverables
:: '''Column (36)''': Credit Risk on Uncollateralized Recoverables

* check the allocation of the RBC charge for reinsurance provision using the TRICK mentioned above
* then just sum the final charges for the 3 categories: ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''

Here are a few R3 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R3)_practice_01_02_v03.pdf '''''2 practice problems for R3''''']

There is a practice template for R3 in the quiz at the end of the next section.

===Week 2: Day 4 (R4)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk '''''(this is the R4 charge)'''''
* NWP risk ''(this is the R5 charge)''

Recall that R4 is a significant contributor of risk to a company. The calculations for R4 are quite involved but do not often appear on the exam. Nonetheless, Alice has created some practice problems for you and there is a practice template in the quiz at the end of the next section.

There are 4 components to the R4 charge, the first 3 of which you should probably know how to calculate. The last one, ''health stabilization'', is not discussed in any detail in Odomirok.

: '''   8%''' of the R4 charge: '''reinsurance recoverables''' ''(reinsurance RBC that was part of the R3 calculation)''
: '''91%''' of the R4 charge: '''unpaid loss & LAE reserve'''
: '''   1%''' of the R4 '''excessive premium growth RBC'''
: '''   0%''' of the R4 charge: health stabilization RBC

Most of the section on R4 in Odomirok is about calculating the RBC for ''unpaid loss & LAE reserve''. The component for ''excessive premium growth RBC'' is almost exactly the same as for R5 and is discussed in the next section.

'''Before charging ahead, let's take a step back''':

* Remember how you did the RBC calculations for R1, R2, and R3? In each case, you had to know which financial statement amounts were '''subject to''' each charge. You use fixed income assets for R1, equity assets for R2, and credit-related items for R3.
* Then you calculated the '''basic charge''' by multiplying those amounts by the appropriate '''RBC factor'''. This RBC factor might be high or low depending on whether the asset is high-risk or low-risk.
* Then you made various adjustments to these basic charges to get the final RBC charge. For example, the ''bond size charge'' and ''asset concentration charge'' for R1.

It's the same idea for the R4 reserve component but at first it didn't look like it, at least it didn't for me. The reason was that Alice's practice problems don't provide any RBC factors.

* For the R4 reserve component, you have to calculate the RBC factor yourself. ''(The RBC factor is the quantity [[(C+1) x A] -1]. This is explained below and in the practice problem.)''
* And there is only 1 financial statement amount that's subject to this charge, net loss & LAE reserves. ''(Note however that the basic R4 charge for reserves is calculated separately for each line of business.)''

:{| class='wikitable'
|-
| '''Company RBC%''': This is the C-value in the formula [[(C+1) x A] -1].
|}

:: → The ''Company RBC%'' is derived from the corresponding ''Industry RBC%'' by applying a company-specific adjustment.
:: → The adjustment factor = (company L+LAE LDF)/(industry L+LAE LDF).
:: → The LDFs are calculated as the (current reserve for 9 prior AYs)/(initial reserves for those AYs).   ← ''capped at 400%''
:: → ''A'' is an adjustment for investment income and ''A<1''.

And there are then 2 further adjustments that are made to the basic R4 reserve charge:

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* LCF or ''Loss Concentration Factor'', which is a multiplicative adjustment

Once you've got all that, you can add in the reinsurance recoverable RBC and the excessive growth charge. We'll just assume the health stabilization charge is 0 since it is rarely a material amount for P&C insurers. ''(Recall that the reinsurance recoverable RBC is usually, but not always, split evenly between R3 & R4. See the section on R3 to review the details.)''

Here's an example of the R4 calculation from Odomirok. It's interesting because it also provides the annual statement locations for the various amounts that are needed for the calculation. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_271_(R4_example)_v03.pdf '''''Odomirok - R4 example''''']

{| class='wikitable' style='background-color: aqua;'
|-
| '''Now you're ready to tackle a full R4 problem!'''
|}

The problem is based on a similar problem for R5 that has appeared several times on past exams. Don't freak out when you see it. If you practice it several times, it will make more sense. It just has a lot of moving parts and you have to memorize the formulas that put all the different parts together to get the final answer. There is also a practice template in the quiz at the end of the next section on R5

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R4)_practice_01_04.pdf '''''4 practice problems for R4''''']

→ tubaguy has a good ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/95/memorization-tip-r4-vs-r5-formula-for-base-rbc memory trick]'' for the R4 and R5 formulas. thx tubaguy!

''And now for the nightmare scenario of an infinite number of practice problems... and you cannot stop until you get them all right''...    :-O

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

===Week 2: Day 5 (R5)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk ''(this is the R4 charge)''
* NWP risk '''''(this is the R5 charge)'''''

The calculations for R5 are complicated and unfortunately there have been exam problems that test the gory details. You can see this in the BattleTable at the top of this wiki article. The problems from '''2014''' and '''2012''' are fairly similar except for the reference to the ''claims-made'' discount in the 2012 problem. The syllabus has changed since 2012 and that problem is no longer relevant. Alice's advice is to ignore the problem from '''2012'''. The 2014 problem covers the major details of the R5 calculation so if you know how to do it, you should be prepared for any kind of R5 question you might get on the exam.

There are 4 components to the R5 charge, but you only need to worry about the calculations for the first two.
: '''99%''' of the R5 charge: '''written premium RBC'''
: '''   1%''' of the R5 charge: '''excessive premium growth RBC'''
: '''   1%''' of the R5 charge: health premium RBC
: '''   0%''' of the R5 charge: health stabilization RBC

Odomirok says this adds up to 100%, but the given percentages obviously add up to 101%. I know it's just rounding, but it confused poor ''Ian-the-Intern''. They could have fixed it by keeping an extra decimal. Anyway, it's not terribly important. Maybe I'm just procrastinating because R5 is such a pain to learn.

Several comments from the R4 section above also apply to R5. You are not given the RBC factor for the NWP component – you have to calculate it. ''(The RBC factor for the R5 NWP component is (CxA)+U-1, and is explained in the practice problem.)'' And there is only 1 financial statement amount that's subject to the R5 charge, net written premium. ''(Note however that the basic R5 charge is calculated separately for each line of business.)''

There are then 2 further adjustments that are made to the basic R5 charge: ''(note the similarity to R4)''

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* PCF or ''Premium Concentration Factor'', which is a multiplicative adjustment

Here's an example of the R5 calculation from Odomirok similar to the R4 example from the previous section. It provides the annual statement locations for the various amounts that are needed for the R5 calculation. It's probably good to scan it. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_279_(R5_example)_v03.pdf '''''Odomirok - R5 example''''']

{| class='wikitable' style='background-color: palegreen;'
|-
| '''Now you're ready to tackle a full R5 problem!'''
|}

Take a quick look at the official statement of the '''2014''' problem before you look at my solution: ''(note there were 2 errors in the statement of the problem - see examiner's report)''

: [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''

''Note that the examiner's report answer to part (c) is now outdated. Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2019 update of Odomirok. Both these risk are now considered in the RBC formula. (shout-out to luo!)''

Anyway, here's my solution to the calculation of R5 for that problem. ''(Once you have R5, calculating the total RBC is easy because they directly give you R0 thru R4.)'' I've included a lot more explanatory details than were in the examiner's report:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18).pdf '''''Solution to 2014.Fall #18''''']

And finally, here are 4 PDFs with practice problems similar to the 2014 exam problem but with different numbers: ''(It should be self-explanatory)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18)_practice_01-04_(v02).pdf '''''4 practice problems like 2014.Fall #18''''']

'''Note 1:''' These 4 problems were generated with random numbers and problem #2 had a negative base RBC charge for WC. This negative charge for WC should probably be set to 0 before combining it with the charges for the other lines.

'''Note 2:''' In the above problems, you were given the $-value for the excessive growth charge, but it's possible you may have to calculate it from the raw data. Recall from the previous section on calculating R4 I said the excessive growth charge for R4 is almost exactly the same as for R5. Well, you can see that clearly in the 2 formulas below:

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R4''') = '''(excess growth)''' x 0.450 x (net loss & LAE reserves)
|}

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R5''') = '''(excess growth)''' x 0.225 x NWP
|}

:: ==> '''(excess growth)''' = '''(average growth over last 3 years)''' – 10%
:: ==> '''(average growth over last 3 years)''' is capped at 40% for each year

The hard part of the calculation ''(and it really isn't that hard)'' is the value for '''(excess growth)'''. Once you have that, the corresponding charge is easy using the above formulas. Here's a pop quiz that shows you how to do it.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F!    :-o'''
|}

:: Given:
:::''(Should use total GWP from the FIVE-YEAR HISTORICAL EXHIBIT discussed in [[Odomirok.12-5yr]] but if only NWP is given, as in [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)''', then use NWP but note the assumption of no reinsurance.)''

:::{| class="wikitable"
|-
! year !! GWP
|-
|| 2016 || 100,000
|-
|| 2017 || 120,000
|-
|| 2018 || 174,000
|-
|| 2019 || 191,400
|}

:: Calculate the NWP excess growth charge.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F Answer!    :-D'''
|}

:: '''(average growth over last 3 years)'''
::: = average (120000/100000 - 1 , 174000/120000 - 1, 191400/174000 - 1)
::: = average (20%, 45%, 10%)      ''(but the growth must be capped at 40%)''
::: ~ average (20%, 40%, 10%)
::: = 23.3%

:: excess growth charge
::: = '''(excess growth)''' x 0.225 x NWP
::: = (23.3% – 10%) x 0.225 x 191,400
::: = '''5,742'''

Note that if the average growth over the last 3 years is less than 10% then the excess growth charge should be set equal to 0. ''(The excess growth charge cannot be negative.)''

There is a web-based practice template for R5 in the next quiz, but here's a good practice problem from an old exam. There are 3 twists in this problem which are explained below.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''

'''Twists'''
# There are 2 lines of business. That means you have to apply equations 4 and 5 separately to each line then calculate the combined total RBC charge using equation 6.
# You have to calculate the excessive growth charge yourself, but it's easy. Just follow the example above
# You have to calculate the company L+LAE 10-year average yourself, which is easy because they give you the 10-year history from Schedule P, '''BUT''' you also have '''cap the L+LAE for each year at 300%'''. As explained in Odomirok: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    ''← shout-out to AU!''

Quiz:

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' '''You must be logged in or this will not work.'''

===Week 3: Day 1 (Catastrophe Risk)===

Calculating the RBC catastrophe risk charge Rcat is the same calculation for earthquake and hurricane. Here's what you need:

* estimated net & ceded losses for 1-in-50 year, 1-in-100 year, 1-in-250 year, 1-in-500 year catastrophe events ''(for filing purposes - see table below)''
: → but only the 1-in-100 year event is used in the Rcat calculation
* net catastrophe risk factor = 1.00 ''(apply to net 1-in-100 year event)''
* contingent credit risk = 0.048 ''(apply to ceded 1-in-100 year event to account for credit risk related to reinsurance recoverables)''

The loss estimates are obtained from catastrophe models but the mechanics of this are beyond the scope of the syllabus. Anyway, once you've got the RBC charge separately for both earthquake and hurricane, the final Rcat charge is:

: [[File: Odomirok.Ch19_(page_290)_cat_formula.png]]

The text has an example for both earthquake and hurricane but the method is exactly the same. If I were solving this problem on an exam, here is how I would do it. You can compare this with the more detailed example from the text further down.

{| class='wikitable'
|-
|| Alice's abbreviated statement of the problem...
|}

: [[File: Odomirok.Ch19_(080)_cat_example_problem.png]]

{| class='wikitable'
|-
|| Alice's abbreviated solution...
|}

: [[File: Odomirok.Ch19_(081)_cat_example_solution.png]]

{| class='wikitable'
|-
|| And here's the more detailed text version of just the hurricane portion...
|}

: [[File: Odomirok.Ch19_(082)_cat_example_text_solution.png]]

The text discusses other details that I would only skim if I were studying for this exam. You can consult the source text for a little more information on these topics but I doubt you need to know more than what I've listed below:

* reporting of projected catastrophe losses: ''can be done on an Aggregate Exceedance Probability (AEP) basis, or Occurrence Exceedance Probability (OEP) basis''
* exemptions from filing catastrophe charges: ''granted when certain conditions are met that indicate a low net catastrophe exposure such as when coverage is less than 10% of policyholder surplus''
* credit risk charge: ''losses ceded to U.S. affiliates and mandatory pools (whether authorized, unauthorized or certified) are not subject to the 0.048 credit risk charge''

Here are a couple of practice problem that shouldn't take you more than just a few minutes:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(Rcat)_practice_01_02.pdf '''''2 RBC catastrophe charge practice problems''''']

===Week 3: Day 2 (Operational Risk)===

This was discussed earlier in the section ''[[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | Trend Test and Risk Categories]]'', but here's a quick review:

'''Operational risk''' is easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

* inadequacy or failure of internal systems
* personnel
* procedures or controls
* external events
* legal risk

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

===Alice's Summer Performance Review (Old Exam Problems)===

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==Pop Quiz B Answers==

: '''(a)''' BSF = 1.500 for 10 issuers
: '''(b)''' BSF = 1.006 for 85 issuers   ← for a hint, ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/852/r1-pop-quiz-b see here]''   ''(shout-out to amberxmc!)''
: '''(c)''' BSF = 0.750 for 120 issuers
: '''(d)''' BSF = 0.126 for 575 issuers

: <html><a href="javascript:history.go(-1)">Go back</a></html>

==Pop Quiz C Answers==

: '''(a)'''
:* basic R1 charge = (8,000 x 0) + (1,000 x 0.003) + (2,000 x 0.01) + (3,000 x 0.3) + (5,000 x 0.05) + (3,500 x 0.05) = '''1,348'''
:: ''(use all items in table)''

: '''(b)''':
:* relevant # of bond issuers = (# class 01 issuers) + (# class 02 issuers) + (# class 06 issuers) = 70 + 50 + 90 = 210
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSF = 300 / 210 - 1 = '''0.429'''

: '''(c)'''
:* (assets subject to BSF) = (1,000 x 0.0030) + (2,000 x 0.0100) + (3,000 x 0.3000) = 923
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSC = 923 x 0.429 = '''396.0'''

: <html><a href="javascript:history.go(-1)">Go back</a></html>

Odomirok.19-RBC

2026-01-27T22:28:05Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 19''' - '''Risk-Based Capital'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-19-rbc ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/060_RBC_General_(v01).mp4 '''(6:15) → RBC - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Risk-Based Capital (RBC)'''

* This chapter discusses the Risk-Based Capital (RBC) system, which was developed by the National Association of Insurance Commissioners (NAIC) in 1994 to help '''detect insurance company insolvencies early'''.

* The RBC system includes a '''formula''' to determine the minimum required capital (authorized control level) for insurance companies, reflecting the risks they face, and a model act that empowers state regulators to take action when a company's RBC ratio falls below certain thresholds.

* The chapter explains the RBC formula's application to property/casualty insurance companies, detailing the different risk categories such as '''asset risk''', '''underwriting risk''', and '''catastrophe risk'''.

* It also describes the '''covariance adjustment''' used in the RBC calculation to account for diversification among risk categories, and the basic operational risk charge introduced in 2018.

* The RBC report is filed annually with the NAIC and includes both the formula calculations and management's analysis of the results, though detailed calculations are confidential.

|}

==Pop Quiz==

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (1st Battle Card in mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: peachpuff; width: 1050px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, please let her know in the ''[https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176 RBC Discussion Forum]'' and we'll send you a BattleActs coffee mug.
|}

: [[File: mug.png | 200px]]

{| class='wikitable' style='background-color: lightgreen;'
|-
|| '''Updates for 2021.Spring are COMPLETE:'''   There were significant changes. (There were no changes for 2021.Fall.)
|}

For candidates who attempted Exam 6 prior to 2021.Spring, there are some new things you have to learn regarding the RBC calculation: ''(Details are contained in the wiki article.)''

* '''new risk category''': catastrophe risk
* '''new risk category''': operational risk
* '''new RBC formula''': includes catastrophe risk and operational risk
* '''new R0 calculation''': this isn't too hard
* '''new R3 calculation''': the portion of the R3 RBC charge for reinsurance recoverables is different

There are also '''minor changes''' to the '''R1''' and '''R2''' material but the text examples and old exam problems on those topics were not affected. There were '''no changes''' to the '''R4''' and '''R5''' calculations.

For all candidates, some exam problems published prior to 2021.Spring are outdated. These include problems regarding:

* total RBC charge or RBC ratio
* RBC charges for R3

The new RBC formula affects many old exam problems but they are still solvable if you assume that both the catastrophe charge Rcat and the operational risk charge equal 0. The previous edition of Odomirok did not cover the details of the R0 calculation so there are no old exam problems for that. Any problems on R3 that involve reinsurance recoverables will not be completely solvable anymore but there are only 2 of those: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)''' and [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''.

And remember → you can generate an infinite number of web-based practice problems for a broad range of RBC problem types so you don't need to rely solely on old exam problems for practice.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Here are the "regular" study tips:'''
|}

The RBC chapter is like Schedule P in that the questions are mostly calculation, but RBC has more different '''types''' of calculations. This wiki article includes lots of problems for you to practice on and it's going to take a lot of time to go through them all. In addition to the problems provided in pdf format within the wiki, and in Excel format ''[[Excel_Practice_Problems | available here]]'', you should do the randomly generated web-based problems from the quizzes until you consistently get the right answer. Since this is a Top 6 reading, you should also do as many of the old exam problems as you can, keeping in mind the above comments regarding changes to the RBC formula.

The source text ''(Chapter 19 of Odomirok)'', which is 60+ pages, includes all kinds of insanely detailed information that you almost certainly don't need to know for the exam. Just learning how to do all the web-based problems will take you long enough. Alice-the-Actuary has kindly curated the source text so the wiki covers everything that's likely to appear on the exam. That includes the overall calculation of the RBC ratio, the various regulator action levels, and details on calculating the individual risk charges R1, R2, R3, R4, R5. Examples and practice for the R0 and Rcat calculation are provided in the wiki and are easy compared to the others. Yay!

'''Estimated Study Time''': 1 week ''(not including subsequent review time)''
[[#BondSizeFactorNote]]
{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''. For a little more on this click on ''[[Using the Source Material]]''.
|}

==BattleTable==

Based on past exams and Alice's expert judgment, the '''main things''' you need to know ''(in rough order of importance)'' are:

* calculating RBC charges R0,1,2,3,4,5,cat, operational risk & RBC-ratio
* identifying action level based on RBC ratio & subsequent regulator/company actions
* strategies for reducing RBC charges
* comparison to IRIS ratios

The RBC questions from 2012 appear to be at least partially outdated and are highlighted in tan. Portions of questions from 2013-2019 may also be partially outdated as explained in the ''[[Odomirok.19-RBC#Study_Tips | Study Tips]]' section.

{| class='wikitable'
|-
| Questions held out from Fall 2019 exam: '''#5, 18, 19'''. ''(Skip these now to have a fresh exam to practice on later. For links to these questions, see [[Exam Summaries]].)''
|}

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 175px;" | part (a) !! style="width: 175px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(13)_v2.pdf E] '''(2019.Spring #13)'''
|| '''identify''': - RBC action level + actions
|| '''materiality standard''': - propose a standard
|| '''calculate''': - R4
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
|| [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''
|| '''calculate''': - R5 '''7''','''8'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(18).pdf E] '''(2018.Fall #18)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level + actions
|| [[NAIC.IRIS]]
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)'''
|| '''calculate''': - change in RBC charge '''7'''
|| '''rapid premium growth''': - impact on RBC
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''
|| '''calculate''': - RBC ratio '''a'''
|| '''identify''': - RBC action level + actions
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''
|| '''financial health''': - use of RBC ratios'''9'''
|| '''R0 RBC charge''': - difference vs R1,2,3,4,5
|| '''RBC vs IRIS''': - similarity & difference
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''
|| '''calculate''': - total RBC'''1'''
|| '''calculate''': - RBC RAL'''2'''
|| '''RAL actions''': - insurer & regulator
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(16).pdf E] '''(2016.Fall #16)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''RBC purpose''': - for regulator
|| '''RBC formula''': advantages/disads'''9'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2016_2-Fall)/(2016_2-Fall)_(17).pdf E] '''(2016.Fall #17)'''
|| '''calculate''': - RBC ratio
|| '''identify''': - RBC action level
|| '''identify''': - RBC actions
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''
|| see [[Freihaut.Reins]]
|| '''calculate''': - R3, R4 '''5'''
|| see [[Freihaut.Reins]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''
|| '''calculate''': - R1
|| '''calculate''': - R2
|| '''reducing R1''': - identify 2 ways
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(19).pdf E] '''(2015.Fall #19)'''
|| '''calculate''': - ACL & regulator action
|| [[Odomirok.25-Solv2]]
|| [[Odomirok.25-Solv2]]
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(19).pdf E] '''(2015.Spring #19)'''
|| '''components of RBC''': - describe
|| '''identifying insolvency''': - aspects of RBC
|| '''interpret RBC ratio''': - ratio = 310%
|| '''internal capital model''': - concerns ''(vs RBC)''

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(25).pdf E] '''(2015.Spring #25)'''
|| see [[Freihaut.Reins]]
|| see [[Freihaut.Reins]]
|| '''calculate''': - RBC ratio (R3, R4, R5) '''6'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''
|| '''calculate''': - R5, total RBC '''3'''
|| '''improving RBC ratio''': - reserving practices
| style="background-color: tan;" | '''limitations of RBC''': '''3a''' - for identifying impairment
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
|| '''calculate''': - R3
|| '''calculate''': - RBC
|| '''action level''': - identify action '''4'''
| style="background-color: lightgrey;" |

|- style='border-bottom: 2px solid;'
| [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(21).pdf E] '''(2013.Fall #21)'''
|| '''RBC risk categories''': - identify 2 categories
|| '''calculate''': - RBC ratio
|| '''action level''': - identify
|| '''action''': - describe

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(14).pdf E] '''(2012.Fall #14)'''
|| see [[Odomirok.8-9-IS]]
|| '''reduce RBC asset risk''': - investment changes
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(20).pdf E] '''(2012.Fall #20)'''
|| '''calculate''': - R5
|| see [[NAIC.IRIS]]
|| '''RBC vs IRIS''': - treatment of premium
| style="background-color: lightgrey;" |

|- style="background-color: tan;"
| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(24).pdf E] '''(2012.Fall #24)'''
|| '''solvency-based frameworks''': - create a new one! '''W'''
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

: '''1''' The examiner's report accepted 10 different answers for this calculation problem, and the first 3 answers are almost certainly wrong. It states "Other non-insurance subsidiaries" could go into R0, R1, or R2, but it can't go into R0; it can only go into R1 or R2. The first 3 sample answers put "Other non-insurance subsidiaries" into R0. The other 7 sample answers show valid combinations based on the given information. ''(This was a poorly exam constructed question.)''
: '''2''' RAL stands for ''Regulatory Action Level''
: '''3''' The statement of this problem contains 2 errors. See examiner's comments in examiner's report.
: '''3a''' Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2014 update of Odomirok. Both these risk are now considered in the RBC formula. 
: '''4''' This problem has a '''trick''' related to tabular discounts for indemnity, which should not be subtracted from surplus to get total adjusted capital. See ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | here]]'' for details.
: '''5''' This was a very nasty problem because they didn't give you the RBC factors. You had to memorize them which is very unreasonable. '''Also''' the 2021 update to the source text changed the test for when to split the reinsurance recoverable RBC charge between R3 and R4. That part of the examiners' report solution is outdated. ''(More on this in [[Odomirok.19-RBC#Week_2:_Day_3_.28R3_with_intro_to_R4.29 | how to calculate R3 & R4]].)''
: '''6''' This is a defective question. See ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/79/spring-2015-25-c#latest this forum discussion]'' for more information.
: '''W''' Alice thinks this is a totes weird question. ''(You can look at it, but she thinks it isn't likely to appear again.)''
: '''7''' There is an error in the examiner's report solution to '''2018.Spring #18a'''. The solution uses NWP to calculate the excess growth factor. This calculation should use GWP from the Five Year Historical Exhibit. The solution for '''2019.Spring #15''' does indeed use GWP which is correct.    
: '''8''' This problem requires you to calculate the company average loss and LAE ratio as a 10-year average, but the given ratios are '''capped at 300%''' for each year. Odomirok states: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    
: '''9''' Part of the answer to these problems is outdated in the examiner's report because the new version of the RBC formula ''(for the syllabus starting 2021.Spring)'' now includes operational and catastrophe risk.
: '''a''' Note that this problem uses an outdated version of the RBC formula. For an updated solution, see ''[[Odomirok.19-RBC#Alice.27s_4th_Day_.28An_Exam_Problem..29 | Alice's 4th Day]]''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==In Plain English!==

===Alice's 1st Day (Intro to RBC)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

This wiki article is the "true story" of Alice's early days in her career when she was a summer intern. Alice's "days" don't necessarily correspond to your own study days. Her days are short and you can probably cover more than one of her days in one of your days.

On Alice's first day of work as an actuarial intern, her mean boss dumped a stack of financial statements on her desk and told her to find out whether the company was healthy. But before she could ask him anything, he was already down the hall issuing orders to someone else. ''"What have I gotten myself into?"'' she thought. Poor Alice had no idea what to do. Fortunately the intern in the next cubicle overheard and peeked over the cubicle wall.

: "''Just calculate the RBC ratio,''" her new friend said. "''It's all in Odomirok. The boss likes to haze interns on their first day, but I can help you. We'll '''tackle''' it together.''"

So Alice and Lakshmi spent the day pulling the relevant information from the financial statements and here is what Alice learned:

:{| class="wikitable"
|-
| '''Formula''': RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
|}

:: '''TAC''' = Total Adjusted Capital = 31,024,000
:: '''ACL''' = Authorized Control Level capital = 5,714,839

: ==> RBC ratio = 31,024,000 / 5,714,839 = '''543%'''

Ok, so far so good, but what in the world does 543% mean? Is that good or bad? ''(The following table appears near the end of chapter 19 of Odomirok)''.

: {| class='wikitable' style='background-color: yellow;'
|-
|| This table overlaps with ''[[Porter.12-Insolvency#Levels_of_Regulatory_Action | Levels of Regulatory Action]]'' from ''[[Porter.12-Insolvency | Chapter 12 of the Porter reading]]'' but is not completely consistent. See ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/386/relationship-to-the-action-levels this forum discussion]'' for more details.
|}

:{| class="wikitable" style="width: 1000px;"

|-
! style="width: 190px" | action levels ['''CRAM'''] !! style="width: 80px" | RANGE !! style="width: 300px" | insurance dept action !! style="width: 200px" | company action !! Alice's action''

|-
|| '''CAL'''   → Company Action Level
| style="text-align: center; background-color: lightgreen;" | '''150-200%'''
|| none (initially)
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''lose a vacation day'''

|-
|| '''RAL'''   → Regulatory Action Level
| style="text-align: center; background-color: lightblue;" | '''100-150%'''
|| commissioner has the right to issue an order specifying corrective action (not mandatory) '''1'''
|| must submit '''action plan''' within 45 days to meet RBC standards
|| '''no bonuses'''

|-
|| '''ACL'''   → Authorized Control Level
| style="text-align: center; background-color: sienna; color: white;" | '''70-100%'''
|| commissioner authorized take control of company (not mandatory)
|| none (initially)
|| '''no raises, no bonuses'''

|-
|| '''MCL'''   → Mandatory Control Level
| style="text-align: center; background-color: red; color: white;" | '''≤ 70%'''
|| commissioner '''must''' rehabilitate or liquidate (mandatory) '''2'''
|| none (initially)
|| '''fire the CEO''' 😢

|}

: '''1''' Commissioner action could include restricting new business.
: '''2''' Insurance commissioner of domiciliary state must take action

If a company's RBC ratio falls below 200%, it's better for the company to take action than for the regulator to step in. A regulator's actions would likely be much more drastic.

:{| class='wikitable'
|-
|| '''Question''': what could be included in a company's action plan for meeting RBC standards
|}

:* explain how to raise needed capital
:* explain how to reduce operations to save money
:* explain how to reduce risks to lower RBC charges

The RBC ratio of '''543%''' for Alice's company is well above the CAL threshold, so it looks like the company is doing really well. ''(Note that the [[Bright Line Indicator Test]] from the SAO material should now make more sense.)'' Anyway, what a great first day of work for Alice. Time to relax.

The RBC test is comprehensive but it doesn't account for every type of insurance company risk. The text states that it doesn't cover risks associated with business plans & strategy, management, internal controls, systems, reserve adequacy, or ability to access capital. ''(It struck me that internal controls should be covered by operational risk, so I'm not sure why the text says risks due to internal controls are not included in the RBC framework.)''

===Alice's 2nd Day (Trend Test & Risk Categories)===

Over morning coffee, Lakshmi pointed out an omission from the above "action table" that Alice learned about yesterday. If the RBC ratio is '''above 200%''' but '''below 300%''', the company is still not in the clear. They would still have to perform the '''trend test'''. Let COR denote Combined Operating Ratio:

:{| class="wikitable"
|-
| '''Trend Test''': If a company's RBC ratio is in the 200-300% range and also has a COR > 120% THEN they are subject to the '''CAL action''' from the action table.
|}

: '''Reminder''': The COR ''(Combined Operating Ratio)'' is the sum of:
:* '''L'''oss & LAE ratio   =   (CY net incurred loss & LAE) / NEP
:* '''E'''xpense ratio   =   [ (other U/W expenses) + (aggregate write-ins for underwriting deductions) ] / NWP
:* '''D'''ividend ratio   =   (policyholder dividends) / NEP
: Recall that COR '''does not include''' investment income. And next time you see your CEO in the break room, you can tell him or her to get the '''LED''' out.

Anyway, Alice's new company is well above the 300% threshold so she was ready to report back to her boss that the company is in great shape, but Lakshmi stopped her.
: "''Not so fast,''" Lakshmi said. "''The RBC ratio is only 1 metric. For example, what about the IRIS ratios? It's like if you had 98% in calculus on your report card but were failing physics, English, and history. It isn't ''likely'', but when you report back to the boss, you should qualify your conclusion on the health of the company if the only thing you calculated was the RBC ratio.''"

You can review [[NAIC.IRIS]] for the IRIS ratios, but getting back to the RBC ratio, Alice needs to make sure she understands exactly how the '''543%''' value was calculated. It's a long calculation that involves several different risk components. The '''charge''' for each component represents the amount of capital required to support that particular risk. ''(Each component has its own calculation but we'll come back to that later.)''

{| class='wikitable'
|-
|| '''2019 Edition:''' The description of R0 is different. New risk categories Rcat and Operational Risk were added.

* Click to ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/231/rbc-mnemonics go to the forum]'' for '''PK's''' memory trick!
* Great news! Another memory trick has been submitted by '''easylifew'''. Use the same link as above to see it!
* More breaking news!!! Yet another memory trick, this time from '''Comadiroma''', who understands that sillier is better-er! Same link as above!
* News alert! Another memory trick, this time from '''mcanlas94'''. Same link as above! ''(But you might have to scroll down.)''
* And on Feb 28, 2024, '''amberxmc''' got in on the action!
|}

:{| class="wikitable"

|-
! risk category !! risk component [partial hint: '''S-FEC''']!! notation !! risk charge for this company

|- style="border-bottom: 2px solid;"
|| ---- || '''S'''ubsidiary Insurance Companies and Miscellaneous Other Amounts || style="text-align: center;" | R0 || style="text-align: right;" | 0

|-
|| asset risk || '''F'''ixed income risk || style="text-align: center;" | R1 || style="text-align: right;" | 553,398

|-
|| asset risk || '''E'''quity risk || style="text-align: center;" | R2 || style="text-align: right;" | 4,303,948

|- style="border-bottom: 2px solid;"
|| asset risk || '''C'''redit risk || style="text-align: center;" | R3 || style="text-align: right;" | 310,060

|-
|| U/W risk || reserve risk || style="text-align: center;" | R4 || style="text-align: right;" | 9,561,305

|- style="border-bottom: 2px solid;"
|| U/W risk || NWP risk || style="text-align: center;" | R5 || style="text-align: right;" | 3,574,411

|- style="border-bottom: 2px solid;"
|| catastrophe || catastrophe risk || style="text-align: center;" | Rcat || style="text-align: right;" | 130,654

|-
|| operational || operational risk || style="text-align: center;" | * || style="text-align: right;" | 332,903

|}

: * Operational Risk is added as a final step in the calculation after applying the covariance adjustment between other risk types, and does not have a corresponding "R" indicator

You might think you'd sum these charges to find the total required capital, but that isn't how it works. Rather than a simple sum, these risk charges are aggregated using this formula:

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & before operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')'''
|}

This works out to 11,096,774.

The '''operational risk''' is then easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including: [Hint: '''L-PIPE''', as in Lead PIPE. It was Alice with the lead pipe in the break room. Don't ever eat the last donut if Alice is around. 😀 

* '''L'''egal risk
* '''  –'''
* '''P'''ersonnel risk ''(in case you hired a dumb-ass intern)''
* '''I'''nadequacy or failure of internal systems
* '''P'''rocedural risk ''(and/or risk of failure of internal controls)''
* '''E'''xternal risk ''(due to external events)''

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

These offset amounts would have to be provided. Anyway, the final total RBC according to the formula below is 11,429,677 without considering offsets to the basic 3% operational risk charge.

:{| class="wikitable"
|-
|| '''Formula''': RBC Capital Required after covariance & after operational risk = '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' + '''('''operational risk''')'''
|}

The part of the formula with the square root is called the '''covariance adjustment'''. ''(Alice's Canadian cousin told her that in Canada this is called the diversification credit. Risk is reduced by spreading or diversifying the risk over multiple independent categories.)

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Is the covariance adjustment less than, greater than, or equal to the simple sum R1 + R2 + R3 + R4 + R5 + Rcat.

:: '''Answer:''' The covariance adjustment is less than the simple sum. ''(Try testing this with some simple numbers. It's a version the triangle inequality you may be familiar with from calculus.)''

:{| class="wikitable"
|-
| '''Question 1''': what is the reason for the covariance adjustment
|}

:: The reason is that risks R1 through R5 and Rcat are assumed to be '''independent'''. It's unlikely that all these risks would reach their maximum value at the same time. The covariance adjustment reduces the required capital to reflect this assumption of independence. For example, the level of equity risk ''(performance of stocks)'' is likely not related to reserve risk. A company would be unlikely to experience both very bad investment returns and very bad underwriting results at the exact same time.

:{| class="wikitable"
|-
| '''Question 2''': why is R0 excluded from the covariance adjustment
|}

:: Well, R0 is '''not independent''' of the other risks. In other words, R0 is '''correlated''' with the other risks. It represents the charge for an subsidiary company and investment in an subsidiary does not provide a diversification benefit.

Let's end Day 2 by applying the RBC Capital Required formula after operational risk:

* RBC Capital Required = 11,429,677 ''(Note that table 97 in the source text seems to have the wrong total.)''

Anyway, we can now calculate the denominator for the RBC ratio:

:{| class="wikitable"
|-
| '''RBC denominator''': ACL capital = '''50%''' x (RBC Capital Required)
|}

So ACL Capital = '''5,714,839''' ''(See [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Alice's 1st Day]].)'' You might also want to take a quick look at '''part (b)''' of:
: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(18).pdf E] '''(2017.Fall #18)'''

Do the mini BattleQuiz then take a break.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===Alice's 3rd Day (Ranking of Risk Charges)===

Alice arrived early today so I prepared a special pop quiz she could do while eating her morning bear claw. It's easy but you'll need the aggregate industry RBC risk charges for each category:

: [[File: Odomirok.Ch19_(table_076)_aggregate_RBC.png]]

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz!    :-o'''
|}

:: '''Question:''' Based on industry totals, rank the risk charges R1 through R5 according to their relative magnitude. ''(You can find this information on page 244 of Odomirok)''

:: '''Answer:''' [https://www.battleacts6us.ca/vanillaforum6us/discussion/116/risk-magnitude-ranking-tip#latest memory trick]!''

::: {| class="wikitable"
|-
! !! risk !! relative magnitude
|-
|| '''R2''' || ''' asset risk''' - equity || style="text-align: center; background-color: lightgreen;" | 31%
|-
|| '''R4''' || ''' U/W risk''' - reserves || style="text-align: center; background-color: lightgreen;" | 30%
|-
|| '''R5''' || ''' U/W risk''' - NWP || style="text-align: center; background-color: lightgreen;" | 20%
|- style="border-bottom: 2px solid;"
|| '''Rcat''' || catastrophe || style="text-align: center; background-color: lightgreen;" | 14%
|-
|| '''R3''' || ''' asset risk''' - credit || style="text-align: center; background-color: coral;" | 2%
|-
|| '''R1''' || ''' asset risk''' - fixed income || style="text-align: center; background-color: coral;" | 2%
|}

:: Of course, you should also be able to explain ''why'' these rankings are the way they are. Let's start at the bottom and work up.

::* '''''asset risk - fixed income''''': Although fixed-income investments can have risks ''(for example, inflation risk)'' they are generally considered very safe so their RBC charge is very close to 0. An example of a fixed income investment is a ''government bond''. Insurance companies generally have over half of their investments in this category.

::* '''''asset risk - credit''''': Aside from slow-paying customers, a significant portion of credit risk comes from reinsurance, but this can be at least partly controlled with sensible reinsurance arrangements.

:: Now let's consider the "''high-value''" categories:

::* '''''catastrophe risk''''': Catastrophe risk is now separated from U/W risk and consists of 2 items: earthquake and hurricane risk. Hurricanes are an increasingly significant source of risk for insurers, but I'm not sure if climate change affects plate tectonics and earthquakes very much. :-)

::* '''''U/W risk - NWP''''': The total U/W risk, which is the risk associated with writing policies, is the most significant contributor of risk for an insurer. The total U/W risk accounts for 30% + 20% = 50% of the total. Also, the biggest component of liabilities on the balance sheet is the reserves. The intuitive reason the ''NWP'' portion of the UW risk is smaller than the ''reserve'' portion is that NWP risk is related to the unexpired portion of written policies. So if we're dealing with annual terms, the unexpired portion will be less than 1 year. Compare this to the reserves for claims that have actually been incurred: These incurred claims may span '''many''' accident years, so the risk ''(and associated charges)'' should be greater.

::* '''''U/W risk - reserves''''': This is the business of insurance companies and reserves is the biggest liability item on the balance sheet. Insurers have the expertise ''(actuaries!)'' to take on significant risk in this category and manage it for the mutual benefit of both the insurer and society.

::* '''''asset risk - equity''''': The calculation of asset risk depends on risk factors associated with different types of equity risks. We'll cover this in detail further down, but you should note that equity risk ''(stocks, for example)'' is much greater than the risk from fixed income investment ''(government bonds, for example)''

:: Just for fun, go back to the [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | example]] from Alice's 2nd day and calculate how the percentages there compare to the table above. The total, without operational risk, is 18,433,776. ''(Answer: For R1 to R5 and Rcat the percentages are: 3%, 23%, 2%, 52%, 19%, 1%. For that example, R4 has the highest RBC charge and equity risk was a distant second. Alice's company must have either few or less risky equities in their investment portfolio.)''

===Alice's 4th Day (An Exam Problem.)===

Today we're going to cover a calculation problem similar to the following exam problem. Note that this problem uses an outdated version of the RBC formula. For the purposes of this problem, assume Rcat = 0 and that the operational risk factor is 0% rather than 3%.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(17).pdf E] '''(2017.Fall #17)'''

It's a very easy problem and I'm surprised people didn't ace it. ''(According to the examiner's report, exam-takers made a lot of different kinds of mistakes.)''

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A!    :-o'''
|}

:: '''Given:'''
::: {| class="wikitable"
|- style="border-bottom: 2px solid;"
! style="border-right: 2px solid;" | description !! scenario 1 !! scenario 2 !! scenario 3
|-
| style="border-right: 2px solid;" | company net loss & LAE ratio || style="text-align: center;" | 85% || style="text-align: center;" | 85% || style="text-align: center;" | 85%
|-
| style="border-right: 2px solid;" | company expense ratio || style="text-align: center;" | 35% || style="text-align: center;" | 35% || style="text-align: center;" | 35%
|- style="border-bottom: 2px solid;"
| style="border-right: 2px solid;" | policyholder dividend ratio || style="text-align: center;" | 10% || style="text-align: center;" | 10% || style="text-align: center;" | 10%
|- style="border-bottom: 2px solid; background-color: gold;"
| style="text-align: center; border-right: 2px solid;" | '''Total Adjusted Capital''' || style="text-align: right;" | 14,000 || style="text-align: right;" | 8,000 || style="text-align: right;" | 12,000
|-
| style="text-align: center; border-right: 2px solid;" | R0 charge || style="text-align: right;" | 10 || style="text-align: right;" | 20 || style="text-align: right;" | 50
|-
| style="text-align: center; border-right: 2px solid;" | R1 charge || style="text-align: right;" | 700 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R2 charge || style="text-align: right;" | 11,700 || style="text-align: right;" | 3,600 || style="text-align: right;" | 3,900
|-
| style="text-align: center; border-right: 2px solid;" | R3 charge || style="text-align: right;" | 900 || style="text-align: right;" | 200 || style="text-align: right;" | 400
|-
| style="text-align: center; border-right: 2px solid;" | R4 charge || style="text-align: right;" | 12,100 || style="text-align: right;" | 3,000 || style="text-align: right;" | 4,200
|-
| style="text-align: center; border-right: 2px solid;" | R5 charge || style="text-align: right;" | 7,800 || style="text-align: right;" | 2,100 || style="text-align: right;" | 3,100
|-
| style="text-align: center; border-right: 2px solid;" | Rcat charge || style="text-align: right;" | 5,400 || style="text-align: right;" | 1,600 || style="text-align: right;" | 2,200
|}

:: '''For each scenario, find''':
::* RBC ratio
::* RBC action or control level
::* appropriate regulator & company action.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz A Answers    :-D'''
|}

:: '''Recall:'''
::* RBC ratio = TAC / ACL ''(sounds like '''tackle''')''
::* ACL capital = '''50%''' x (RBC Capital Required)
::* RBC Capital Required = '''1.03''' x [ '''R0''' + '''sqrt('''R12 + R22 + R32 + R42 + R52 + Rcat2''')''' ]
::* (The factor of 1.03 accounts for operational risk.)

:: '''Scenario 1''':
::* RBC Capital Required = 19,946
::* ACL capital = 9,973
::* RBC ratio = 14,000 / 9,973 = '''140%'''   ''(first mug-winner: GLC!)''

::: ==> '''action or control level''': '''RAL''' ''(Regulator Action Level)''
::: ==> '''regulator action''': commissioner has the right to issue an order specifying corrective action (not mandatory)
::: ==> '''company action''': must submit '''''action plan''''' within 45 days describing how to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 2''':
::* RBC Capital Required = 5,568
::* ACL capital = 2,784
::* RBC ratio = 8,000 / 2,784 = '''287%'''

::: ==> '''action/control level''': depends on results of [[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | trend test]] because RBC ratio is in the 200-300% range
:::* COR = 85% + 35% + 10% = 130% > 120% ==> action level is '''CAL''' ''(Company Action Level)''
::: ==> '''regulator action''': none ''(initially)''
::: ==> '''company action''': must submit '''''action plan''''' within 45 days to meet RBC standards ''(to commissioner of domiciliary state explaining how to increase capital or decrease risk)''

:: '''Scenario 3''':
::* RBC Capital Required = 7,159
::* ACL capital = 3,580
::* RBC ratio = 12,000 / 3,580 = '''335%'''

::: ==> '''action or control level''': '''none''' ''([[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 |trend test]] not required because RBC ratio > 300%)''
::: ==> '''regulator action''': none
::: ==> '''company action''': none

'''Trick''': In the above problems, I gave you the value of TAC, but sometimes you have to calculate TAC using the formula: [Hint: ''no tabular, no medical'' 
: TAC = PHS - (non-tabular discount) - (tabular discounts on medical reserves)
* That seems easy enough, but keep in mind that tabular discounts can be for ''medical'' or ''indemnity'', and the indemnity portion is not subtracted. You had to know this to correctly solve:
:: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''
* The question provided the tabular discount for ''indemnity'' and the examiner's report listed as a '''common mistake''' subtracting this ''indemnity'' discount amount. So just keep that in mind.

'''Tip''': For the practice template in the mini BattleQuiz, I sometimes like to just keep pressing the '''New''' and '''Cheat''' buttons without actually doing the calculation. I find that seeing the answer immediately helps build my intuition on how the RBC ratio corresponds to the action level ''(without having to stop and do the whole calculation every time.)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

===Alice's 5th Day (R0 and Another Exam Problem)===

We covered lots of useful information above about RBC and how to do basic calculations, but we did it in a different order from Odomirok. Let's now take a step back and look at how Odomirok organized the RBC chapter. In the problems we've already done, you were directly given R0 thru R5 and Rcat. Now you have to learn how to ''calculate'' these charges directly from financial statement information.

:{| class="wikitable"
|-
! page !! topic !! comment
|-
| style="text-align: center;" | 236 || Overview || ''covered above''
|-
| style="text-align: center;" | 240 || RBC Formula || ''covered above''
|-
| style="text-align: center;" | 244 || style="text-align: center;" | R0 || detailed calculation: ''investments in affiliates (common stock, preferred stock, alien insurers, off B/S items)''
|-
| style="text-align: center;" | 249 || style="text-align: center;" | R1 || detailed calculation: '''''bond size''''', '''''asset concentration'''''
|-
| style="text-align: center;" | 260 || style="text-align: center;" | R2 || detailed calculation: '''''asset concentration'''''
|-
| style="text-align: center;" | 265 || style="text-align: center;" | R3 || detailed calculation: '''''reinsurance recoverable allocation'''''
|-
| style="text-align: center;" | 268 || style="text-align: center;" | R4 || detailed calculation: '''''excessive premium growth''''', '''''reinsurance recoverable allocation''''', '''''loss-sensitive discount''''', '''''loss concentration'''''
|-
| style="text-align: center;" | 283 || style="text-align: center;" | R5 || detailed calculation: '''''excessive premium growth''''', '''''loss-sensitive discount''''', '''''premium concentration'''''
|-
| style="text-align: center;" | 289 || style="text-align: center;" | Rcat || detailed calculation:
|-
| style="text-align: center;" | 293 || style="text-align: center;" | operational risk || detailed calculation:
|-
| style="text-align: center;" | 294 || RBC Model Act || '''''covered above'''''
|}

As a start, let's look at an old exam problem. I didn't like how the examiner's report explained the solution, so I solved it myself in a way that made more sense to me. You can see what I did in the link below. You could have almost figured it out from what we've already covered, plus a little bit of common sense. '''Note''': This exam problem is actually outdated because it's based on an earlier version of the RBC calculation that did not include catastrophe risk or operational risk. It's still valuable to look at however if you assume that cat risk and operational risk are both 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_v3.pdf '''''Solution to 2017.Spring #19''''']

Now, here are a couple of similar practice problems but with different numbers. Note that you have to assume Rcat and operational risk are 0.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(17S.19)_practice_01_02_v3.pdf '''''2 practice problems like 2017.Spring #19''''']

And finally, here is the link to the actual exam problem and answer. They accepted '''10 different answers''' because they didn't provide enough information in the statement of the problem. ''(You had to make certain assumptions.)'' Anyway, it might be instructive to take a quick look at some of the alternate answers. Don't spend too long on that though.

: [https://www.battleacts6us.ca/pdf/Exam_(2017_1-Spring)/(2017_1-Spring)_(19).pdf E] '''(2017.Spring #19)'''

'''A quick primer on calculating R0''': The most recent version of Odomirok added details regarding the R0 calculation. This is discussed below.

The R0 charge considers the risks associated with investments in subsidiary insurance companies as well as miscellaneous off-balance sheet and other items. Specifically, there are separate RBC charges for:

# common stocks in the subsidiary
# preferred stocks in the subsidiary
# investments in alien insurance company affiliates
# off-balance sheet or other items

Subsidiary and affiliated insurance companies are only considered within R0 if they are U.S. domiciled entities subject to RBC, or if they are alien insurers ''(foreign to the U.S.)''.

There are 5 formulas you need to memorize. The charge for common stock depends on the accounting method the reporting entity uses to report the investment.

:{| class='wikitable'
|-
|| R0 ('''common stocks''') using equity method || = min[ affiliate RBC x ('''ownership%''' of common stock) , value of common stock as recorded by reporting entity ]
|-
|| R0 ('''common stocks''') using market method || = min[ affiliate RBC x ('''ownership%''' of common stock) , (statutory surplus of affiliate) x ('''ownership%''' of common stock) ]
|}

:: '''Note:''' The R0 formula for the market method is potentially more complicated than what's written above, but I think it has zero chance of being asked. If you'd like to see the full formula, see ''[[Expanded R0 Formula for Market Method]].''

The formulas for the other items are:

:{| class='wikitable'
|-
|| R0 ('''preferred stocks''') '''1''' || = min[ (affiliate RBC - total value of common stock) x ('''ownership%''' of preferred stock) , value of preferred stock as recorded by reporting entity ]
|-
|| R0 ('''alien insurance affiliate''') || = 0.5 x (carrying value of company's interest in affiliate)
|-
|| R0 ('''off-balance/sheet items''') || = 1.0% x (value of each off-balance sheet item)
|}

: '''1''' This charge cannot be less than 0. If the formula gives a negative value, just set it = 0 instead.

In the formula for preferred stocks, the quantity ''(affiliate RBC - total value of common stock)'' is referred to a the subsidiary's '''excess RBC'''.

In the formula for off-balance sheet items, the 1.0% risk factor is almost always the appropriate factor.
[https://www.battleacts6us.ca/vanillaforum6us/discussion/385/r0-factor-for-securities-lending-programs memory trick]!)'' This charge would be applied to the following:

* non-controlled assets
* guarantees for the benefit of affiliates
* contingent liabilities
* DTAs (Deferred Tax Assets)

There have not been any published exam questions where you had to calculate R0. If an R0 calculation does appear on the exam it will probably be fairly simple. Here are a few examples:

'''Example 1''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 40% , 100,000 x 40% ]   =   28,000

'''Example 2''': An insurer has 40% ownership of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The affiliate's statutory surplus is 60,000. The reporting entity does not use the equity method of accounting. ''(It uses the market method. For the purposes of this simple example, ignore the "B" component of the charge. See [[Expanded R0 Formula for Market Method]] for a description of B.)''
: → R0 for reporting entity   =   min[ 70,000 x 40% , 60,000 x 40% ]   =   24,000

'''Example 3''': An insurer owns 25,000 of common stock in an insurance subsidiary that has 100,000 in common stock. The total RBC charge for the affiliate is 70,000. The reporting entity uses the equity method of accounting.
: → R0 for reporting entity   =   min[ 70,000 x 25% , 100,000 x 25% ]   =   17,500

'''Example 4''': An insurer has 50% ownership of preferred stock in an insurance subsidiary that has 100,000 in preferred stock. The total RBC charge for the affiliate is 70,000 and the affiliate owns 40,000 of common stock. The accounting method is not relevant when dealing with preferred stocks.
: → R0 for reporting entity   =   min[ (70,000 - 40,000) x 50% , 100,000 x 50% ]   =   15,000   ← ''if < 0, just set = 0'' 

'''Example 5''': Annual Statement carrying value of the company’s interest in the alien insurance affiliate is 120,000. ← ''BA mug winner: VP!''
: → R0 for reporting entity   =   0.5 x 120,000   =   60,000

'''Example 6''': An insurer records a total carrying value of 200,000 for balance sheet assets over which it does not have exclusive control.
: → R0 for reporting entity   =   1.0% x 200,000   =   <s>3.14159265</s>   2,000   ← ''BA mug winner: DB!''

We will cover the detailed calculations for R1 through R5 in Alice's second week on the job.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' '''You must be logged in or this will not work.'''

<hr>

===Week 2: Day 1 (R1)===

{| class='wikitable' style='background-color: peachpuff; width: 1000px;'
|-
|| '''BattleActs Coffee Mug Challenge!'''   Alice has double-checked her RBC calculations but if you find an RBC calculation error that slipped past her, let her know at info@battleacts.ca and we'll send you a BattleActs coffee mug!
|}

Now we're getting down into the weeds of the RBC calculations. There is a lot of detail here. You must practice, practice, practice. This section on R1 is quite long, but the subsequent section on R2 is much shorter because it's similar to R1.

You can click to see a ''[[Odomirok.19-RBC#Summary_for_R1_.26_R2 | summary table for R1 and R2]]''. It might be an idea to take a quick look, but it won't mean much until you've covered the R1 and R2 details.

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk '''''(this is the R1 charge)'''''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk ''(this is the R3 charge)''

In particular, the '''R1 RBC charge''' covers interest rate risk and default risk for fixed income investments in the following 5 categories:

# Bonds
# Off-balance sheet collateral and Schedule DL, Part 1, Assets
# Other long term assets ''(includes mortgage loans, low income housing tax credits, working capital finance investments)''
# Miscellaneous assets ''(includes cash, cash equivalents, other short-term investments, nonadmitted collateral loans)''
# Replication (synthetic asset) transactions and mandatorily convertible securities

Note that the prior version of the RBC formula listed 10 categories including a category for holding companies that is no longer on this list. The text examples were not affected however and the actual calculation of the R1 charge did not change. ''(Since the R1 calculation for holding companies seems to have been removed, calculating R1 should actually be easier than before.)''

In any case, I don't think you have to memorize the above list. If you get an R1 or R2 problem on the exam, I would just assume that all the investments given in the problem are subject to the basic charge. That is, as long as you use only fixed income investments for R1 and equity investments for R2.

The largest contributor to the R1 charge is unaffiliated bonds. Note also that the 'Bond Size Charge' and 'Asset Concentration Charge' together account for a significant portion of R1. Those components are explained further down.

Today we're covering the '''detailed calculations for R1'''. We'll be basing the discussion on the exam problem below from '''2015.Fall'''. It gives you financial statement info on stocks and bonds then asks you to calculate R1 and R2.

: [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(17).pdf E] '''(2015.Fall #17)'''

Anyway, let's get back to R1. Consider a simplified version of the exam problem:

:{| class="wikitable"
|-
! quantity !! notation !! value !! description
|-
| basic R1 charge || -- || '''406''' || ''this is the basic RBC charge for fixed income investments owned by the insurer''
|-
| bond size charge || BSC || '''609''' || ''an extra charge reflecting the level of diversification of the unaffiliated bond portfolio''
|-
| asset concentration charge || ACC || '''379''' || ''reflects increased risk of large concentrations of bonds'' ''(doubles the RBC charge for the 10 largest issuers)''
|}

Given the information in the above format, calculating R1 is trivial:

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

The answer is:

: R1 = 406 + 609 + 379 = '''1,394'''.

But in the exam problem, you are not given these quantities directly - you have to calculate them. If '''BSF''' stands for ''Bond Size Factor'' then here's what you need:

::{| class="wikitable"
|-
! quantity !! formula
|-
| basic || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| BSC || = BSF x (total R1 charges for bonds subject to BSF)
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

We'll cover how to calculate each of these 3 components in the next few subsections. We're going to use portions of the example in Odomirok to demonstrate the calculation and then come back to the exam problem at the end of this section.

====Basic R1 RBC charge====

This part of the calculation is very simple. You just multiply the amount held in each fixed investment category by the RBC factor.

'''Example''':

:{| class='wikitable'

|-
! item !! amount !! RBC factor !! RBC charge = (amount) x (RBC factor)

|-
|| cash & equivalents || style='text-align: right;' | 154,000 || style='text-align: center;' | 0.0030 || style='text-align: center;' | 462

|-
|| mortgage bonds || style='text-align: right;' | 245,000 || style='text-align: center;' | 0.0500 || style='text-align: center;' | 12,250

|-
|| U.S. government bonds || style='text-align: right;' | 6,395,684 || style='text-align: center;' | 0.0000 || style='text-align: center;' | 0

|-
|| Class 02 unaffiliated bonds || style='text-align: right;' | 4,987,460 || style='text-align: center;' | 0.0100 || style='text-align: center;' | 49,875

|}

And assuming these are all the fixed income investments the company has, the '''basic R1 RBC charge''' is just the sum of the last column: '''62,587'''

Notes on the '''RBC charge factor''':

: ==> depends on the category of investment or class of bond
: ==> investments are classified according to their credit-worthiness ''(see also [[Odomirok.6-7-BS#Bonds | bonds]])''
: ==> the exam problem considers only class 02 bonds, which are ''high'' credit quality so the RBC charge is ''relatively low''

====Bond Size Charge (BSC)====

To calculate the bond size charge '''BSC''', you first need to calculate '''BSF''' ''(Bond Size Factor)''. To do this, you need the following table from Odomirok:

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || || 2.5 ||

|-
|| next 50 || || 1.3 ||

|-
|| next 300 || || 1.0 ||

|-
|| > 400 || || 0.9 ||

|- style="border-top: solid 2px;'
|| Total || || ||

|}

'''Example''': If there were 325 issuers then you would fill in the above table as follows ''but counting only issuers of bonds subject to the BSF''.

::{| class='wikitable' style='text-align: center;'

|-
! !! # bond issuers (1) !! weights (2) !! weighted # of issuers (3) = (2) x (1)

|-
|| first 50 || 50 || 2.5 || 125

|-
|| next 50 || 50 || 1.3 || 65

|-
|| next 300 || 225 || 1.0 || 225

|-
|| > 400 || 0 || 0.9 || 0

|- style="border-top: solid 2px;'
|| Total || 325 || || 415

|}

:: Then BSF = 415 / 325 - 1 = 0.277.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz B!    :-o'''
|}

:: Calculate the BSF ''(Bond Size Factor)'' for the following total # of bond issuers: ''[[Odomirok.19-RBC#Pop_Quiz_B_Answers |Click for Answer]]'' 

::: '''(a)''' 10
::: '''(b)''' 85
::: '''(c)''' 120
::: '''(d)''' 575

Notes on '''BSF''':
: ==> only the following bond classes are subject to BSF
::* class 01 → 06 unaffiliated bonds
::: ''(exclude '''U.S.''' government bonds)'' (''shout-out to DS!)''
: ==> BSF decreases as ''bond count'' increases

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''TYPO in new edition of source text:''' The current Odomirok source text states the following:

• The bond size factor is calibrated such that the break-even point where the factor equals 1.0 is set at 1,300 bonds.
 • '''This should be: equals 0.0.'''

 '''CHANGE in new edition of source text:'''

• Portfolios containing 1,300 or more bonds will receive a discount to their RBC charge for bonds.
 • (In the prior version of Odomirok, portfolios containing 1,300 or more bonds did not receive a charge or a discount.)

See also ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/283/bond-size-factor this forum thread]''.  ''(shout-out to kulotus, BA MUG winner!)''
|}

'''Warning:''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''

In the text example, ''# of bond issuers'' = 120, which is part (c) above and so BSF = 0.750. The final part of the BSC calculation is to multiply BSF by the ''R1 bond charges that are '''subject to''' the BSF''. In the text example, this value is '''247,319'''. ''(This is highlighted in the next pop quiz and also explained further down when we look at the full R1 exhibit.)''

: '''BSC''' = 0.750 x 247,319 = '''185,490'''.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz C!    :-o'''
|}

:: '''Question''': Sometimes you aren't given a single value for the # of bond issuers. You have to calculate that yourself. Using the data below, calculate:

::: '''(a)''' basic R1 charge
::: '''(b)''' BSF
::: '''(c)''' BSC

:: '''Hint''': To calculate BSC, you don't multiply BSF by bond ''values''. Rather, you multiply BSF by the R1 ''charges'' for bonds that are subject to the BSF. ''[[Odomirok.19-RBC#Pop_Quiz_C_Answers |Click for Answer]]'' 

:::{| class='wikitable' style='text-align: center;'
|-
! fixed income investment !! amount !! RBC factor !! # bond issuers
|-
| style='text-align: left; | U.S. government bonds || 8,000 || 0.0000 || 200
|-
| style='text-align: left; | class 01 unaffiliated bonds || 1,000 || 0.0030 || 70
|-
| style='text-align: left; | class 02 unaffiliated bonds || 2,000 || 0.0100 || 50
|-
| style='text-align: left; | class 06 unaffiliated bonds || 3,000 || 0.3000 || 90
|-
| style='text-align: left; | collateral loans || 5,000 || 0.0500 || 100
|-
| style='text-align: left; | mortgage bonds || 3,500 || 0.0500 || 100
|}

====Asset Concentration Charge (ACC)====

'''Warning:''' Odomirok uses a totally different example to demonstrate the ACC calculation versus the comprehensive R1 calculation. ''(There is a link to the example exhibit further down.)'' For this section, we'll use the data from their example, but the practice problems Alice created will give you 1 set of numbers for the whole R1 calculation. ''You're welcome.'' :-)

Note from the ''[[Odomirok.19-RBC#Alice.27s_5th_Day_.28R0_and_Another_Exam_Problem.29 | RBC charge summary table]]'' that both R1 ''(fixed income investment risk) '' and R2 ''(equity investment risk)'' have an asset concentration charge. Now, I'd like to cover the R1 calculation here and save the R2 calculation for the next section, but you can't completely separate R1 and R2. Why the heck not???!!! Alice will explain below.

The first thing you have to know is which '''fixed income investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated bonds in classes 02 through 05
* collateral loans
* mortgage loans

This list has 3 items for the purposes of sorting ''(see below)'' but each bond class 02 through 05 subsequently receives its own RBC factor.

The first thing you have to know is which '''equity investments''' are subject to the ACC: ''(items in green font are used in Odomirok's example)''

* unaffiliated preferred stocks and hybrid securities in classes 02 through 05
* unaffiliated common stock
* investment in real estate
* encumbrances on invested real estate
* schedule BA assets (excluding collateral loans)
* receivable for securities
* aggregate write-ins for invested assets
* derivatives

This list has 8 items for the purposes of sorting ''(see below)'' but each stock class 02 through 05 subsequently receives its own RBC factor. The example from Odomirok, whose link is provided below, uses only the investments in green font from the 2 lists above. ''(And the 2015 exam problem is an even more simplified version of the text example.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_p249_250.pdf '''''Odomirok - ACC example for R1 & R2''''']

'''''Why ACC for R1 & R2 can't be completely separated:'''''

* Note how in the table in the text they sum the fixed & equity investments for each bond issuer then rank the issuers from highest to lowest.
* For this ranking, the fixed investments '''are not separated''' from the equity investments – ''they are all mixed together.''
* This is why you cannot completely separate the ACC calculations for R1 & R2.

If I were going to write a step-by-step procedure for myself on how to calculate ACC, this is how I would do it:

: '''step 1''': gather all fixed income investments and equity investments that are '''subject''' to the ACC ''(see above lists)''
: '''step 2''': sort the list from highest to lowest
: '''step 3''': truncate this list and keep only the '''top 10''' rows of this table

Then these last 2 steps '''are''' done separately for R1 & R2.

: '''step 4''': sum the TOP 10 results in each separate category ''(classes 02 through 05 are treated '''separately''' at this step)''
: '''step 5''': multiply each sum from step 4 by the appropriate RBC factor

Note that for step 4 for the text example, Odomirok assumes all bonds are class 02 and all stocks are class 03. (shout-out to AB!) You can see this in the text table.

'''ACC Concept''': The asset concentration charge basically just doubles the RBC charge for the 10 largest issuers.

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz D!    :-o'''
|}

: For the example in Odomirok, verify that R1 = 95 and R2 = 218. ''(Note that the grand ACC total in text table is listed as 312. But 95 + 218 = 313. Hey Odomirok, do arithmetic much? ← that's an Alice joke.)''

{| class='wikitable'
|-
| '''Question''': what is an ACF or Asset Concentration Factor
|}

* Th ACF was used in the text example from above:
:: '''ACF''' = weighted average of RBC factors for assets subject to the concentration charge
* Therefore, if someone tells you the ACF, you can calculate the ACC very easily with the formula below:
:: '''ACC''' = ACF x (total value of assets subject to the concentration charge)

You should quickly double-check the R1 ACF value of 0.020 and the R2 ACF value of 0.074 from the text table. ''(shout-out to mec06e!)''
: → ''I found all this information hard to keep straight in my head. I had to do a lot of practice problems before I understood clearly how all the different pieces fit together.''

====Full R1 Examples====

So you see that calculating R1 can get messy really quickly. It isn't that the concept is hard. You just have to remember the 3 components.

:{| class="wikitable"
|-
| '''Formula''': R1 = basic charge + BSC + ACC
|}

And here is a nice presentation of the full R1 example from Odomirok:

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_251.pdf '''''Odomirok - full R1 example (table 88)'''''] ''← doesn't show details for asset concentration charge''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_mixed_text_examples.pdf '''''Odomirok - full R1 example - combines 2 text examples'''''] ''← my version shows details for the asset concentration charge example from table 86 & 87''

Finally, here is my solution to the exam problem referenced at the top of the R1 section. Note that this exam problem is very simplified because there is only 1 category of fixed income investments ''(unaffiliated bonds)'' and then there is only 1 class of unaffiliated bonds ''(class 2.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_v3.pdf '''''Solution to 2015.Fall #17''''']

And here are a couple of similar practice problems but with different numbers: ''(shout-out to AS!)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(15F.17)_practice_01_02_v4.pdf '''''2 practice problems like 2015.Fall #17''''']

And since Alice is evil, she has created 4 more full R1 practice problems to ruin your day: :-)

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_R1_practice_01_04.pdf '''''4 full R1 practice problems''''']

Just to summarize, here are references to the components of the Odomirok R1 example:

* current edition tables 78-79: calculation of the '''BSF''' ''(Bond Size Factor)''
* current edition tables 80-81: calculation of '''ACC''' ''(Asset Concentration Charge)'' for R1 and R2 for a company with multiple classes of fixed income and equity assets
* current edition table 82: calculation of '''total R1''' for a company that has multiple classes of fixed income and equity assets

===Week 2: Day 2 (R2)===

====General====

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk '''''(this is the R2 charge)'''''
: '''C'''redit risk ''(this is the R3 charge)''

R2 includes the charge for risk associated with equity investments in the following categories:

# Affiliated investments
# Unaffiliated stocks ← major contributor to R2 charge
# Real estate
# Schedule BA assets ← major contributor to R2 charge
# Miscellaneous assets, including receivables for securities, aggregate write-ins for invested assets and derivatives
# Replication (synthetic asset) transactions and mandatory convertible securities

This list is slightly different from the previous version of Odomirok but the text examples were not affected and the mechanics of calculating the R2 charge did not change.

The asset concentration charge is also a major contributor to the R2 charge. This calculation is similar to the R1 calculation except easier because there's no BSF term ''(Bond Size Factor.)'' The only '''modification''' to the basic charge is the ACC ''(Asset Concentration Charge.)''

If you're given basic charge = 1,365 ''(basic R2 charge)'' and ACC = 1,335 then even ''Ian-the-Intern'' can calculate R2 correctly. :-)

:{| class="wikitable"
|-
| '''Formula''': R2 = basic charge + ACC
|}

The answer is:

: R2 = 1,365 + 1,335 = '''2,700'''.

Of course in the exam problem, you're not given these quantities directly - you have to calculate them. But this too is easy because it's very similar to the calculation for R1. Actually the formulas are the same – they just apply to equity assets instead of fixed income assets.

:{| class="wikitable"
|-
! quantity !! formula
|-
| basic charge || = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|-
| ACC || = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|}

Now, calculating R2 can still get messy for the same reasons that R1 gets messy. But it isn't conceptually difficult. One slight complication however is an equity asset under the category of affiliated investments for ''holding companies''. Its RBC calculation is a little different. You don't multiply its value by the RBC factor. Rather you multiply the RBC factor of 0.225 by the holding company value in excess of the carrying value for indirectly owned insurance affiliates calculated in R0. There is an example calculation on the wiki page ''[[RBC for Holding Companies]]''.


:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E!    :-o'''
|}

:: Go back to the practice problems from the previous section and calculate R2. ''(the 2 practice problems like 2015.Fall #17)''

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz E Answers!    :-D'''
|}

:: '''practice 01''': R2 = (basic charge) + ACC = (52,600 x 0.15) + (52,600 - 300 - 0) x 0.15 = '''15,735''' '' ← shout-out to meowyadoin!'' '''Note from Alice''': ''I'm purrin fine!!''
:: '''practice 02''': R2 = (basic charge) + ACC = (51,100 x 0.15) + (51,100 - 600 - 500) x 0.15 = '''15,165''' '' ← shout-out to meowyadoin & nraoof & TD!''

Now that we've covered R1 and R2, there's a comment I made in [[Odomirok.19-RBC#Week_2:_Day_1_.28Another_Exam_Problem.29 | Week 2: Day 1]] about allocation of the ACC (''Asset Concentration Charge)'' that should now make more sense. Recall that the exam problem we looked at had '''10 different sample answers''' in the examiner's report. One source of ambiguity was that they didn't tell how to allocate ACC between R1 and R2. You now know that the ACC is calculated separately for R1 and R2, but the exam problem only provided the total ACC. To properly solve the problem, you had to know how much went into R1 and how much went into R2. Since they didn't tell you, you had to make an assumption:

* The examiners accepted '''''any''''' allocation of ACC between R1 and R2.

The simplest thing to do is put it all either in R1 ''or'' R2, and I opted to put it all in R2.

''(shout-out to KB!)''

Here's 1 final follow-up question on the ACC.

:{| class='wikitable'
|-
| '''Question''': in general, which assets are not subject to the ACC ''(Asset Concentration <s>Factor</s> Charge)'' ''← shout-out to PU!''
|}

:* assets deemed to be of low risk ''(like class 01 unaffiliated bonds or preferred stock)''
:* assets that have already received the maximum charge of 0.3000 ''(like class 06 unaffiliated bonds)''

====Summary for R1 & R2====

* ''[https://www.battleacts6us.ca/animations/animation_01_confused_Ian.php Ian-the-Intern kept getting confused]'' when Alice asked him to calculate R1 & R2 so she made him a summary table that helped him keep things going straight ''(or gaily forward, whichever the case may be.)''

''(Note that if you print this, the background colors are not visible. I don't know why.)
 ('''''Update''': Someone astutely pointed out in the forum that if you copy the table and paste into Excel, when you print, it will show the colors. Thanks!)'''''

:{| class='wikitable'

|-
! item !! R1 !! R2

|- style='background-color: palegreen;'
|| '''formula →'''
|| '''R1''' = basic charge + BSC + ACC
|| '''R2''' = basic charge + ACC

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''basic charge'''   = Σ [ (asset values subject to basic charge) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' basic charge
|| '''fixed income assets'''   [1] Bonds   [2] Off-balance sheet collateral and Schedule DL, Part 1, Assets   [3] Other long term assets   [4] Miscellaneous assets ''(cash, cash equivalents,...)''   [5] Replication transactions, mandatorily convertible securities   • ''see footnote'' '''2'''
|| '''equity assets'''   [1] Affiliated investments   [2] Unaffiliated stocks   [3] Real estate   [4] Schedule BA assets   [5] Miscellaneous assets   [6] Replication transactions, mandatory convertible securities  

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''BSC''' (Bond Size Charge)   = BSF x (total R1 charges for bonds subject to BSF)
|| not applicable

|-
| style='text-align: center;' | types of assets '''subject to''' BSF
|| '''fixed income assets''' '''1'''   - class 01-06 unaffiliated bonds   - non-U.S. government bonds
|| not applicable

|- style='background-color: powderblue; border-top: solid 2px;'
|| '''formula →'''
|| '''ACC''' (Asset Concentration Charge)   = Σ [ (asset values subject to ACC for TOP 10 issuers) x (RBC factor) ]
|| same formula as for R1, applies to different assets

|-
| style='text-align: center;' | types of assets '''subject to''' ACC
|| '''fixed income assets'''   - bonds (class 02-05)   - collateral loans   - mortgage loans   - working capital finance investments – NAIC 02   - low income housing tax credits
|| '''equity assets'''   - unaffiliated preferred stocks & hybrid securities (class 02-05)   - unaffiliated common stock   - real estate   - encumbrances on invested real estate   - schedule BA assets (excluding collateral loans)   - receivable for securities   - aggregate write-ins for invested assets   - derivatives

|}

: '''1''' The source text states that unaffiliated classes 02-06 plus non-U.S. government bonds in class 01 are subject to the BSF. But then their example includes class 01 unaffiliated bonds. ''I will assume that BSF is applied to unaffiliated bonds class 01-06 and non-U.S. government bonds.''
: '''2''' The 2019 edition of Odomirok has a discrepancy in the RBC factor for '''Schedule BA assets'''. In Table 81 on page 258, the factor is listed as 0.05, but on page 264 the factor is listed as 0.2. ''(shout-out to pb!)

Here are 2 problems that combine the calculation of R1 & R2.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R1R2)_practice_01_02.pdf '''''2 practice problems for R1 & R2''''']

And here's a quiz that covers both the R1 and R2 calculation.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' '''You must be logged in or this will not work.'''

===Week 2: Day 3 (R3 with intro to R4)===

Recall the subsidiary risk R0 and the 3 asset risk categories R1, R2, R3 with the hint: '''S-FEC'''

: '''S'''ubsidiary risk ''(this is the R0 charge)''
: '''F'''ixed income risk ''(this is the R1 charge)''
: '''E'''quity risk ''(this is the R2 charge)''
: '''C'''redit risk '''''(this is the R3 charge)'''''

Below is a link to a problem from way back in 2014 where you have to calculate R3. It's pretty easy ''(aside from 1 small trick)'' because they explicitly tell you which financial statement amounts relate to credit risk '''''and''''' they give you the associated RBC factors.

Without even studying this section, you could guess that '''to calculate R3''' you have to multiply ''credit-related amounts'' by the corresponding ''RBC factors''. You'd probably get half the points just doing that. But to get full points, you'd have to know the trick:

: [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(20).pdf E] '''(2014.Spring #20)'''

If you looked at the solution, you'll see that after multiplying the ''credit-related amounts'' by the ''RBC factors'' they made an adjustment for reinsurance. That's the trick.

:{| class="wikitable"
|-
| '''R3 Trick''': The RBC charge for reinsurance recoverable is split 50/50 between R3 and R4 '''1'''
|}

:: '''1''' Use this split only if:

::: '''unpaid loss & LAE component of R4'''   >   (RBC charge for non-invested assets) + ½ x (RBC charge for reinsurance recoverables)     ''(shout-out to luohuasheng! )''

:: Note that R3 is always greater than the ''right-hand-side'' of this inequality since the ''right-hand-side'' contains only 2 of the 3 components of R3. The 3 components of R3 are ''(see [[Odomirok.19-RBC#Assets_subject_to_R3 | Assets subject to R3]])'': ''non-invested assets, reinsurance recoverables, health credit risk.''

:: Remember that R4 ''(30% of industry-wide RBC charges)'' should almost always be greater than R3 ''(2% of industry-wide RBC charges)''. Therefore, this inequality should '''virtually always''' be true. And in fact, the examiner's report never even checked – they just went ahead and did the 50/50 allocation. ''(If by some freak occurrence this inequality were false, then 100% of the charge for reinsurance recoverable would go to R3. This could happen in the case of "limited net reserves" because then R4 could be small enough relative to R3. This reserve RBC limitation exists so the company cannot diversify away a portion of its credit risk in that situation. thx PA!)''

In this problem you also have to '''calculate R4''' but it's very easy because they give you all the components. You just have to recognize them:

* basic loss reserving RBC charge: '''400,000'''
* excessive growth charge/penalty for loss reserves: '''75,000'''

Just add them up then throw in the 50% allocation for the reinsurance recoverable charge. ''(See the R3 trick above.)''

We'll cover the detailed calculations for R4 and R5 in further down. They are hard problems.

====Assets subject to R3====

I would have said what we covered above this is very likely all you need to know about R3, but Alice reminded me about '''part (b)''' of the following rather unfair problem:

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(26).pdf E] '''(2016.Spring #26)'''   ←   calculation of RBC charge for reinsurance recoverables is outdated - see the practice problem further down for the current calculation

The reason it's unfair is that you had know the ''RBC factors'' for the components of R3. In one of the previous quizzes, there was a practice template on calculating total RBC. To solve it, you had to know which of the financial statement items are '''subject to''' the R3 charge, but in that problem I gave you the factors. Let's step back for a moment and list all the possible R3 items. ''(Items in green relate to this exam problem.)''

: '''1. Non-Invested Assets''':
:* Investment income due and accrued ''(factor = 0.01)''
:* Amounts Receivable related to uninsured plans ''(0.05)''
:* Federal income tax recoverable ''(0.05)''   ←   removed from calculation for the most recent version of the RBC formula
:* Guaranty funds receivable or on deposit ''(0.05)''
:* Recoverable (parent/subs/affiliates) ''(0.05)''
:* Aggregate Write-ins for other than Invested Assets ''(0.05)''
: '''2. Reinsurance recoverable''' ''(0.1)''   ← ''for more information [https://www.battleacts6us.ca/vanillaforum6us/discussion/223/r3-calculation-question#latest click to see this forum discussion]''
: '''3. Health Credit Risk''' ''(accounts for 0% of P&C insurer risk)''

Now, in '''(2016.Spring #26)''', you weren't given the actual RBC ''charges'', you were given the financial statement amounts. To get the charges you had to multiply each by the correct ''RBC factor'', which was not given. ''(The correct factors are in parentheses in the above list.)'' In other words, they expected you to memorize these factors. If you didn't memorize these factors, my advice would be to make up something reasonable like 0.05 ''(shout-out to PA!)'' and just use that across the board. Technically you'd get the wrong answer but it would let you complete the problem and if you did everything else correctly you would still get most of the points. ''(Alice thinks it was ridiculous to expect you to memorize the RBC factors. Don't get her started!)

'''R3 trick''': The solution in the examiner's report explicitly checked the inequality for the R3 trick. I wonder if they deducted points for not checking, even if you correctly did the 50/50 allocation. They didn't mention it.

Here are a couple of practice problems on R3 that I think are self-explanatory. They aren't hard. Here's what you do:

* calculate the basic charges for ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''. You do this simply by multiplying the given amounts by the RBC factors.

* the RBC charge for reinsurance recoverables comes directly from '''Schedule F, Part 3, Columns (35) & (36)''':
:: '''Column (35)''': Credit Risk on Collateralized Recoverables
:: '''Column (36)''': Credit Risk on Uncollateralized Recoverables

* check the allocation of the RBC charge for reinsurance provision using the TRICK mentioned above
* then just sum the final charges for the 3 categories: ''non-invested assets'', ''reinsurance recoverables'', and ''health credit risk''

Here are a few R3 practice problems.

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R3)_practice_01_02_v03.pdf '''''2 practice problems for R3''''']

There is a practice template for R3 in the quiz at the end of the next section.

===Week 2: Day 4 (R4)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk '''''(this is the R4 charge)'''''
* NWP risk ''(this is the R5 charge)''

Recall that R4 is a significant contributor of risk to a company. The calculations for R4 are quite involved but do not often appear on the exam. Nonetheless, Alice has created some practice problems for you and there is a practice template in the quiz at the end of the next section.

There are 4 components to the R4 charge, the first 3 of which you should probably know how to calculate. The last one, ''health stabilization'', is not discussed in any detail in Odomirok.

: '''   8%''' of the R4 charge: '''reinsurance recoverables''' ''(reinsurance RBC that was part of the R3 calculation)''
: '''91%''' of the R4 charge: '''unpaid loss & LAE reserve'''
: '''   1%''' of the R4 '''excessive premium growth RBC'''
: '''   0%''' of the R4 charge: health stabilization RBC

Most of the section on R4 in Odomirok is about calculating the RBC for ''unpaid loss & LAE reserve''. The component for ''excessive premium growth RBC'' is almost exactly the same as for R5 and is discussed in the next section.

'''Before charging ahead, let's take a step back''':

* Remember how you did the RBC calculations for R1, R2, and R3? In each case, you had to know which financial statement amounts were '''subject to''' each charge. You use fixed income assets for R1, equity assets for R2, and credit-related items for R3.
* Then you calculated the '''basic charge''' by multiplying those amounts by the appropriate '''RBC factor'''. This RBC factor might be high or low depending on whether the asset is high-risk or low-risk.
* Then you made various adjustments to these basic charges to get the final RBC charge. For example, the ''bond size charge'' and ''asset concentration charge'' for R1.

It's the same idea for the R4 reserve component but at first it didn't look like it, at least it didn't for me. The reason was that Alice's practice problems don't provide any RBC factors.

* For the R4 reserve component, you have to calculate the RBC factor yourself. ''(The RBC factor is the quantity [[(C+1) x A] -1]. This is explained below and in the practice problem.)''
* And there is only 1 financial statement amount that's subject to this charge, net loss & LAE reserves. ''(Note however that the basic R4 charge for reserves is calculated separately for each line of business.)''

:{| class='wikitable'
|-
| '''Company RBC%''': This is the C-value in the formula [[(C+1) x A] -1].
|}

:: → The ''Company RBC%'' is derived from the corresponding ''Industry RBC%'' by applying a company-specific adjustment.
:: → The adjustment factor = (company L+LAE LDF)/(industry L+LAE LDF).
:: → The LDFs are calculated as the (current reserve for 9 prior AYs)/(initial reserves for those AYs).   ← ''capped at 400%''
:: → ''A'' is an adjustment for investment income and ''A<1''.

And there are then 2 further adjustments that are made to the basic R4 reserve charge:

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* LCF or ''Loss Concentration Factor'', which is a multiplicative adjustment

Once you've got all that, you can add in the reinsurance recoverable RBC and the excessive growth charge. We'll just assume the health stabilization charge is 0 since it is rarely a material amount for P&C insurers. ''(Recall that the reinsurance recoverable RBC is usually, but not always, split evenly between R3 & R4. See the section on R3 to review the details.)''

Here's an example of the R4 calculation from Odomirok. It's interesting because it also provides the annual statement locations for the various amounts that are needed for the calculation. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_271_(R4_example)_v03.pdf '''''Odomirok - R4 example''''']

{| class='wikitable' style='background-color: aqua;'
|-
| '''Now you're ready to tackle a full R4 problem!'''
|}

The problem is based on a similar problem for R5 that has appeared several times on past exams. Don't freak out when you see it. If you practice it several times, it will make more sense. It just has a lot of moving parts and you have to memorize the formulas that put all the different parts together to get the final answer. There is also a practice template in the quiz at the end of the next section on R5

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(R4)_practice_01_04.pdf '''''4 practice problems for R4''''']

→ tubaguy has a good ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/95/memorization-tip-r4-vs-r5-formula-for-base-rbc memory trick]'' for the R4 and R5 formulas. thx tubaguy!

''And now for the nightmare scenario of an infinite number of practice problems... and you cannot stop until you get them all right''...    :-O

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' '''You must be logged in or this will not work.'''

===Week 2: Day 5 (R5)===

Recall that U/W risk ''(versus asset risk)'' has 2 categories:

* reserve risk ''(this is the R4 charge)''
* NWP risk '''''(this is the R5 charge)'''''

The calculations for R5 are complicated and unfortunately there have been exam problems that test the gory details. You can see this in the BattleTable at the top of this wiki article. The problems from '''2014''' and '''2012''' are fairly similar except for the reference to the ''claims-made'' discount in the 2012 problem. The syllabus has changed since 2012 and that problem is no longer relevant. Alice's advice is to ignore the problem from '''2012'''. The 2014 problem covers the major details of the R5 calculation so if you know how to do it, you should be prepared for any kind of R5 question you might get on the exam.

There are 4 components to the R5 charge, but you only need to worry about the calculations for the first two.
: '''99%''' of the R5 charge: '''written premium RBC'''
: '''   1%''' of the R5 charge: '''excessive premium growth RBC'''
: '''   1%''' of the R5 charge: health premium RBC
: '''   0%''' of the R5 charge: health stabilization RBC

Odomirok says this adds up to 100%, but the given percentages obviously add up to 101%. I know it's just rounding, but it confused poor ''Ian-the-Intern''. They could have fixed it by keeping an extra decimal. Anyway, it's not terribly important. Maybe I'm just procrastinating because R5 is such a pain to learn.

Several comments from the R4 section above also apply to R5. You are not given the RBC factor for the NWP component – you have to calculate it. ''(The RBC factor for the R5 NWP component is (CxA)+U-1, and is explained in the practice problem.)'' And there is only 1 financial statement amount that's subject to the R5 charge, net written premium. ''(Note however that the basic R5 charge is calculated separately for each line of business.)''

There are then 2 further adjustments that are made to the basic R5 charge: ''(note the similarity to R4)''

* LSD or ''Loss-Sensitive Discount'', which is subtracted from the basic charge
* PCF or ''Premium Concentration Factor'', which is a multiplicative adjustment

Here's an example of the R5 calculation from Odomirok similar to the R4 example from the previous section. It provides the annual statement locations for the various amounts that are needed for the R5 calculation. It's probably good to scan it. ''(It's mostly Schedule P. Some of the amounts are provided by the NAIC.)''

: [https://www.battleacts6us.ca/pdf/Odomirok.19_RBC_279_(R5_example)_v03.pdf '''''Odomirok - R5 example''''']

{| class='wikitable' style='background-color: palegreen;'
|-
| '''Now you're ready to tackle a full R5 problem!'''
|}

Take a quick look at the official statement of the '''2014''' problem before you look at my solution: ''(note there were 2 errors in the statement of the problem - see examiner's report)''

: [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(18).pdf E] '''(2014.Fall #18)'''

''Note that the examiner's report answer to part (c) is now outdated. Interest rate risk and catastrophe risk were not taken into account by the RBC formula prior to the 2019 update of Odomirok. Both these risk are now considered in the RBC formula. (shout-out to luo!)''

Anyway, here's my solution to the calculation of R5 for that problem. ''(Once you have R5, calculating the total RBC is easy because they directly give you R0 thru R4.)'' I've included a lot more explanatory details than were in the examiner's report:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18).pdf '''''Solution to 2014.Fall #18''''']

And finally, here are 4 PDFs with practice problems similar to the 2014 exam problem but with different numbers: ''(It should be self-explanatory)''

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(14F.18)_practice_01-04_(v02).pdf '''''4 practice problems like 2014.Fall #18''''']

'''Note 1:''' These 4 problems were generated with random numbers and problem #2 had a negative base RBC charge for WC. This negative charge for WC should probably be set to 0 before combining it with the charges for the other lines.

'''Note 2:''' In the above problems, you were given the $-value for the excessive growth charge, but it's possible you may have to calculate it from the raw data. Recall from the previous section on calculating R4 I said the excessive growth charge for R4 is almost exactly the same as for R5. Well, you can see that clearly in the 2 formulas below:

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R4''') = '''(excess growth)''' x 0.450 x (net loss & LAE reserves)
|}

:{| class="wikitable"
|-
| '''Formula''': (excessive premium growth charge '''for R5''') = '''(excess growth)''' x 0.225 x NWP
|}

:: ==> '''(excess growth)''' = '''(average growth over last 3 years)''' – 10%
:: ==> '''(average growth over last 3 years)''' is capped at 40% for each year

The hard part of the calculation ''(and it really isn't that hard)'' is the value for '''(excess growth)'''. Once you have that, the corresponding charge is easy using the above formulas. Here's a pop quiz that shows you how to do it.

:{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F!    :-o'''
|}

:: Given:
:::''(Should use total GWP from the FIVE-YEAR HISTORICAL EXHIBIT discussed in [[Odomirok.12-5yr]] but if only NWP is given, as in [https://www.battleacts6us.ca/pdf/Exam_(2018_1-Spring)/(2018_1-Spring)_(18).pdf E] '''(2018.Spring #18)''', then use NWP but note the assumption of no reinsurance.)''

:::{| class="wikitable"
|-
! year !! GWP
|-
|| 2016 || 100,000
|-
|| 2017 || 120,000
|-
|| 2018 || 174,000
|-
|| 2019 || 191,400
|}

:: Calculate the NWP excess growth charge.

:{| class="wikitable"
|-
| style="background-color: green; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz F Answer!    :-D'''
|}

:: '''(average growth over last 3 years)'''
::: = average (120000/100000 - 1 , 174000/120000 - 1, 191400/174000 - 1)
::: = average (20%, 45%, 10%)      ''(but the growth must be capped at 40%)''
::: ~ average (20%, 40%, 10%)
::: = 23.3%

:: excess growth charge
::: = '''(excess growth)''' x 0.225 x NWP
::: = (23.3% – 10%) x 0.225 x 191,400
::: = '''5,742'''

Note that if the average growth over the last 3 years is less than 10% then the excess growth charge should be set equal to 0. ''(The excess growth charge cannot be negative.)''

There is a web-based practice template for R5 in the next quiz, but here's a good practice problem from an old exam. There are 3 twists in this problem which are explained below.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_1-Spring)/(2019_1-Spring)_(15)_v2.pdf E] '''(2019.Spring #15)'''

'''Twists'''
# There are 2 lines of business. That means you have to apply equations 4 and 5 separately to each line then calculate the combined total RBC charge using equation 6.
# You have to calculate the excessive growth charge yourself, but it's easy. Just follow the example above
# You have to calculate the company L+LAE 10-year average yourself, which is easy because they give you the 10-year history from Schedule P, '''BUT''' you also have '''cap the L+LAE for each year at 300%'''. As explained in Odomirok: ''The company average loss and LAE ratio is a straight average over the past 10 accident years of the net loss and LAE ratios provided in Schedule P, Part 1, column 31. Loss and LAE ratios for any accident year in excess of 300% are capped at that value in consideration of anomalous, one-time results.''    ''← shout-out to AU!''

Quiz:

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' '''You must be logged in or this will not work.'''

===Week 3: Day 1 (Catastrophe Risk)===

Calculating the RBC catastrophe risk charge Rcat is the same calculation for earthquake and hurricane. Here's what you need:

* estimated net & ceded losses for 1-in-50 year, 1-in-100 year, 1-in-250 year, 1-in-500 year catastrophe events ''(for filing purposes - see table below)''
: → but only the 1-in-100 year event is used in the Rcat calculation
* net catastrophe risk factor = 1.00 ''(apply to net 1-in-100 year event)''
* contingent credit risk = 0.048 ''(apply to ceded 1-in-100 year event to account for credit risk related to reinsurance recoverables)''

The loss estimates are obtained from catastrophe models but the mechanics of this are beyond the scope of the syllabus. Anyway, once you've got the RBC charge separately for both earthquake and hurricane, the final Rcat charge is:

: [[File: Odomirok.Ch19_(page_290)_cat_formula.png]]

The text has an example for both earthquake and hurricane but the method is exactly the same. If I were solving this problem on an exam, here is how I would do it. You can compare this with the more detailed example from the text further down.

{| class='wikitable'
|-
|| Alice's abbreviated statement of the problem...
|}

: [[File: Odomirok.Ch19_(080)_cat_example_problem.png]]

{| class='wikitable'
|-
|| Alice's abbreviated solution...
|}

: [[File: Odomirok.Ch19_(081)_cat_example_solution.png]]

{| class='wikitable'
|-
|| And here's the more detailed text version of just the hurricane portion...
|}

: [[File: Odomirok.Ch19_(082)_cat_example_text_solution.png]]

The text discusses other details that I would only skim if I were studying for this exam. You can consult the source text for a little more information on these topics but I doubt you need to know more than what I've listed below:

* reporting of projected catastrophe losses: ''can be done on an Aggregate Exceedance Probability (AEP) basis, or Occurrence Exceedance Probability (OEP) basis''
* exemptions from filing catastrophe charges: ''granted when certain conditions are met that indicate a low net catastrophe exposure such as when coverage is less than 10% of policyholder surplus''
* credit risk charge: ''losses ceded to U.S. affiliates and mandatory pools (whether authorized, unauthorized or certified) are not subject to the 0.048 credit risk charge''

Here are a couple of practice problem that shouldn't take you more than just a few minutes:

: [https://www.battleacts6us.ca/pdf/Odomirok.Ch19_(Rcat)_practice_01_02.pdf '''''2 RBC catastrophe charge practice problems''''']

===Week 3: Day 2 (Operational Risk)===

This was discussed earlier in the section ''[[Odomirok.19-RBC#Alice.27s_2nd_Day_.28Trend_Test_.26_Risk_Categories.29 | Trend Test and Risk Categories]]'', but here's a quick review:

'''Operational risk''' is easy to calculate because the basic charge is 3% of the pre-operational risk RBC total. Operational risk considers the risk of financial loss resulting from operational events that have not already been reflected in existing risk charges including:

* inadequacy or failure of internal systems
* personnel
* procedures or controls
* external events
* legal risk

It does not include reputational risk arising from strategic decisions. Note also that this basic 3% charge can be adjusted downward in certain circumstances. According to the source text:

* ''The operational risk charge is further reduced by the sum of offset amounts reported by directly owned life insurance company subsidiaries that prepare and file the Life RBC calculation, adjusted for the percentage of ownership in the directly owned life insurance company subsidiaries (but not to produce a charge that is less than zero).

===Alice's Summer Performance Review (Old Exam Problems)===

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=19-RBC&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-19-rbc/176'''Forum''']

==Pop Quiz B Answers==

: '''(a)''' BSF = 1.500 for 10 issuers
: '''(b)''' BSF = 1.006 for 85 issuers   ← for a hint, ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/852/r1-pop-quiz-b see here]''   ''(shout-out to amberxmc!)''
: '''(c)''' BSF = 0.750 for 120 issuers
: '''(d)''' BSF = 0.126 for 575 issuers

: <html><a href="javascript:history.go(-1)">Go back</a></html>

==Pop Quiz C Answers==

: '''(a)'''
:* basic R1 charge = (8,000 x 0) + (1,000 x 0.003) + (2,000 x 0.01) + (3,000 x 0.3) + (5,000 x 0.05) + (3,500 x 0.05) = '''1,348'''
:: ''(use all items in table)''

: '''(b)''':
:* relevant # of bond issuers = (# class 01 issuers) + (# class 02 issuers) + (# class 06 issuers) = 70 + 50 + 90 = 210
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSF = 300 / 210 - 1 = '''0.429'''

: '''(c)'''
:* (assets subject to BSF) = (1,000 x 0.0030) + (2,000 x 0.0100) + (3,000 x 0.3000) = 923
:: ''(remember that you only use unaffiliated bond classes 01 → 06, non-U.S. government bonds)''
:* BSC = 923 x 0.429 = '''396.0'''

: <html><a href="javascript:history.go(-1)">Go back</a></html>

COPLFR.SAO

2026-01-27T22:25:09Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://battleacts.discourse.group/t/scope-section-mnemonic/2971 another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://battleacts.discourse.group/t/mnemonic-for-type-of-opinion/2800 click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts.discourse.group/t/memory-trick-for-a-reasonable-opinion/2723 this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://battleacts.discourse.group/t/other-actuary-npc/2620 this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://battleacts.discourse.group/t/other-actuary-npc/2620 this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts.discourse.group/t/materiality-standard-meaning/2790 forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://battleacts.discourse.group/t/materiality-standard-meaning/2790 brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:23:39Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://battleacts.discourse.group/t/scope-section-mnemonic/2971 another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://battleacts.discourse.group/t/mnemonic-for-type-of-opinion/2800 click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts.discourse.group/t/memory-trick-for-a-reasonable-opinion/2723 this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://battleacts.discourse.group/t/other-actuary-npc/2620 this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://battleacts.discourse.group/t/other-actuary-npc/2620 this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:22:40Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://battleacts.discourse.group/t/scope-section-mnemonic/2971 another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://battleacts.discourse.group/t/mnemonic-for-type-of-opinion/2800 click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts.discourse.group/t/memory-trick-for-a-reasonable-opinion/2723 this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:21:25Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://battleacts.discourse.group/t/scope-section-mnemonic/2971 another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://battleacts.discourse.group/t/mnemonic-for-type-of-opinion/2800 click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts6us.ca/vanillaforum6us/discussion/339/memory-trick-for-a-reasonable-opinion this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:20:09Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/591/scope-section-mnemonic another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://battleacts.discourse.group/t/mnemonic-for-type-of-opinion/2800 click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts6us.ca/vanillaforum6us/discussion/339/memory-trick-for-a-reasonable-opinion this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:18:20Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://battleacts.discourse.group/t/scope-disclosures/2433 here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/591/scope-section-mnemonic another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/419/mnemonic-for-type-of-opinion click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts6us.ca/vanillaforum6us/discussion/339/memory-trick-for-a-reasonable-opinion this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:17:16Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://battleacts.discourse.group/t/2018-f-23/2672 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/5/scope-disclosures here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/591/scope-section-mnemonic another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/419/mnemonic-for-type-of-opinion click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts6us.ca/vanillaforum6us/discussion/339/memory-trick-for-a-reasonable-opinion this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

COPLFR.SAO

2026-01-27T22:15:05Z

Graham:

'''Reading''': “A Public Policy Practice Note, Statements of Actuarial Opinion on Property & Casualty Loss Reserves, 2021.” Exclude Appendix I.1.3 NAIC Title SAO Instructions and Appendix IV. SSAPs.

'''Author''': Committee on Property and Liability Financial Reporting, American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coplfr-sao ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Statement of Actuarial Opinion'''

* The "Statement of Actuarial Opinion" (SAO) outlines the appointed actuary’s evaluation of an insurance company’s loss and loss adjustment expense (LAE) reserves, ensuring they are reasonable and compliant with regulatory requirements. The SAO is a crucial document that is submitted with the insurer’s Annual Statement and must be prepared by a qualified actuary.

* The SAO comprises four main sections: '''Identification, Scope, Opinion,''' and '''Relevant Comments''', each detailing specific aspects such as the actuary's qualifications, the scope of the reserves analyzed, the opinion on the reserves, and any additional commentary on risks and uncertainties. There are also 2 required exhibits: '''Exhibit A''' (carried reserves) and '''Exhibit B''' (disclosures).

* Furthermore, the Actuarial Opinion Summary (AOS) supplements the SAO and includes the actuary’s range of unpaid claim estimates compared to the company's recorded reserves, required to be filed confidentially with the domiciliary state by March 15 annually .

|}

==Pop Quiz==

'''Notes''':

# The Pop Quiz below is a '''comprehensive multiple choice review''' of the Statement of Actuarial Opinion (SAO).
# The Battle Cards in the quiz are '''categorized''' under the wiki article ''[[ASOP.36]]'' which is the Actuarial Standards of Practice for the SAO.
# The wiki article ''[[ASOP.36]]'' is a very short article.
# The '''bulk of the material''' on the SAO is in the wiki article ''[[COPLFR.SAO]]''.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=36&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''Multiple Choice (ASOP 36 - mini BattleQuiz 2)]''' ← for general review of topic

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice's interesting factoid''': This reading is generally listed as '''NEW''' in the Fall syllabus for any given year but that's misleading because it's really just an '''update''' of a reading that has been on the syllabus for a long time. These ''[[COPLFR Updates | annual updates]]'' are usually minor. ''(click link for details.)''. The wiki article below has been updated to include these changes.
|}

''' New for 2022-Fall '''

''' New for 2021.Fall '''  You can click the ''[[COPLFR Updates | annual updates]]'' link for a comprehensive list of changes and clarifications in the updated version of the source text. There was 1 change however that seemed more noteworthy than the others.

* '''Section 2.2.3''': two new requirements pertaining to attestation and categorization of continuing education

''You can find notes for these changes in this wiki article by using control-f to search the phrase:'' '''New for 2021.Fall'''

This is the most important reading in the syllabus. If you're covering the readings in rank order, then you'll already have a basic understanding of the SAO from ''[[Odomirok.16-17-SAO]]''. It is well worth working the old exam problems all the way back to 2012, but it might be a bit much to do this all at once. To start, I would recommend going through this wiki article thoroughly and then doing 1 year's worth (2 sittings) of old exam problems. Then set it aside and go on to the next wiki article, but come back to COPLFR roughly once a week. Each time you come back to COPLFR, review the BattleCards and old exam problems you've already covered before continuing to work your way backwards through the old exams. If you follow this pattern over the course of your study, the SAO questions will seem very easy on exam day!

This is a reading where you really do have to refer to the source material after you've read this wiki article. The COPLFR text is well-written and there's no reason for me to duplicate what they've already done. '''Alice the Actuary's gentle guided pathway''' in this wiki article will take you through 1 example of each of the important SAO topics using a selection of old exam problems. This will give you a good framework so that the time you spend with the COPLFR source text will be much more efficient. Your most important task is then work your way backwards through the remaining old exam problems, referring to the source text where appropriate. It's also sometimes helpful to make a few supplementary notes wherever you feel that might solidify your understanding.

''' Another SAO Multiple Choice Problem Set '''  Click here: ''[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=A&prefix=all&suffix=all&section=all&subSection=all&subsetFlag=MC&examRep=all&examYear=all&examTerm=all&quizNum=0&select07=0&select08=0&select09=0 Web-based problems]'' and select the very first problem.

'''Estimated Study Time''': Up to 1 week on your first pass - then another week on your second pass. It's a lot to take in and I think it will be better to break it up. ''(Those 2 weeks don't include subsequent weekly review.)''

{| class="wikitable"
|- style="background-color: lightgrey;"
| '''Source Readings''': BattleActs includes all material from past exams in at least 1 of the elements of the system: ''wiki articles, BattleCards, BattleTables''. It also covers significant material that has not appeared on past exams but that I've judged to be important. Still, it's a good idea to spend a portion of your time reviewing the source readings. You may have a different opinion on what's important and what you can skip. You cannot read all 2,500 pages in depth, but BattleActs give you the necessary background knowledge so that the time you do spend on the source readings will be '''much more efficient'''.
|}

{| class="wikitable"
|-
| style="background-color: darkslategrey; color: white; border: solid; border-width: 2px; border-radius: 10px;" | '''Pop Quiz    :-o'''
|}

* Describe the organization of the SAO ''(Statement of Actuarial Opinion)'' [Hint: '''ISOR + (A,B)'''] ''[[COPLFR.SAO#POP_QUIZ_ANSWERS |Click for Answer]]'' 

==BattleTable==

Alice-the-Actuary helped me compile previous exam questions into a table. You can use this to easily see which topics are tested most frequently.

The tables for COPLFR are the most extensive by a wide margin. Most readings have at most 1 problem per exam, but COPLFR consistently has 4-5 problems on each exam. For that reason, I've separated the tables by exam and placed them all in a separate wiki article.

{| class="wikitable" style='background-color: navajowhite; font-size: 36px;'
|-
| '''Standard BattleTables:''' ''[[BattleTables - COPLFR]]''
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

You can take a quick look at those now, but I don't think they will be very helpful until you've built a foundation. There is just too much information to absorb. What you ''should'' keep in however is the following...

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* Relevant Comments: section 5.1-5.2
:: '''(5.1)''' company-specific risk factors
:: '''(5.2)''' RMAD ''(Risk of Material Deviation)'' and the materiality standard

* Opinion: section 4.3-4.6
:: '''(4.3)''' type of opinion – ''reasonable''
:: '''(4.4)''' type of opinion – ''inadequate/excessive''
:: '''(4.5)''' type of opinion – ''qualified''
:: '''(4.6)''' type of opinion – ''no opinion''

* Opinion: section 4.10
:: '''(4.10)''' work of others ''(disclosures the appointed actuary must make)''

* Miscellaneous: ''many other items are asked consistently, although a little less frequently than the above sections''

{| class='wikitable' style='background-color: powderblue'
|-
|| '''Alice's Pro-Tip''': Use control-f to bring up the search box in ''[[BattleTables - COPLFR]]''. Then type in key phrases to quickly locate exam questions on that topic.
|}

: Examples of key phrases:
:* material
:* opinion
:* RMAD
:* error ''(for questions about identifying and correcting errors)''
:* language ''(for questions about illustrative language in the SAO)''
:* disclosure ''(there are many exam questions on the topic of disclosures within the SAO – see Bonus Step 9 for more info on Disclosures)''

: ''(Note that control-f will bring up a search box on almost any webpage or document. It's an invaluable tool if you're searching for something specific.)''

'''Alice the Actuary's gentle guided pathway''' will take you through 1 example of each of the important SAO topics, including but not limited to those listed above. Once you've done that, you must go through all the old exam problems. The questions usually aren't very hard, but it takes time to memorize all the facts '''''reliably'''''. The reason this reading comes at the beginning of your study is that it is '''by far''' the most heavily tested topic. This way, you'll have plenty of time for review between now and the exam.

As you go through these old exam questions, you'll begin to notice they're quite repetitive. The examiners do their best to ask the questions in different ways, but there are only so many different ways you can pose questions on the same material. This topic is '''easy points''' if you just put in the time. ''(Not all the readings are like that.)''

==In Plain English!==

===Introduction===

Before we get too deeply into the content, here's an outline for the SAO portion of the COPLFR reading. The green highlighted sections account for virtually all the SAO material on the exam. ''(If you're pressed for time, you can probably skip the other sections completely. But make sure you do '''all''' the old exam problems.)''

:{| class="wikitable" style="text-align: center;"
|-
! Section # !! Section Title !! Relative Importance
|-
|| 1 || style="text-align: left;" | Introduction '''1''' || 0%
|- style="background-color: lightgreen;"
|| 2 || style="text-align: left;" | Identification Section of the SAO || 5%
|- style="background-color: lightgreen;"
|| 3 || style="text-align: left;" | Scope Section of the SAO || 15%
|- style="background-color: lightgreen;"
|| 4 || style="text-align: left;" | Opinion Section of the SAO || 25%
|- style="background-color: lightgreen;"
|| 5 || style="text-align: left;" | Relevant Comments Section of the SAO || 45%
|-
|| 6 || style="text-align: left;" | Additional Considerations || < 1%
|- style="background-color: lightgreen;"
|| 7 || style="text-align: left;" | AOS ''(Actuarial Opinion Summary)'' || 10%
|-
|| 8 || style="text-align: left;" | Actuarial Report || < 1%
|-
|| 9 || style="text-align: left;" | Resources || < 1%
|}

: '''1''' This introductory section has nothing to do with the SAO - it just explains how the AAA ''(American Academy Actuaries)'' organizes its practice notes.

===Alice's Gentle Guided Pathway to Learning the SAO===

Alice is out of town at a conference on self-driving cars and has entrusted me to teach you in her absence. ''(She's also planning to party hard in the evenings, so we won't be hearing from her for a while!)'' We'll proceed in chronological order through the highlights of the COPLFR reading. Recall the memory hint for the ''[[Odomirok.16-17-SAO#Intro_2 | organization]]'' of the SAO: '''ISOR + (A,B)'''. Let's get to it!

====Step 1: Definition of Qualified Actuary (Identification)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(20).pdf E] '''(2016.Spring #20)''' - part (b)
|-
|| '''SAO section''' || '''I'''dentification section
|-
|| '''topic''' || AA qualifications - ''definition of qualified actuary''
|-
|| '''text reference''' || section (2.1.2)
|}

:{| class="wikitable"
|- style="width: 250;"
|| This exam question is '''OUTDATED''' because the definition of "qualified actuary" changed for the 2020.Fall exam. It's still a good question however because it demonstrates one of the types of questions that are asked regarding the SAO. '''The text below has been modified to be consistent with the current syllabus.'''
|}

: '''Part (b)''': The question provides a definition of ''"Qualified Actuary"'' that's intentionally incorrect, and asks you to identify the errors. To answer a question like this, you have to have memorized the paragraph in section (2.1.2) of the COPLFR reading that starts with, ''"Qualified Actuary" is a person...'', as well as bullet points (i), (ii), and (iii) that follow. Unless you have a photographic memory, you have to figure out a way to break it down to make it easy to remember. I did this by breaking the sentences into meaningful phrases.

: The '''green font''' highlights correct statements that were omitted from the exam question.
: The '''red font''' indicates the errors that were intentionally inserted into the exam question.

<hr>

:: "Qualified Actuary" is a person who...

:: (i)
::: '''meets'''
:: ...education, experience, continuing education requirements...
::: '''of the'''
:: ...SQS for SAO ''(Specific Qualification Standards for Statement of Actuarial Opinion)''...
::: '''as set forth in'''
:: ...the QS ''(Qualification Standards)'' for actuaries issuing opinions in the U.S...
::: '''promulgated by'''
:: ...the '''AAA''' ''(American Academy of Actuaries)'' '''not the CAS'''...
::: and '''<s>either</s>''' '''both'''   (aside from ''[[Exceptions to Definition of Qualified Actuary]]'')

:: (ii)
::: maintains an AAD ''(Accepted Actuarial Designation)''
:: (iii)
::: is a member of a professional actuarial association that
:::* requires adherence to the AAA code of conduct
:::* requires adherence to the U.S. qualification standards
:::* participates in ABCD ''(Actuarial Board for Counselling & Discipline)'' for members practicing in the U.S.

<hr>

: ''So, you had to recognize that the '''red part''' should be removed, and that the '''green part''' had to be inserted. Unfortunately, the definition of "qualified actuary" doesn't end there but I didn't want to clutter the presentation. On your second pass through Alice's Gentle Guided Pathway, take a look at [[Exceptions to Definition of Qualified Actuary]]''.

:{| class="wikitable"
|-
| '''Final Comments on Step 1'''
|}

:: I have a couple of tricks for memorizing things like this: ''(The breakdown in (i) above consists of several phrases separated by the '''bold font''' "connector" statements.)''
::* I didn't copy the text verbatim. Some portions of the official statement are not important. For example, under the '''"meets"''' item, the text says basic education, but I shortened that simply to education.
::* I also like to reduce long phrases to abbreviations. Under the '''"of the"''' item, I simply wrote SQS for SAO. The abbreviations are intended as a memory trigger for the words they represent. ''(Of course, you then have to remember what the abbreviations stand for!)''
::* If I were taking the exam, I would memorize the whole thing, but if you're pressed for time ''(or if you just don't feel like it!)'' you can try to guess what the critical elements are. Here, the examiners just wanted you to know who '''promulgates''' the standards ''('''it's the AAA''', '''not the CAS''')''.

:: Something that threw me on my first reading of COPLFR is that the definition of ''"Qualified Actuary"'' in section (2.1.2) is different from the ''"Qualifications"'' of the actuary. The ''"Qualifications"'' section provides detail for terms such as education, experience, continuing education. In other words, it lays out the ''qualifications'' you need to be considered ''qualified''. See also ''[[Supplementary Information on Qualifications for Appointed Actuary]]''.

:: ''' New for 2021.Fall - Section 2.2.3 ''' Once you get your designation, either ACAS or FCAS, you will be subject to "CE" or Continuing Education requirements. This is a bit of a pain but it's generally not too hard to satisfy provided you don't leave it until the last minute! Continuing education requirements are not new but there is now a feature on the CAS website where you must attest that your annual CE requirements have been met. Additionally, you must specify which category your CE credits fall into. These categories are listed in section 2.2.3 and consist of things like ''Law & Regulation'', and ''Policy Forms & Underwriting'', ''Reinsurance'', ''Reserves'', etc. You can often fulfill much of this online but it's more fun to go to a conference. You might see Alice there. :-)

====Step 2: Disclosures in the Scope Section (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2015_2-Fall)/(2015_2-Fall)_(25).pdf E] '''(2015.Fall #25)''' - part (a)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || items to disclose in the scope section of the SAO
|-
|| '''text reference''' || section (3) - intro
|}

: '''Part (a)''': This question is straightforward in that it asks you simply to list 4 items that must be disclosed in the '''scope''' section. It expands on the discussion of the scope provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''. The question asks for 4 disclosures, but there are actually more than 4 possible answers.

: The answers provided in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' were:
:* reserve items in opinion
:* accounting basis for reserves
:* review date
:* data sources

: The additional answers in the examiner's report are the names of several subsections under section (3) from COPLFR:
:* intercompany pooling ''(if applicable)''
:* evaluation of the data for reasonableness & consistency
:* reconciliation to Schedule P
:* reviewed methods & assumptions in determining reserves

: There is a tricky exam problem on this topic and a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/288/2018-f-23 forum discussion]'' that may be helpful in understanding the answer in the examiner's report. Here's the problem:
:: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(23).pdf E] '''(2018.Fall #23)'''

:{| class="wikitable"
|-
| '''Final Comments on Step 2'''
|}

:: I couldn't think of a good memory trick for this. If anyone comes up with one, let me know, in the forum or in an email. '''Update''': BattleActs user ''Casey and others'' posted a good memory trick to the forum ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/5/scope-disclosures here]''. I've also reproduced the rearrangement below: [Hint: '''DREARIRR''', pronounced ''drearier'' because this list is ''dreary'' to memorize!]

::: '''D'''ata sources
::: '''R'''eserve items in opinion
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''R'''eview date
::: '''I'''ntercompany pooling (if applicable)
::: '''R'''eviewed reserve setting methods and assumptions
::: '''R'''econciliation to Schedule P

:: (''Casey'' scores 10 hit points on the beast!) And if that isn't your cup of tea, here's another one: '''I DR3EAD''' this exam. ''

::: '''I'''ntercompany pooling (if applicable)
::: –
::: '''D'''ate of review
::: '''R3''': '''R'''econciliation to schedule P, '''R'''eserve items in opinion, '''R'''eview of methodologies and assumptions
::: '''E'''valuation of data for reasonableness and consistency
::: '''A'''ccounting basis for reserves
::: '''D'''ata sources

:: And here is ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/591/scope-section-mnemonic another mnemonic for this list]'' for those of you with children who are afraid of the dark! ''

:: The most frequently tested topic from the scope section is '''reconciliation to Schedule P'''. We'll look at that next!

====Step 3: Schedule P Reconciliation (Scope)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(21).pdf E] '''(2016.Spring #21)''' - part (b)
|-
|| '''SAO section''' || '''S'''cope section
|-
|| '''topic''' || data - ''Schedule P reconciliation''
|-
|| '''text reference''' || section (3.7)
|}

: '''Part (b)''': This ''should'' be a straightforward question on the process for performing the Schedule P reconciliation, but there are 2 issues:
:* You may not have studied Schedule P, although you probably have some familiarity with it already from your work duties. You can glance ahead at the ''[[Odomirok.15-P#Overview_.26_Organization_of_Schedule_P | Organization of Schedule P]]'', specifically the brief summary of the layout of Schedule P - Part 1.
:* The other issue is that the relevant section in COPLFR is very wordy. We'll come back to this after discussing the answer to this question.

: This question was only 0.75 points but the sample answer for part (b) looks like a question worth 3 or 4 points! I seriously doubt anyone gave that much detail. A better place to look is further down under the heading examiner's report. I think you would get full points just by writing:
:* net paid losses must be reconciled
:* the reconciliation is done against Schedule P - Part 1
:* the reconciliation should be done by line of business & accident year

: This is essentially what it says in COPLFR, section (3.7), in bullet points B, C, D:
:: '''B''': reconcile the given data on a direct + assumed basis and net of reinsurance basis ''(net paid losses in the above exam question)'' to Schedule P - Part 1 or explain why omitted reconciliations were not done.
:: '''C''': reconcile by line of business & accident year
:: '''D''': explain any discrepancies

: If I were answering this question on the exam, I would list points B, C, D. The part about explaining discrepancies seems important, and was indeed listed as part of the sample answer

'''Also added for 2022-Fall:''' There's a new note saying, "''Schedule P reconciliations often include complicated mapping of the data used by the Appointed Actuary to the data within Schedule P.''" This mapping should also be included in the AA report. I don't know how important that comment is for the exam, but I thought it was kind of interesting. The actuary's raw data probably looks very different from the nice tidy format of Schedule P, and performing the required data reconciliation could be really messy.

:: 😕  ← ''Alice-the-Actuary working on her data mapping document''

:{| class="wikitable"
|-
| '''Final Comments on Step 3'''
|}

:* '''Section (3.5.3) is new for 2022-Fall''' It doesn't look very important but you should probably at least know what a ''[[Letter of Representation]]'' is. Click on the link for more information.
:* Section (3.7.1) in COPLFR provides a further discussion that's ''extremely detailed''. If this were a less heavily tested reading, I would skip it, but you should probably at least scan it.
:* Section (3.7.2) provides '''illustrative language'''. This is very important, but in this case, it's obvious and easy to remember. All you have to say is:

::: → ''I reconciled the data to Schedule P - Part 1 of the company's current Annual Statement.''
:: If there were no discrepancies, that's all you have to say. If there were discrepancies you need to provide an explanation.

====Step 4: Type of Opinion (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(20).pdf E] '''(2014.Fall #20)''' - parts (a) & (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || SAO - ''type of opinion''
|-
|| '''text reference''' || section (4.0) & (4.3) – (4.6)
|}

: '''Parts (a) & (b)''': This is a great question for learning about the main part of the SAO. The question provides 4 scenarios and asks you to state the type of opinion. First, recall from the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]'' the 5 possible types of opinion: ''R, I, E, Q, N''.

:: '''Reasonable''': recorded reserves are WITHIN actuary's reasonable range of unpaid claim liabilities
:: '''Inadequate''': recorded reserves are BELOW actuary's reasonable range of unpaid claim liabilities
:: '''Excessive''': recorded reserves are ABOVE actuary's reasonable range of unpaid claim liabilities
:: '''Qualified''': actuary is UNABLE TO ISSUE an opinion on certain material items ''(reserves could still be within actuary's range)''
:: '''No Opinion''': actuary is UNABLE TO CONCLUDE that reserves are reasonable

: So, you have to match each scenario to the correct type of opinion. There are no tricks – it's completely straightforward. Give it a try before looking at the answer!
: → If you'd like a memory hint for these opinions, I reckon you can ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/419/mnemonic-for-type-of-opinion click here]'' to go to a post by '''Sharmishtha''' in the forum!

:{| class="wikitable"
|-
| '''Final Comments on Step 4'''
|}

:: Sometimes, in addition to stating the type of opinion, they also ask you to propose language for the opinion. This is similar to '''Step 1''' above in that you have to have memorized the appropriate '''illustrative language'''. We touched upon this in the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok - The Boring Details]]''.

:: The opinion must start with:
::: → ''In my opinion, the amounts carried in Exhibit A on account of the items identified...''

:: Then there are 4 parts as described in the introductory part of section (4) in COPLFR. The basic language for a reasonable opinion is as follows:
::: '''[A]''' ''Meet the requirements of the insurance laws in state X''. ''(insert the appropriate state)''
::: '''[B]''' ''Are computed in accordance with accepted actuarial standards and principles''.
::: '''[C]''' ''Make a reasonable provision for all unpaid loss and loss adjustment expense obligations of the Company under the terms of its contracts and agreements''.
::: '''[D]''' ''Make a reasonable provision for the unearned premium reserves for long duration contracts'' ''(and possibly Other Loss Reserve items on which the Appointed Actuary is expressing an Opinion of the Company under the terms of its contracts and agreements.)''

: You must memorize this. ''(See [https://battleacts6us.ca/vanillaforum6us/discussion/339/memory-trick-for-a-reasonable-opinion this forum post] for a memory trick. )'' Of course, if the opinion is not reasonable the language will change. Sometimes the net reserves are reasonable while the gross reserves are not. This must all be disclosed. You should keep section (4) of COPLFR handy as you work through all the old exam problems. Don't do them now, though. Finish the steps in Alice's guided pathway first.

Here's a link to a more recent exam problem regarding the SAO opinion. It's a hard problem. I wouldn't recommend trying to solve it on your first pass through the SAO material, but at least read the statement of the problem so you know what's coming.

: [https://www.battleacts6us.ca/pdf/Exam_(2019_2-Fall)/(2019_2-Fall)_(22).pdf E] '''(2019.Fall #22)'''

''(You should definitely come back to this problem later.)''

====Step 5: Work of Others (Opinion)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(21).pdf E] '''(2014.Fall #21)''' - part (b)
|-
|| '''SAO section''' || '''O'''pinion section
|-
|| '''topic''' || work of others - ''considerations & disclosures''
|-
|| '''text reference''' || section (4.10)
|}

: '''part (b)''': You can see from the COPLFR spreadsheet of exam questions that ''work of others'' is a top exam question from COPLFR. The answer is straightforward; it's a bullet point list from section (4.10.1) about items the appointed actuary should consider (and consider disclosing) when making use of the work of another:

:   → Hint: '''P-NEC''' or alternately "'''(E)NPC'''" - see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum post for explanation]. 
:   → BONUS Hint: '''PReQUL''' - see the 2nd entry in ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/232/other-actuary-npc this forum thread for an explanation]. 

:: '''P'''roportion of reserves covered by other person's work ''(relative to total reserves)''
:: ''' –'''
:: '''N'''ature of coverage
:: '''E'''ffect of variations in other person's estimates on appointed actuary's opinion
:: '''C'''redentials of other person

: The examiner's report gave other answers which weren't specifically from that section of the reading, but were based more on common sense and general knowledge. ''(Example: did the other person use reasonable methods & assumptions...)'' I like that they accepted these alternate answers instead of simply expecting you to memorize the list in the reading.

:Now, to aid your memory and deepen your understanding, here is an extension to this problem:
:* ''For each of the considerations listed, describe an ideal situation from the appointed actuary's point of view.''

: For consideration '''P''', the appointed actuary would like the proportion of reserves calculated by the other person to be small. That way, the AA maintains stronger control over the final opinion. For consideration '''N''', the AA might prefer that the other person's analysis was for a short-tailed line like auto physical damage, because the impact of unexpected unfavorable loss development would be smaller, and the AA would not have to review it as thoroughly. For consideration '''E''', the AA would like the range of the other person's estimates to be small. In other words, whether the final paid amount is at the low or high end of the range, there would be little effect on the AA's final opinion. And finally, for consideration '''C''', it's preferable that the other person's credentials and experience align closely with the work they did.

: So, like I said, this wasn't part of the question, but it aids your memory and deepens your understanding to think beyond what was specifically asked.

:{| class="wikitable"
|-
| '''Final Comments on Step 5'''
|}

: Let's go back to the intro section of (4.10) and note a distinction that could be important. It deals with whether this ''other person'' is an actuary or a non-actuary ''(like a modeler or a statistician.)'' The required disclosures are slightly different. If the ''other person'' is:
:: '''an actuary''': disclose '''→''' name, credential, affiliation ''(within OPINION paragraph)''
:: '''a non-actuary''': disclose '''→''' name, affiliation, type of analysis performed

: And of course, this assumes the work is material. ''(The text doesn't specifically say that no disclosures are required if the work is not material, but that seems reasonable. Or, at least, the disclosures would be minimal. At that point, it's a matter for the AA's judgment.)''

====Step 6-A: Company-Specific Risk Factors (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (c)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || company-specific risk factors
|-
|| '''text reference''' || section (5.1)
|}

: '''part (c)''': Company-specific risk factors can be used to fill-in-the-blanks in the illustrative language in '''Step 6-C'''. This section is conceptually easy, but requires you to memorize another bullet-point list. Actually, you don't have to memorize every item in the list, and many of them are common-sense anyway.

: Before diving into the answer to this exam question, let's do a quick review of the ''Relevant Comments'' section of the SAO. Recall this is the 4th of 4 required sections in the SAO. Do you remember off the top of your head how the SAO is organized? [Hint: '''ISOR + (A,B)''']. For more help, ''[[Odomirok.16-17-SAO#Intro_2 | click here]]''. Anyway, the purpose of the ''Relevant Comments'' section is to address topics of regulatory importance such as ''company-specific risk factors, materiality'', and ''RMAD'' or ''Risk of Material Adverse Deviation''. Those topics are discussed below as part of ''Alice's Guided Pathway''. But first, here's a direct link to the intro of the ''Relevant Comments'' chapter from COPLFR. Give it a quick read. And note the addition of these potential risk factors: ''conflagration events and the opioid epidemic.''

:: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p66-68.pdf '''''Relevant Comments Overview (2020 source text)'''''] 

: Let's get back to the exam question. As mentioned above, you really just have to memorize the list of ''company-specific risk factors'' but how are you going to do that?

: My strategy for learning a long list is to break it down into manageable pieces, shorten the description of each item, and create a memory trick. This list contains '''18 items'''.
:* '''Items 11-16 (rearranged)''': '''DONGAS''' ''(risk items related to company operations)''
::: '''D'''ata ''(thin data or unexplained changes)''
::: '''O'''perations ''(qualitative changes in operations)''
::: '''N'''ew ''(new products or new markets)''
::: '''G'''rowth ''(rapid growth in 1 or more business segments)''
::: '''A'''dequacy ''(changes in adequacy of case reserves)''
::: '''S'''everity ''(changes in severity or frequency)''

:: Actually, you probably don't even need to specifically memorize these – they are all obvious. You could come up with most of them from general knowledge.

:* '''Selection from first 10 items''': ''(general risk factors that could apply to all companies)''
::: - A&E losses ''(Asbestos & Environmental)''
::: - catastrophic weather events
::: - '''cyber liability''' ''(this is very topical)''
::: - mass torts ''(asbestos)''
::: - constructions defects ''(it seems a lot of bridges have been falling down lately)''
::: - new legislation

:* '''Last 2 items''': '''New for the 2020.Fall syllabus update of COPLFR'''
::: - distributional changes in limits / attachment points / deductibles
::: - terms of reinsurance contracts

:: You could probably come up with most of these as well. If you read the list once or twice, I'm sure you'll remember enough of them to answer a given exam question.

: So, having covered the risk factors listed in COPLFR, let's return to the specific exam question. This was a nasty question because they were clearly trying to trick you. The question asked for risk factors pertaining to a '''personal lines''' company, and they did not accept many of the answers in the above lists '''unless''' you stated specifically how it could impact the personal lines carrier. But more than that, it felt like they were simply looking for reasons to deduct points. '''For example''':

:* '''accepted answer''': changes in adequacy of known case reserves
:* '''rejected answer''': the risk that reserves are inadequate

I was like, huh? I suppose I can see that the first answer is more specific. There is probably always a risk that reserves are inadequate, but the first answer goes further in that it highlights a '''reason''' to suspect the reserves are inadequate. Still, it was only worth 0.25 points. This question teaches you to be specific ''(but also be brief.)''

:* '''other accepted answers''':
::: - catastrophic weather events
::: - new products/markets
::: - rapid growth
::: - thin data or unexplained changes in data

These 4 answers were pretty much straight from the bullet point list. But again, for 0.25 points each, I wouldn't overthink it. There are much bigger fish to fry elsewhere on the exam.

:{| class="wikitable"
|-
| '''Final Comments on Step 6-A'''
|}

:: The ''illustrative language'' for this is in section (5.1.2). If you check the text, there is a long first paragraph that's basically a disclaimer. It says that ultimate claim amounts are based on future contingent events, whereas current estimates are derived from historical data, '''therefore''' the final settlement amounts could be very different from the reserve amounts in Exhibit A. ''(In other words, if things go to hell in a hand-basket, don't blame the actuary!)''

:: The second paragraph of the ''illustrative language'' lists the risk factors and may provide some sort of an explanation.

:: '''Note''': There is an important comment in the first paragraph of section (5.1.1). It states that the actuary should comment on potential risk factors '''''even when no RMAD is judged to exist.'''''

:: '''Extra-credit question''': ''(This is something you might want to come back to on your second pass of this material.)'' Can you think of combinations of risk factors that might magnify each other? Even if individual risk factors don't seem important in isolation, the combination of 2 or more risk factors may be significant. The text gives 4 examples in this section of chapter 5. The 4th one mentions an increase in limits on policies sold with a decrease in reinsurance. ''(Of course, there are many more examples than those listed. Trying to think of examples is a good way to learn all these company-specific risk factors.)''

:: ''' New for 2021-Fall - Section 5.7 - COVID-19 ''' ''(with a minor update for 2022-Fall) ''

::* '''direct impacts''': loss and unearned premium reserves, claims patterns and loss trends, collectability of reinsurance and/or premiums, exposure
::* '''indirect impacts''': claims handling delays and procedural changes resulting from public health orders

:: Discussion of COVID-19 should be included in the Relevant Comments section of the SAO and possibly other sections if appropriate. Practice notes from 2021 and 2022 included a section on COVID Considerations, which was removed in the 2023 Practice Note. Therefore, a question related to COVID remains unlikely going forward. Specific examples of COVID-19 impacts and considerations could include:

::* '''Worker's Compensation''': Some states have passed regulations whereby an employee working outside of their home who tests positive for COVID-19 is presumed to have acquired the disease related to their employment and is eligible for workers’ compensation benefits.

::* '''Actuarial Loss Data''': Delays in the court system may have impacted loss payment & reporting.

====Step 6-B: Materiality Standard (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (a)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || materiality standard - propose 3 standards
|-
|| '''text reference''' || section (5.2)
|}

: '''general''': Section (5.2) is the '''most heavily tested''' section from COPLFR. It is practically guaranteed there will be questions on:
:* materiality standards
:* RMAD ''(Risk of Material Adverse Deviation)''

:: ''(Recall that Section (5.1) covers company-specific risk factors such as catastrophic weather events or rapid growth.)''

: '''part (a)''': We talked a little bit about materiality in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok - miscellaneous]]''. Click the link for a brief review because I'm assuming you already know that stuff. In particular, you need to know:
:* the various options for materiality standards
:* how to determine if there is risk of MAD, or RMAD, using the materiality standard

:The exam problems are just more examples of the same thing. You guys are smart, Odomirok and COPLFR are well-written, and the examiner's reports have the all the answers. It's just a matter of practice. Note that 2 of the valid materiality standards are based on information we haven't yet covered, namely the RBC or Risk-Based Capital calculation in ''[[Odomirok.19-RBC]]'', and the IRIS ratios, discussed in ''[[NAIC.IRIS]]'', but don't worry too much about this for now. (If you want more RMAD practice immediately, check the links in [[BattleTables - COPLFR]]). Every exam has questions related to materiality and RMAD. Otherwise, you can circle back after the guided tour when you come back to work all the old exam problems. You're going to do that, right? RIGHT?!!   😉

:{| class="wikitable"
|-
| '''Final Comments on Step 6-B'''
|}

:: Did you catch the '''''error''''' in the examiner's report. ''(It's a small one.)'' One of the proposed materiality standards was 10% of reserves. That would be 10% x 400 = 40, but the answer was listed as 25.

:: Anyway, take a quick look the ''illustrative language'' that might appear in the Relevant Comments regarding the materiality standard. But this is another case where the language is obvious, so you really don't have to spend time memorizing it. It could be something like this:

::: → ''My Materiality Standard for purposes of addressing the risk of material adverse deviation of the Company’s reserves for unpaid losses and loss adjustment expenses has been established as xx% of the Company’s net loss and LAE reserves, or $X million.''

:: The underlined phrases were not underlined in the COPLFR text. I underlined those phrases here because it always helps me better understand a long sentence if I break it into meaningful pieces.

:: The only other item you should probably glance at is the full list of '''7 considerations''' in selecting a materiality standard. We've covered 5 of them and the other 2 deal with the effect of reinsurance in making a decision. Here's a direct link to the relevant page in the source text:

::: [https://www.battleacts6us.ca/pdf/COPLFR.SAO_(2020)_p70.pdf '''''Considerations for Materiality Standards (2020 source text)''''']

:: '''Alice's Pro-Tip''': ''Memorize these considerations.'' :-)

====Step 6-C: RMAD (Relevant Comments)====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(24).pdf E] '''(2016.Spring #24)''' - part (b)
|-
|| '''SAO section''' || '''R'''elevant comments section
|-
|| '''topic''' || does RMAD exist ''(Risk of Material Adverse Deviation)''
|-
|| '''text reference''' || section (5.2)
|}

:{| class="wikitable" style='background-color: navajowhite;'
|-
|| '''Note''': For 2023-Fall, a new reading was added to the syllabus, ''[[BM.RMAD]]''. It doesn't have any information that isn't covered in COPLFR, but it only takes 20-30 minutes to go over it and it's probably a good review once you've finished the RMAD material in COPLFR.
|}

: '''part (b)''': You're asked to select one of your 3 proposed materiality standards from part (a). There is no deep reasoning here – they just want you to say something halfway intelligent to justify your selection. You can look at different explanations in the examiner's report. My 3 proposed standards were '''40''', '''50''', '''150''', calculated as follows:

:* 10% of reserves = 10% x 400 = '''40'''
:* 20% of surplus = 20% x 250 = '''50'''
:* amount of deviation that triggers next RBC action level: ''(See also [[Odomirok.19-RBC#Alice.27s_1st_Day_.28Intro_to_RBC.29 | Odomirok.19-RBC]])''
::* Let '''ACL''' = Authorized Control Level, which is given as 50
::* Let '''CAL''' = Company Action Level. The formula is: CAL = 2 x ACL = 2 x 50 = 100
::* We're given Total Adjusted Capital = 250, therefore a ''drop'' of '''150''' is required for capital to hit the CAL of 100. This drop is the 3rd proposed materiality level.

: '''My final choice''': materiality standard = 50
: '''Reason''': This is the middle of the 3 calculated. ''(Note that the value of 150, based on RBC action level, was much higher than my other proposals and didn't seem reasonable.)''

: The second part of part (b) asks whether there is RMAD ''(Risk of Material Adverse Deviation)'' based on this materiality standard. There is a simple rule for this:
:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

: For my choice: (400 + 50) '''<''' 500 ==> '''YES''', RMAD exists

: Students often ask whether this test for RMAD is backwards. Here is a ''[https://battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning forum discussion on RMAD]'' that addresses this confusion.
: There is also another test related to RMAD called the ''[[Bright Line Indicator Test]]''. Click the link for an explanation.
:{|class='wikitable
|-
|| There is a ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/408/materiality-standard-meaning#latest brief forum comment]'' pointing out that it might be more intuitive to algebraically rearrange the formula used to test RMAD as follows:
:* (high end of actuary's reserve range) - (reserves) '''>''' materiality standard ==> '''YES''' ''(to RMAD)''
:* (high end of actuary's reserve range) - (reserves) '''≤''' materiality standard ==> '''NO''' ''(to RMAD)''
|}

:{| class="wikitable"
|-
| '''Final Comments on Step 6-C'''
|}

:: Let's look at the ''illustrative language'' for the comments regarding RMAD. The COPLFR reading provides 3 examples of illustrative language and you definitely have to read & study them, but we'll look at them briefly here:
::: '''Example 1''': RMAD exists
:::* 1st sentence:
::::: → ''I believe there are significant risks and uncertainties associated with the Company’s net loss and loss adjustment expense reserves that could result in material adverse deviation.''
:::: This is boilerplate language.
:::* 2nd sentence:
::::: → ''I have identified those risk factors as ____________, ____________, and ____________.''
:::: The blanks would contain specific risk items from section (5.2), such as ''catastrophic weather events'' or ''rapid growth''. We'll cover these in '''Step 6-C'''.
:::* 3rd sentence:
::::: → ''These risk factors are discussed in more detail in section (5.2) and elsewhere in this opinion.''
:::: This is just so the reader knows there more details are provided elsewhere.
:::* 4th and final sentence:
::::: → ''Other risks may arise in the future.''
:::: I paraphrased this final sentence, but my short version conveys the same information. ''(Good enough for the exam!)''

::: '''Example 2''': factors that could mitigate RMAD
:::* This depends on the company, but it could be something like the existence of reinsurance. Just explain it.

::: '''Example 3''': RMAD does not exist
:::: You would think this would be the shortest example, but it's actually the longest. Here, you explain how you arrived at your conclusion that there is no RMAD. It would basically be just a rehash of parts (a) & (b) of this exam problem: your materiality standard and your calculation to determine whether RMAD exists.

:: Note that for this particular exam problem there '''was''' RMAD, so you would have to use the illustrative language from Examples 1 & 2, not 3.

====Step 7: Actuarial Opinion Summary====

:{| class="wikitable"
|-
|| '''exam Q''' || [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(22).pdf E] '''(2017.Fall #22)''' - part (c)
|-
|| '''AOS section''' || Exhibits A,B,C,D
|-
|| '''topic''' || how to construct the AOS exhibits
|-
|| '''text reference''' || section (7.3)
|}

: '''part (c)''': You are asked to construct the '''AOS ''(Actuarial Opinion Summary)'' items A,B,C,D'''. Note that the AOS has an item E, but that isn't asked here. We'll return to item E further down. Note also that the AOS has items A through E, whereas the SAO has exhibits A & B. Do you remember what these exhibits contain? If not, check the very bottom of the table in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | The Boring Details]]''. Or if it's too much trouble to click on the link, Alice asked me to list them again for you here!

:: '''Exhibit A''': recorded amounts for items mentioned in the scope ''(in other words, the loss reserves)''
:: '''Exhibit B''': disclosure items regarding NET reserves in the scope ''(interesting that Exhibit B refers only to NET reserves)''

: Now, as if all these items and exhibits weren't confusing enough, the ''illustrative language'' for the actuarial opinion is broken down into 4 sections that are labeled [A], [B], [C], [D]. See section (4) of COPLFR on the Opinion section of the SAO. The source reading didn't use the square brackets here – I added them to provide at least some level of differentiation.

: Anyway, once you get all that straight in your head, you should review ''[[Odomirok.16-17-SAO#Chapter_17_.28Actuarial_Opinion_Summary_Supplement.29 | AOS Format]]'' from Odomirok. It's probably also a good idea to open the link that's included there to Mr. Smith's Awesome AOS and print it out for reference. ''(Either that or keep it open in a separate tab so you can refer to it easily.)''

Well, that's really all the information you need to do this problem. The answer in the examiner's report is clearly written so have a crack at it!

:{| class="wikitable"
|-
| '''Final Comments on Step 7'''
|}

:: You may struggle a little if this is your first time constructing the AOS, but you'll get the hang of it soon enough. Remember that if you want more practice, you can easily find all the exam problems related to the AOS using the ''[[BattleTables - COPLFR | COPLFR.SAO BattleTables]]''.
====Old Exam Questions====

''No further advice here - just jump in an attack!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' ''2019 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' ''2018 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]''' ''2017 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]''' ''2016 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=5'''mini BattleQuiz 5]''' ''2015 questions''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=6'''mini BattleQuiz 6]''' ''2014 questions

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=7'''mini BattleQuiz 7]''' ''2012 & 2013 questions (exam only given in the Fall)''

<hr>

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=COPLFR&suffix=SAO&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/coplfr-sao1/172'''Forum''']

<hr>

===Alice's Snarky Comments===

As Alice was working through these problems, she jotted down a few of her thoughts and snarky comments. ''("'''ASC'''" stands for Alice's Snarky Comment)''

'''(ASC #1):''' '''Trick in''': [https://www.battleacts6us.ca/pdf/Exam_(2013_2-Fall)/(2013_2-Fall)_(25).pdf E] '''(2013.Fall #25)'''

* A comment on ''assumptions & methods'' appears in Section (3.8) of the Scope.
* A comment on ''changes in assumptions & methods'' appears in Section (5.12) in Relevant Comments.

The point here is that ''assumptions & methods'' is '''different''' from ''changes in assumptions & methods''. Whatever...

'''(ASC #2):''' '''Pooling'''

* Inter-company pooling is '''different''' from voluntary & involuntary pools. This comes up in the '''Scope''' section of the SAO. ''(Those darn examiners were trying to trick you here.)''

'''(ASC #3):''' '''Section (3.5)'''

* In (3.5), ''Provider of Actuary's Data'', the illustrative language identifies the provider and says the actuary reviewed it
:: ==> but it '''doesn't''' say what to do if they data is deficient somehow. See [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(25).pdf E] '''(2014.Spring #25c)'''
:: ==> apparently this disclosure of bad data can be either in Scope or Opinion where you give the actual opinion or in RMAD because this may represent a material risk
* The writers of the 2014.Spring exam should have had their work peer reviewed! They totally botched the wording for part (a) of [https://www.battleacts6us.ca/pdf/Exam_(2014_1-Spring)/(2014_1-Spring)_(24).pdf E] '''(2014.Spring #24a)'''

==POP QUIZ ANSWERS==

The SAO consists of 4 sections, and 2 exhibits: '''ISOR + (A,B)'''

# '''I'''dentification
# '''S'''cope
# '''O'''pinion
# '''R'''elevant comments

* '''Exhibit A''': recorded amounts for items in scope ''(loss reserves, reinsurance...)''
* '''Exhibit B''': disclosure items regarding NET reserves in scope

[[COPLFR.SAO#Study_Tips |Back to Study Tips]]

AdminFL.Hurricane

2026-01-27T22:13:56Z

Graham:

'''Reading''': “FHCF 2022 Annual Report,” 2022, '''pp. 4-5, 7, 10-11.'''

'''Author''': Florida Hurricane Catastrophe Fund, State Board of Administration of Florida

[https://battleacts.discourse.group/c/candidates-6u/adminfl-hurricane/244'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/adminfl-hurricane ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/700_Hurricane_Fund_(v01).mp4 '''(5:45) → FL Hurricane Fund - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Florida Hurricanes'''

The '''Florida Hurricane Catastrophe Fund (FHCF)''' is a state trust fund designed to provide reimbursement to residential property insurers for catastrophic hurricane losses.

The fund aims to '''stabilize the insurance market''' by:

* offering reliable coverage
* at lower cost than private insurance (due to its tax-exempt status and exclusion of profit margins)

Participation in the FHCF is '''mandatory''' for most Florida residential property insurers. It operates by:

* charging actuarially-determined premiums
* utilizing post-event revenue bonds for additional funds (when necessary)

|}

==Pop Quiz==

==Study Tips==

This a pretty easy reading. There is 1 extremely simple calculation problem, otherwise it's memorization. I think there is a '''high probability''' of a question on hurricanes appearing on the exam.

Hurricanes is a "hot" topic in Florida! Get it? 🤯

'''Estimated study time''': ½ day ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
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|}

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/adminfl-hurricane/244'''Forum''']

==In Plain English!==

===Page 4-5===

====What is the Florida Hurricane Catastrophe Fund?====

This short section covers very basic information about FHCF. Memorize these answers!

:{| class='wikitable'
|-
|| '''Question''': What is the FHCF (Florida Hurricane Catastrophe Fund.)
|}

:* a state trust fund that provides reimbursement to residential property insurers for a portion of their Florida catastrophic hurricane losses

:{| class='wikitable'
|-
|| '''Question''': Briefly describe the reason for the creation of the FHCF (Florida Hurricane Catastrophe Fund.)
|}

:* hurricane Andrew in 1992 caused billions in damage and multiple insurer insolvencies
:* an unstable property insurance market can negatively impact Florida's economy
:* FHCF provides a stable and ongoing source of reimbursement to insurers ''(thus protecting and advancing the state's insurance capacity)''

:{| class='wikitable'
|-
|| '''Question''': Why are FHCF premiums lower versus market prices. (2)
|}

:* FHCF does not include a profit factor or risk load
:* FHCF is exempt from federal taxes

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

====How Does the FHCF Work?====

Participation in FHCF is mandatory for insurers with exposures above a ''de minimis'' threshold. Insurers purchase a "policy" or '''reimbursement contract''' with FHCF, and this policy has a specified retention and coverage limit. ''(Insurers are responsible for losses below the retention and above the coverage limit.)''

: → ''FHCF then covers a percentage of an insurer's losses between the retention and the coverage limit.''
: → ''plus a 10% allowance for LAE''

This percentage is selected by the insurer upon execution of its FHCF reimbursement contract where the options are: 90%, 75%, or 45%.

: → ''Premiums, retentions, and coverage limits are based on each insurer’s annual reporting of insured values.''

{| class='wikitable'
|-
|| '''Question''': Briefly describe how the FHCF is self-supporting.
|}

:* FHCF charges insurers actuarially-determined premiums
:* FHCF can rely on proceeds from bonds backed by assessments ''(if the cash balance of the FHCF fund is insufficient)''
:* FHCF engages in finance and risk-transfer activities ''(improves liquidity and minimizes assessments)''

If the above question came up on the exam, I would write a concise answer as follows:

: → ''FHCF charges actuarially-determined premiums, issues bonds, invests funds, engages in risk-transfer''

There is a table in the source text that describes '''5 FHCF Operational Responsibilities'''. This looks like a potential exam question.

{| class='wikitable'
|-
|| '''Question''': Briefly describe the operation responsibilities of the FHCF.
|}

:* FHCF manages in-house operations, oversees outside service providers
:* FHCF specific staff responsibilities include: ''admin, financial operations, audit prep, claims examinations, debt financing, legal''  →  ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/990/memory-hint-fhcf-staff-responsibilities memory hint]''
:* FHCF contracts with outside service providers ''(Ex: actuarial)''
:* FHCF relies on SBA (State Board of Administration) for investment & technology services
:* FHCF Advisory Council provides advice regarding implementation of the FHCF statute

A quick way to remember the bullet points above is just to remember the underlined words. Note that 2 of the 5 bullet points don't have underlined words but exam questions rarely ask for ALL the answers. They usually just ask for 2 ''(or sometimes 3.)''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

===Page 7===

====Participation====

The source text has a very simple example how to calculate the following quantities for a participating insurer:

* retention level
* coverage limit

To calculate the '''retention level''' you need 3 pieces of information:

# insurer's FHCF premium
# the coverage percentage the insurer selected ''(either 90%, 75%, or 45%)''
# the '''retention multiples''' for the given year for each coverage percentage

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''Formula''':    '''retention level'''  =  (FHCF premium)  x  (retention multiple)
|}

The retention multipliers may be given in a table as follows:

:{| class='wikitable' style="text-align: center;"
|-
|| '''Coverage Percentage'''
|| '''2022 - 2023 Retention Multiple'''
|-
|| 90%
|| 5.9418
|-
|| 75%
|| 7.1302
|-
|| 45%
|| 11.8837
|}

Then if the insurer had chosen a coverage percentage of 75% and their FHCF premium was $1,000,000 this insurer's retention is simply:

* $1,000,000  x  7.1302  =  $7,130,200

All you have to memorize here are the 3 required pieces of information and the formula. The calculation is extremely simple.

Calculating the coverage limit is just as simple but instead of a retention multiplier, you need the '''payout multiple'''.

:{| class='wikitable' style="background-color: navajowhite;"
|-
|| '''Formula''':    '''coverage limit'''  =  (FHCF premium)  x  (payout multiple)
|}

If the payout multiple for a given year is:

* 12.2371

Then the coverage limit for the insurer described above is:

* $1,000,000  x  12.2371  =  $12,237,100

Easy-peezy, lemon-squeezy!

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=3'''mini BattleQuiz 3]'''

===Page 10-11===

====Claims-Paying Capacity====

It's important to note that the reimbursement insurers receive under FHCF is not unlimited. According to the the source text:

: → ''The FHCF does not constitute a full-faith-and-credit obligation of the State of Florida.''

I take this to mean that if a really HUGE hurricane hit Florida, FHCF could be forced to reduce its reimbursement to insurers to amounts below what was stipulated in the original reimbursement contract. The source text goes on to say:

: → ''FHCF’s potential obligation for a particular contract year is limited to its '''[1]''' cash balance '''[2]''' risk transfer recoveries '''[3]''' amounts it is able to borrow (through bonds)''

FHCF recalculates its claims-paying capacity each May and October for the upcoming 12-month and 24-month period. This is critical for market stability.

====Debt Financing and Risk Transfer====

FHCF uses debt financing and risk transfer to serve the marketplace. When FHCF issues bonds, this is a form of debt financing.

:{| class='wikitable'
|-
|| '''Question''': After a hurricane, under what circumstances would FHCF issue bonds?
|}

:* when the projected reimbursement payments to insurers exceed cash resources

:{| class='wikitable'
|-
|| '''Question''': How are FHCF-issued bonds repaid?
|}

:* emergency assessments on (most) property and casualty insurance premiums
:: (WC, medical malpractice, accident and health, federal flood insurance premiums are exempt from assessment)

:{| class='wikitable'
|-
|| '''Question''': What is the maximum permissible assessment that FHCF can charge insurers?
|}

:* 6% of losses attributable to any ONE year
:* 10% of losses attributable to MULTIPLE years

:{| class='wikitable'
|-
|| '''Question''': What organization handles the issuance of bonds for FHCF?
|}

:* State Board of Administration Finance Corporation

One issue for FHCF is whether they have enough resources to pay reimbursements to insurers. A second issue however, is whether they have enough liquid resources to pay promptly. Prompt payments are something insurers rely on.

:{| class='wikitable'
|-
|| '''Question''': How does FHCF meet its liquidity need? ''(in terms of making prompt payments to insurers)''
|}

:* by issuing "pre-event" debt
:: ''(doesn't add to its claims-paying capacity, but helps assure prompt payments)''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=4'''mini BattleQuiz 4]'''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=AdminFL&suffix=Hurricane&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/adminfl-hurricane/244'''Forum''']

==POP QUIZ ANSWERS==

Cole.Nuclear

2026-01-27T22:12:49Z

Graham:

'''Reading''': “Nuclear Verdicts, Tort Liability, and Legislative Responses,” Journal of Insurance Regulation, 2023, '''pp. 9-19. '''

'''Author''': Cole, C and Marzen, C.,

[https://battleacts.discourse.group/c/candidates-6u/cole-nuclear/243'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/coe-nuclear ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/690_Nuclear_Verdicts_(v01).mp4 '''(5:30) → Nuclear Verdicts - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Nuclear Jury Awards'''

'''A "nuclear verdict" refers to extremely large jury awards, typically in excess of $100 million, often including substantial punitive damages.'''
 → ''(This reading is completely and totally unrelated to nuclear power!!!)''

The paper aims to '''explain the rise''' of nuclear verdicts (extremely high jury awards) and their '''impact''' on various industries, particularly insurance and trucking. The paper also suggests '''strategies''' to mitigate these verdicts, including legal reforms and defense strategies.

'''Reasons''' for the rise in monetary verdicts include:

* case-specific details
* plaintiff/defendant attorney tactics

'''Consequences''' of these verdicts include:

* higher insurance costs
* business bankruptcies

|}

==Pop Quiz==

==Study Tips==

This reading on nuclear verdicts is well written, easy to read, and is only 10 pages. It isn't a terrible idea to read it if you're having trouble falling asleep some night. :-)

There are 4 very obvious potential exam questions from this reading and if you click the links you can go directly to the answers:

* What are the ''[[Cole.Nuclear#nuclear_causes | reasons]]'' for nuclear verdicts? ''(There are 6 in total and you just have to memorize them.)''
* What are the ''[[Cole.Nuclear#nuclear_impact | impacts]]'' of nuclear verdicts? ''(5 answers)''
* What are the ''[[Cole.Nuclear#nuclear_defense | defense strategies]]'' against nuclear verdicts? ''(5 answers)''
* What are some ''[[Cole.Nuclear#nuclear_state_activity | state legislative reforms]]'' that address nuclear verdicts? ''(5 answers)''

{| class='wikitable' style='background-color: navajowhite;'
|-
|| '''Alice-the-Actuary's Pro Tips!'''
# You could probably skip reading the source text entirely (and even the wiki article) and just use the Battle Cards to memorize the answers to the above questions!
# You don't even have to memorize all the answers to each question because on the exam, they often only ask you for 2 or 3!
|}

'''Estimated study time''': 1 hour ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
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|}

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cole&suffix=Nuclear&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

==In Plain English!==

===Reasons for Nuclear Verdicts (p9)===

There are many reasons that nuclear verdicts have become more common.

:{| class='wikitable'
|-
|| '''Question''': Identify industries that may be particularly vulnerable to nuclear verdicts. (2)
|}

:* Insurance
:* Trucking (see example below)

Insurance is an obvious answer because insurers get sued all the time. The problem with trucking is that people's cars can slide underneath the truck (if there are no guardrails on the side of the truck to prevent this) and this often causes serious injury or death.

====The Nature of the Facts of the Case (p9)====

The source text has a good (hypothetical) example of an injury case that could have a high likelihood of resulting in a nuclear verdict. It is paraphrased below:

'''Assumptions''':
# A 25-year-old woman is seriously injured in a terrible accident involving a commercial truck.
# The commercial trucking company is at fault in the incident, and the woman was working as a nurse making approximately $100,000 per year.
# The injured party’s car was completely totaled in the incident, worth approximately $40,000.
# The woman incurred serious injuries, with medical bills of approximately $500,000, which include bills for the ambulance, hospital stay, necessary surgeries as a direct and proximate result of the incident, and therapy costs.
# The woman is unable to return to work as a nurse because of the incident.
#* With the nurse’s annual salary of approximately $100,000 per year, and 40 years remaining until the nurse reaches the age of 65, there is approximately $4 million in damages on a future wage loss claim.

:{| class='wikitable'
|-
|| '''Question''': Identify reasons related to the facts of an injury case that a jury verdict may be "nuclear". (3) ''(You may use the above example as a guide, but the reasons should be generally applicable.)''
|}

:* plaintiff is young
:* plaintiff is seriously injured
:* plaintiff had a high-income job (and requires lifetime compensation because they can no longer work at that job)

====Jurisdiction of State versus Federal Court (p10)====

Another factor influencing the verdict size and the chance of a nuclear verdict is whether the case goes to trial in state court or federal court. A federal court has been found to be preferable for the defendant.

:{| class='wikitable'
|-
|| '''Question''': Identify reasons that federal courts are more favorable to a defendant and may lower the odds of a nuclear verdict. (4) [Hint: '''Dr. J(C)''']
|}

:* federal court may be more likely to '''D'''ismiss the case entirely
:* federal court may be more likely to '''R'''esolve the case before trial
:* federal courts choose '''J'''uries from a broader range of individuals
:* federal court judges may be less likely to be from the same '''C'''ity as the plaintiff

Note that personal injury suits are often filed in the state where the injury occurs, but this isn't always the case.

:{| class='wikitable'
|-
|| '''Question''': Identify potential conditions whereby a personal injury suit might be moved from state to federal court. (2)
|}

:* if the amount in controversy exceeds $75,000
:* if the plaintiffs and defendants are from different states (diverse parties)

: Another way of saying the second bullet point is: ''The case must meet the conditions of '''diversity jurisdiction'''.''

Several of the cases mentioned in the source text where the jury delivered a nuclear verdict were in state courts. It seems then that defendants should push to have the cases heard in federal court.

====Plaintiff Utilization of “Reptile Theory” or “Reptile Tactics” (p10)====

Another possible reason for nuclear jury awards is the use of "Reptile Tactics" by the '''plaintiffs' counsel'''. It's based on neuroscience and our common evolutionary origins with reptiles. The details are outside the scope of actuarial work, but you should be understand enough about it to know why it might contribute to excessive judgments against defendants.

:{| class='wikitable'
|-
|| '''Question''': Briefly describe '''[1]''' Reptile Theory/Tactics and '''[2]''' why those tactics might contribute to excessive jury awards.
|}

:# '''Reptile Theory''': Both we, and reptiles, have a part of our brains that focuses on the protection of the individual, family, and community
:# '''Excessive Awards''': Plaintiffs' counsel appeals to the reptilian part of our brain and focuses on safety rather than the proper legal standard.
:#* The jury then improperly uses the safest possible standard rather than the proper legal standard in determining level of liability and monetary award.

Note that reptile tactics are tactics of plaintiffs' attorneys. In the next section, we consider tactics by '''defense attorneys'''.

====Other Reasons: Stealth Jurors, Tactics at Trial, and Egregious Conduct on the Part of Defendants (p11)====

'''Stealth Jurors''': The concept of a '''stealth juror''' is easy to understand. This is a juror who is skilled at hiding their bias against defendants during jury selection, and who is then more likely to propose a higher monetary award against the defendant.

'''Tactics at Trial''': Another reason for the increase in nuclear verdicts is that '''defense attorneys''' often focus on "preserving a record on appeal." This means they make sure to raise objections and follow certain procedures during the trial so that, if the case is appealed, they have a strong basis to argue that errors were made. However, this focus on creating a good record for appeal might lead them to spend less effort on persuading the jury during the trial itself. As a result, the defense might not present their case as effectively, potentially leading to higher verdicts. A concise way of expressing this is:

:{| class='wikitable' style='background-color: navajowhite;'
|-
|| defense attorneys focus on preserving a record on appeal  →  less focus on winning over jurors  →  higher jury awards against defendant
|}

'''Egregious Conduct''': This is another reason for high awards that's very easy to understand. Big corporations ''(or medium or small corporations)'' sometimes exhibit very bad attitudes towards the injured plaintiff. This encourages sympathy for the plaintiff and may lead to higher awards. It isn't too hard to find examples of this. Just google it. That's what the Julia Roberts movie "Erin Brockovich" was all about. That wasn't insurance or trucking which, as mentioned earlier are often the defendants in case that go nuclear, but it's still a good example of egregious conduct that lead to a nuclear award. You could make a good case that it was indeed justified in that circumstance.


:{| class='wikitable'
|-
|| '''Question''': Identify all reasons for '''nuclear verdicts''' discussed in this wiki article. (6)
|}

:* '''plaintiff-related reason''': plaintiff is young, seriously injured, and had a high-income job
:* '''plaintiff-related reason''': reptile tactics by plaintiffs' attorneys
:* the case is tried in state court
:* stealth jurors
:* '''defendant-related reason''': if defense attorneys focus on "preserving a record on appeal" instead of focusing on winning over jurors
:* '''defendant-related reason''': egregious conduct by defendant

To remember these reasons, use the color-coding in the bullet points above to organize your thoughts. There are '''2 plaintiff-related reasons''', then 2 sorta miscellaneous reasons, then '''2 defendant-related reasons'''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cole&suffix=Nuclear&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===The Impact of Nuclear Verdicts (p12)===

Nuclear verdicts have significant impacts on the insurance industry, particularly in commercial trucking, causing a 22.5% increase in annual insurance payments between 2019 and 2020. These verdicts lead to higher insurance costs across various sectors, influencing both the cost and availability of coverage. Companies facing the risk of nuclear verdicts may reduce innovation and product development, and some small businesses, like trucking companies, have been driven to bankruptcy. Additionally, the fear of nuclear verdicts often results in larger settlements and changes to insurance programs, such as reduced coverage limits and increased excess insurance attachment points.


:{| class='wikitable'
|-
|| '''Question''': Identify direct and indirect impacts of '''nuclear verdicts''' on insurers and other industries. (5) [Hint: '''B''''''I''''''DD''''''S''']

|}

:* '''B'''ankruptcy (Ex: small trucking businesses)
:* '''Increased''' cost of insurance
:* '''Decreased''' availability of insurance
:* '''Decreased''' innovation & product development
:* '''S'''hadow effect larger pre-trial settlements ''(because defendant anticipates the potential for the jury to assess an even higher amount)''

Sometimes people tell me they remember the memory hints sprinkled through the wiki but that they can't remember the question it goes with. That's not good! This is where making up a personalized story comes in handy. To me, the word '''B''''''I''''''DD''''''S''' reminds me of the card game "Bridge" because Bridge is all about "bidding". And what you bid has a big "impact" on whether you win the hand. Now, my dumb story about Bridge might not resonate with you but you can make up your own dumb story. The dumber, the better! 😜

An alternate mnemonic was proposed by '''nathankan353''' in the forum, '''BASIC''':

:* '''B'''ankruptcy
:* '''A'''vailability of insurance (decrease)
:* '''S'''hadow Effect of larger pre-trial
:* '''I'''nnovation of insurance (decrease)
:* '''C'''ost of insurance (increase)

===Mitigation of Nuclear Verdicts (p13)===

Companies can enhance safety measures and attorneys can employ specific defense strategies and appeals to reduce the likelihood of nuclear verdicts, while state and federal actions, such as recent legislative proposals in Texas and Iowa, also aim to mitigate this issue.

====The Use of Defense Strategies and the Appeal Process (p13)====

Defense attorneys can try using the comparative fault defense. This means that the degree of fault attributable to the plaintiff is assessed by the jury ''(in addition to the fault of the defendant)''. In practice, several jurisdictions use something called '''modified comparative fault defense'''. Specifically, this means:

* no compensation if plaintiff > 50% at fault
* pro-rated compensation if plaintiff is ≤ 50% at fault

That seems fair because there could be situations where the plaintiff was a dumb-ass. There are some pretty bad defendants out there, but there are also some pretty dumb plaintiffs and that shouldn't be ignored!

Another defense strategy is to file a pre-trial motion to '''limit questions''' from plaintiff's counsel that relate to Reptile Tactics. And a third defense strategy may be to work harder at identifying '''stealth jurors'''. This could take the form of a supplemental jury questionnaire.

A 4th defense tactic is an '''offer to confess''', which is just a fancy way of saying that the defense offers to settle prior to the trial. The plaintiff can refuse, of course, but the catch is that if the verdict is less than the pre-trial offer, the plaintiff is then responsible for a portion of the defendant's costs, possibly even including attorney fees.

The 5th and last defense tactic is simply for the defendant to '''appeal''' the verdict. Sometimes this is successful; sometimes it isn't. In any case, let's summarize this into "Battle Card" format. I rearranged the order to group them a little better.


:{| class='wikitable'
|-
|| '''Question''': Identify defense strategies against '''nuclear verdicts'''. (5)
|}

:* '''Pre-trial''':
::* defendant '''uses''' a supplemental questionnaire to better identify stealth jurors
::* defendant '''offers''' to confess ''(if plaintiff refuses, they may have to pay some of the defendant's costs)''

:* '''During trial''':
::* defendant '''uses''' a (modified) comparative fault defense ''(no compensation if plaintiff > 50% at fault, pro-rated compensation if ≤ 50% at fault)''
::* defendant '''limits''' questions based on Reptile Tactics ''(because that could inflame the jury's emotions which could induce then to ignore appropriate legal standards)''

:* '''After trial''':
::* defendant '''appeals''' verdict

====State and Federal Legislative Activity (p15)====

Some states with lots of lawsuits and high liability losses tend to adopt tort reform faster, and these reforms can lower costs for insurers and consumers. Many states cap punitive damages either by a dollar limit or a ratio, like $500,000 or a 3:1 ratio. Some states have unique rules based on the defendant's income or net worth. Additionally, federal legislation like the Stop Underrides Act aims to improve truck safety and could reduce huge verdicts in trucking cases.


:{| class='wikitable'
|-
|| '''Question''': Identify and briefly describe STATE & FEDERAL legislative activity related to tort reform and nuclear verdicts. (5)
|}

# '''State Tort Reform Adoption''':
#* States with higher liability losses, more lawyers, and more lawsuits tend to adopt tort reform faster, aiming to reduce litigation costs.
# '''Caps on Punitive Damages''':
#* Many states cap punitive damages using either a fixed dollar amount (e.g., $500,000) or a ratio (e.g., 3:1) to limit excessive awards.
# '''Unique State Limits''':
#* Some states base punitive damage caps on the defendant's income or net worth, such as Kansas, Mississippi, and Montana.
# '''Specialized Rules''':
#* Certain states have specific rules for punitive damages in cases like product liability (Connecticut) or wrongful death (Rhode Island).
# '''Federal Legislation - Stop Underrides Act''':
#* This act aims to reduce underride accidents involving trucks, potentially lowering the occurrence of nuclear verdicts in trucking-related cases.

Note that the #1-4 are state activities, and only #5 is a federal activity. A potential exam question may ask you '''separately''' for an example of state legislative activity and federal legislative activity. It makes more sense for the "Stop Underrides Act" to be federal rather than state because trucks usually cross state lines so a state law wouldn't be very useful. As soon as the truck left the state, it wouldn't be subject to the law anymore.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cole&suffix=Nuclear&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cole&suffix=Nuclear&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/cole-nuclear/243'''Forum''']

==POP QUIZ ANSWERS==

NAIC.AnnualExs

2026-01-27T22:12:05Z

Graham:

'''Reading''': Official Annual Statement Examples

* The following companies post their annual statements online. Candidates may use these (or their own company’s statements) as illustrations to better understand the annual statement but are not responsible for any company-specific data: (1) Allstate and (2) The Liberty Mutual Group.

'''Author''': National Association of Insurance Commissioners (NAIC)

  [https://battleacts.discourse.group/c/candidates-6u/naic-annualexs/242'''Forum''']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Annual Statement Examples'''

This syllabus entry is 2 examples of annual statements, 1 from Travelers and 1 from Liberty Mutual. These are updated each year to provide information for the most recent year-end.
|}

==Study Tips==

The CAS syllabus citation for this article is confusing. The syllabus says this is a new reading but it really isn't. The financial statements are generally updated with data reflecting the most recent year-end, but that doesn't matter since they are provided only as examples. The exhibits the CAS selects for inclusion in these examples can change significantly from year to year. ''(It seems almost random what they decided to include/exclude.)

Keep these annual statements handy as I've referenced it in various places throughout the wiki. Other than that, there's nothing to do. ''(I've included a small number of super-simple BattleCards below to pump up your BRQ.)''

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
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! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
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|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=AnnualExs&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-annualexs/242'''Forum''']

==In Plain English!==

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=AnnualExs&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

NAIC.Annual

2026-01-27T22:11:17Z

Graham:

'''Reading''':

* Official 2023 NAIC Annual Statement Blanks, Property and Casualty, (both individual and consolidated basis), pp. 2-13
* Notes to the Financial Statement (p. 14, refer to the Odomirok paper for the Notes to cover)
* Schedules D (pp. SI03 through SI09)
* F (pp. 20-29)
* H (pp. 30-32)
* P (pp. 33-93).

* Candidates will be expected to have knowledge of other sections of the annual statement that are discussed in other Syllabus readings.
* Candidates are '''not responsible''' for page numbers.
* The “Notes to the Financial Statement” are cited for reference only.
* Candidates are responsible for the Notes as described in the Odomirok reading where the Notes are referenced by title. If the 2022 Annual Statement and the study materials differ, candidates may base their answers on either.

'''Author''': National Association of Insurance Commissioners (NAIC)

[https://battleacts.discourse.group/c/candidates-6u/naic-annual/241'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-iris ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''NAIC Annual Statement Blank'''

This is a statement blank for the annual statement.

|}

==Study Tips==

The CAS syllabus citation for this article is confusing. The syllabus says this is a new reading, however, it actually isn't. The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

There is no material here. The Travelers and Liberty Mutual examples of annual statements are better to look at. You can also look at your own company's annual statement. There is 1 easy BattleCard.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
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|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=Annual&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-annual/241'''Forum''']

==In Plain English!==

Recall that SAP ''(Statutory Accounting Principles)'' are a set of accounting rules for insurance companies set forth by the National Association of Insurance Commissioners. They are used to prepare the statutory financial statements of insurance companies.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=Annual&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

BM.RMAD

2026-01-27T16:01:41Z

Graham:

'''Reading''': “Risk of Material Adverse Deviation Study Note,” April 2023.

'''Author''': Brandt, E.A. and Maxwell, L.A.

[https://battleacts.discourse.group/c/candidates-6u/bm-rmad/239'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/bm-rmad ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Schedule P - Loss & LAE Reserves'''

* This reading discusses the need for actuaries to '''assess the risk''' that actual future losses might significantly exceed the estimated reserves.
* The actuarial evaluation considers:
:* '''quantitative tests''' – ''Bright Line Indicator Test, Materiality Range Test''
:* '''qualitative factors''' – ''business line volatility, catastrophe impacts''
About 30% of Statements of Actuarial Opinion reviewed indicated significant RMAD ''(with a higher prevalence among stock insurers compared to mutual companies.)''

|}

==Pop Quiz==

==Study Tips==

Everything in this reading is covered in the other SAO readings. You can skip this reading entirely without missing any important information. Having said that, it's well written and might make good bedtime reading. It's got some pretty good examples so it reinforces the material you've already covered.

'''Estimated study time''': 20-30 minutes ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
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[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=BM&suffix=RMAD&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/bm-rmad/239'''Forum''']

==In Plain English!==

===Introduction===

''[[ASOP.36]]'' states the following:

* ''The actuary should consider whether there are significant risks and uncertainties that could result in future paid amounts being materially greater than those provided for in the reserves.''

That's blazingly obvious! Even Ian-the-Intern gets it!

===Materiality===

The materiality standard should be chosen based on:
* the actuary’s professional judgment
* any applicable materiality guidelines or standards
* the intended purpose of the SAO

We previously covered ''[[Odomirok.16-17-SAO#Miscellaneous | common choices for a materiality standard]]''. This reading has a table showing the proportion of insurers that selected the various options.
* 71% chose % of surplus
* 50% of those used a percentage of 10%

[[File: BK.RMAD (010) materiality choices.png]]

===Risk of Material Adverse Deviation===

There are 2 quantitative tests for RMAD, both of which have been discussed in previous readings:

* ''[[Bright_Line_Indicator_Test | Bright Line Indicator Test]]''
* A ''[[COPLFR.SAO#Step_6-C:_RMAD_.28Relevant_Comments.29 | comparison]]'' of:
:: [1] (reserves) + (the materiality standard)
:: [2] high end of actuary's reserve range

For the comparison test, the rule is:

:: (reserves + materiality standard) '''<''' (high end of actuary's reserve range) ==> '''YES''' ''(to RMAD)''
:: (reserves + materiality standard) '''≥''' (high end of actuary's reserve range) ==> '''NO''' ''(to RMAD)''

{| class='wikitable'
|-
|| '''Note''': ''If the actuary didn't produce a range of estimates then the comparison test is not even possible.''
|}

This reading makes the additional point that these quantitative tests are not definitive. Even if the conclusion is "NO" '''from both tests''', the actuary should still apply qualitative tests to make the final determination regarding the existence of RMAD. Considerations include:

* long-tail or volatile lines (WC, liability lines)
* catastrophes from late in the year that may not be reflected in the reserves
* excess claims that are not reported to the (re)insurer until the retention is breached

Conversely, even of both quantitative tests indicate "YES" to RMAD, the actuary doesn't necessarily conclude RMAD exists. There could be mitigating circumstances embedded in the qualitative considerations.

===RMAD in Practice===

This short section states that of the SAOs reviewed for the writing of this paper, 30% stated that "YES" to RMAD. '''I found that surprising!'''

But stating that RMAD exists doesn't necessarily mean the company is in trouble. It's simply to inform the Board of Directors of the possibility that a company’s booked reserves may develop beyond the principal user’s expectations.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=BM&suffix=RMAD&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=BM&suffix=RMAD&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/bm-rmad/239'''Forum''']

==POP QUIZ ANSWERS==

IEE.Current

2026-01-27T16:00:54Z

Graham:

'''Reading''': 2023 Insurance Expense Exhibit

'''Author''': n/a

[https://battleacts.discourse.group/c/candidates-6u/iee-current/240'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/iee-current ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': ''' Insurance Expense Exhibit'''

This reference, ''Insurance Expense Exhibit'', is not a reading. It's the IEE that's discussed in great detail in ''[[Odomirok.18-IEE]]''.
|}

==Study Time==

Everything you need to know is in ''[[Odomirok.18-IEE]]''.

'''Estimated study time''': 0 minutes ''(zero)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

  [https://battleacts.discourse.group/c/candidates-6u/iee-current/240'''Forum''']

Porter.6-Formation

2026-01-27T15:59:34Z

Graham:

'''Reading''': Insurance Regulation, Insurance Institute of America, 2008. - '''Chapter 6''' - '''Insurer Formation, Licensing & Market Regulation'''
* pp. 6.11-6.17 only

'''Author''': Porter, K.

[https://battleacts.discourse.group/c/candidates-6u/porter-6-formation'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/porter-6-formation ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Porter 6 (Insurer Formation, Licensing, and Market Regulation)'''

Chapter 6 discusses the regulatory framework for '''forming''', '''licensing''', and '''marketing''' insurance companies. State regulations are primarily concerned with market conduct and solvency.

* '''Market conduct regulation''' focuses on consumer protection on such areas as:

:* ''sales, advertising, and claims settlement''

* '''Solvency regulation''' aims to prevent insurer insolvency through:

:* ''financial examinations''

|}

==Study Tips==

Spend at most 30 minutes on this reading.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
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|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Porter&suffix=6-Formation&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/porter-6-formation/238'''Forum''']

==In Plain English!==

Insurers must be licensed in state A to write policies in state A, but they can be '''incorporated''' anywhere. An insurer is called:

* domestic - ''if incorporated in state A, licensed in state A, writes policies in state A''
* foreign - ''if incorporated in state B, licensed in state A, writes policies in state A''
* alien - ''if incorporated outside of the U.S., licensed in state A, writes policies in state A''

The licensing requirements are different for each but may depend on something called seasoning, which just means the insurer already has experience operating in another state. ''(Seasoning requirements can be relaxed if the applicant has a strong capital base or is owned by a seasoned insurer.)''

There may also be requirements surrounding capital ''(obvious)'' as part of something called an '''organizational exam'''. This exam might include verification that:

* capital requirements are met
* management team is in place
* records are in good order
* rates have been approved

'''Market conduct regulation''' of an insurer includes conduct surrounding:

* sales & advertising
* underwriting
* rates
* claims settlement

Those items of market conduct are pretty obvious and if you were asked for that list on the exam, you could probably come up with it without having specifically memorized it. ''You guys have enough experience and general knowledge that you can take educated guesses and often be right!''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Porter&suffix=6-Formation&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.30-Future

2026-01-27T15:59:00Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 30''' - '''The Future of Financial Reporting'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-30-future/237'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-30-future ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Future of Financial Reporting'''

* Chapter 30 discusses the '''future of financial reporting & solvency monitoring''' of insurance companies.

* The results of the 2015 Financial Sector Assessment Program (FSAP) found (despite improvements) '''ongoing issues''' with how U.S. insurance companies measure capital adequacy and value assets/liabilities.

|}

==Study Tips==

Spend no more than 10 minutes on this reading.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
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|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=30-Future&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-30-future/237'''Forum''']

==In Plain English!==

The '''Financial Sector Assessment Program''' ''(FSAP)'' is a periodic peer reivew of financial regulation for G20 countries.
* it is benchmarked against IAIS ICPs ''(IAIS = International Association of Insurance Supervisers, ICPs = Insurance Core Principles)''
* the U.S. did well historically but may not do well going forward because SAP doesn't reflect the time value of money

IAIS is developing '''ComFrame''' ''(Common Framework)'' to supervise international insurance groups.
* needs a standard method for valuing assets & liabilities
* ComFrame proposes '''IFRS''' to meet this need
* the U.S. method is different from IFRS ==> problem! ''(U.S. insurers may need to create 2 sets of financial statements.)''

The '''Federal Insurance Office''' ''(FIO)'' was created by the ''Dodd-Frank Wall Street Reform & Consumer Protection Act of 2010''.
* studies & collects information on the INSURANCE INDUSTRY & state insurance regulatory systems
* drafts federal regulation for the insurance industry

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=30-Future&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.24-IFRS

2026-01-27T15:58:31Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 24''' - '''International Financial Reporting Standards'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-24-ifrs/236'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-24-ifrs ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''IFRS'''

International Financial Reporting Standards (IFRS) are global standards aimed at providing '''transparent and comparable financial information across borders''', widely used by major economies except the U.S., which adheres to its own GAAP.

IFRS 17, issued to replace the interim IFRS 4, '''standardizes insurance contract accounting'''

|}

==Study Tips==

'''International Financial Reporting Standards''' ''(IFRS)'' are global reporting standards from the '''International Accounting Standards Board''' ''(IASB)''. This is a very complex topic and the overview given in the source text barely scratches the surface. You will not be able to gain an understanding of IFRS from this brief treatment. All you can do is memorize a few selected items just in case they are asked on the exam:

* definition of '''insurance contract'''
* the concept of ''level of aggregation''
* methods for ''measuring'' the liabilities of insurance contracts
* the basic formula:    '''insurance contract liability'''    =    LRC   +   LIC

I think the likelihood of an exam question on this topic is low.

'''Estimated study time''': 30 minutes ''(not including subsequent review time)''

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=24-IFRS&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-24-ifrs/236'''Forum''']

==In Plain English!==

===General Information===

In broad terms, IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. Let's take a step back however and see how IFRS relates to the current GAAP standard in the United States.

The first thing you have to know about '''accounting standards''' is:
* FASB develops and issues GAAP standards
* IASB develops and issues IFRS standards

Recall:
* FASB = ''Financial Accounting Standards Board''
* IASB = ''International Accounting Standards Board''

FASB & IASB are '''cooperating''' to create financial reporting standards to:
* increase transparency & consistency among insurers operating in different countries
* align standards with company economics ''(versus regulatory prudence)''

An important first step in this cooperation is the IFRS definition of '''insurance contract''':
* a '''contract''' under which one party (the insurer) accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder if a specified uncertain future event (the insured event) adversely affects the policyholder

Recall that in the U.S. ''insurance risk'' requires both ''underwriting risk'' and ''timing risk''. <s>Note however that IFRS does not require ''timing risk''</s>.  ← ''IFRS does require timing risk.''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=24-IFRS&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===IFRS 17===

IFRS 17 establishes principles for the recognition, measurement, presentation and disclosure of insurance contracts. The treatment of IFRS 17 in chapter 24 of Odomirok is very brief but here are few items that are discussed:

{| class='wikitable'
|-
|| '''Level of Aggregation'''
|}

* an insurer can aggregate its portfolio of insurance contracts into different groups
* there are 3 broad levels of aggregation used for defining groups and these levels are based on the concept of "onerous contracts"
* the term "onerous contracts" is a key concept in IFRS but it is not defined in Odomirok ''(for this reason, it would not be a good exam question)''

After the insurer aggregates their contracts into groups, the next step is to measure the liabilities associated with these groups. There are a few different ways of doing this.

{| class='wikitable'
|-
|| '''Measurement Models''': General Model ''(this is the default approach in IFRS)''
|}

* Balance Sheet liability   =   FCF + CSM
: → FCF
:: = Fulfillment Cash Flow
:: = [ Present Value of (premium - losses - benefits - expenses) ] + [ adjustment for timing and risk of these cash flows ]
: → CSM
:: = Contractual Service Margin
:: = (expected profit for providing future insurance coverage)

* calculating the '''discount rate''' used in the PV calculation is a complex topic that is not discussed in any detail in the source text
: → as a general rule however, use current discount rates ''(versus historical rates in effect at contract inception)''

* The '''VFA''' or ''Variable Fee Approach'' is based on the General Model but with additional features to account for contracts with direct participating features.

{| class='wikitable'
|-
|| '''Measurement Models''': Premium Allocation Approach
|}

* a simplified version of the General Model but one of these eligibility requirements assessed at contract inception must be met:
:    - can be used for short-term contracts ''(policy term ≤ 1 year)''
:    - can be used for longer-duration contracts '''IF''' PAA is a reasonable approximation to GMA over the life of the contract
:    - applies only to LRC component of insurance contract liabilities ''(see below)''

:{| class='wikitable'
|-
| '''Question''': define the term ''Liability for Incurred Claims'' or LIC
|}

:* insurer’s obligation to pay claims for events that have already occurred

:{| class='wikitable'
|-
| '''Question''': define the term ''Liability for Remaining Coverage'' or LRC
|}

:* insurer’s obligation to provide insurance coverage for events that have not yet occurred ''(basically just the premium liabilities)''

{| class='wikitable' style="background-color: lightgreen;"
|-
| '''Extra background information on IFRS 17'''
|}

* Here's a link to the official IFRS 17 website. It isn't specifically part of the syllabus but I found it helpful. Take a quick look now then you can come back later to review:

:: → ''[https://www.ifrs.org/-/media/project/insurance-contracts/ifrs-standard/ifrs-17-accounting-model-a3-jan-2018.pdf accounting model]''

* Under the IFRS accounting model, we have the following relationship on the balance sheet:

:: → insurance contract liability    =    LRC    +    LIC

* And the CSM ''(Contractual Service Margin)'' is part of LRC.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=24-IFRS&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=24-IFRS&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.21-Tools

2026-01-27T15:57:56Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 21''' - '''Measurement Tools'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-21-tools/235'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-21-tools ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Measurement Tools'''

The chapter discusses various measurement tools used to '''evaluate the financial health''' of property/casualty insurance companies.

No single tool can provide a comprehensive assessment, and a '''combination of tools''' should be used to gain insights, including:

* audited financial statements
* IRIS ratios
* RBC calculations

These tools can help identify trends and potential issues over time, offering '''early warnings of financial impairment risks''', but they cannot detect every problem ''(such as management deficiencies or fraud.)''

|}

==Study Tips==

This chapter provides a nice overview and is good bedtime reading. But since there has never been an exam question specifically from this chapter, spend no more than 30 minutes. There are just a few basic BattleCards.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=21-Tools&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-21-tools/235'''Forum''']

==In Plain English!==

Statutory statements show '''financial health''' ''(or lack thereof)'' in 2 ways:
* balance sheet strength - ''are assets sufficient to cover liabilities''
* earning potential - ''is the company going to generate a profit going forward''

On an insurer's balance sheet, the biggest liability is reserves, and information on '''reserve adequacy''' can be found in several places in the annual statement:
* 5-year historical exhibit
* Schedule P ''(this is where the really good information is)''
* Schedule F ''(shows reserves net of reinsurance)''
* notes to the financial statements ''(miscellaneous items that may or may not provide further details on reserve adequacy)''

There are some common causes and/or warning signs for '''insolvencies''': [Hint: '''GoNGS''']
: '''Go''' - poor Governance ''(CEO sucks)''
: '''N''' - New entrant to market ''(inexperienced management, lower capital)''
: '''G''' - Growth too rapid ''(get premiums up front, but the trouble starts when the losses start rolling in)''
: '''S''' - Size too small ''(can't absorb unexpected losses)''

In my head, I read the hint as ''Gongs'', as in that old T.V. show called the ''The Gong Show''. Anyway, 2 other general reasons for '''insolvencies''' are:
* deficient reserves
* under-pricing

One more memory trick for reasons for insolvency:

: '''D'''eficient reserves
: '''U'''nderpricing
: '''N'''ew entrant to market
: '''G'''rowth too rapid

''(because insolvency puts you in deep doo-doo.)''

And just a few more "crap" reasons that have appeared in examiner's reports:

* '''C'''atastrophe
* '''R'''einsurer insolvency
* '''A'''sbestos
* '''P'''oor investment results

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=21-Tools&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.13

2026-01-27T15:57:03Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 13''' - '''Overview of Schedules and Their Purpose'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-13'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-13 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Schedules within Financial Statements'''

Chapter 13 from Odomirok is an overview of various Schedules in the annual statement such as:
* '''Asset Schedules''': A, B, BA, D, DA, DB, DL, E
* '''Reinsurance''': Schedule F
* '''Loss & LAE Reserves''': Schedule P
* '''Premium Writings by State''': Schedule T
* '''Organizational Structure''': Schedule Y

These schedules are essential for stakeholders and regulators to analyze the '''financial health and risk exposures''' of the insurance company.

Each schedule serves a '''specific purpose''', from detailing assets and their valuations to outlining reinsurance and premium distributions across states.

|}

==Study Tips==

Spend no more 10 minutes on this chapter.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=13&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-13/233'''Forum''']

==In Plain English!==

For reference, here's a list of Schedules discussed in Chapter 13, but I don't think you have to memorize them or know any details beyond what's already covered in higher-ranked chapters. ''(I've highlighted in ''' green ''' the ones that most people would be able to identify.)''

:{| class='wikitable'

|-
! asset schedule !! information shown !! details

|- style='background-color: lightgreen;'
| style='text-align: center;' | A || real estate || '''Part 1''': owned at year-end, '''Part 2''': purchased during year, '''Part 3''': sold during year
|-
| style='text-align: center;' | B || mortgage loans || '''Part 1''': owned at year-end, '''Part 2''': acquired during year, '''Part 3''': ended during year
|-
| style='text-align: center;' | BA || other long-term invested assets || '''Part 1''': owned at year-end, '''Part 2''': purchased during year, '''Part 3''': sold during year
|- style='background-color: lightgreen;'
| style='text-align: center;' | D || stocks & bonds || '''Part 1''': bonds owned, '''Part 2''': stocks owned
|-
| style='text-align: center;' | DA || other short-term investments || '''Part 1''': short-term investments, ''(no other parts to this schedule)''
|-
| style='text-align: center;' | DB || derivatives || '''Parts A, B, C, D''': show different categories of derivatives
|-
| style='text-align: center;' | DL || securities lending || '''Parts 1, 2''': details of securities lending collateral assets
|- style='background-color: lightgreen;'
| style='text-align: center;' | E || cash & cash equivalents || '''Part 1''': cash, '''Part 2''': cash equivalents, '''Part 3''': special deposits

|}

Other common Schedules within the annual statement are:

:{| class='wikitable'

|-
! schedule !! information shown

|-
| style='text-align: center;' | F || reinsurance ''([[Odomirok.14-F]])''
|-
| style='text-align: center;' | P || loss & LAE reserves ''([[Odomirok.15-P]])''
|-
| style='text-align: center;' | T || premium writings by state
|-
| style='text-align: center;' | Y || organizational structure

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=13&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.11-GenInt

2026-01-27T15:56:33Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapter 11''' - '''General Interrogatories'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-11-genint/232'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-11-genint ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''General Interrogatories'''

The General Interrogatories are a '''series of questions''' included in the statutory Annual Statement of an insurance company. There are 2 parts:

* '''Part 1''': common questions for all types of insurers
* '''Part 2''': specific questions for property/casualty insurers.

The '''purpose''' of these interrogatories is to provide additional clarity and identify areas that might require further regulatory review such as:
* company operations
* financial conditions
* exposures to catastrophic events

|}

==Study Tips==

Spend no more than 10 minutes on this chapter.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=11-GenInt&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-11-genint/232'''Forum''']

==In Plain English!==

The '''purpose''' of the ''General Interrogatories'' is to provide further information on: [Hint: '''COB''' - ''yummy like corn-on-the-'''cob''']
: '''C'''ontrols ''(both internal & external)''
: '''O'''perations
: '''B'''usiness practices

And here are a few examples of '''items''' discussed in the ''General Interrogatories'': [Hint: '''R-MESS''' - ''the interrogatories are a '''mess''' of further information]
: '''R'''egulatory exams
: '''  –'''
: '''M'''erger activity
: '''E'''xemptions from regulations
: '''S'''ales commissions - ''whether they're excessive just to acquire business''
: '''S'''uspension of licenses - ''if applicable

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=11-GenInt&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Odomirok.1-5-Intro

2026-01-27T15:56:06Z

Graham:

'''Reading''': Financial Reporting Through the Lens of a Property/Casualty Actuary - '''Chapters 1,2,3,4,5''' - '''Introduction to Financial Reporting'''

'''Author''': ''Kathleen C. Odomirok'', FCAS, MAAA, ''Liam M. McFarlane'', FCIA, FCAS, ''Gareth L. Kennedy'', ACAS, MAAA, ''Justin J. Brenden'', FCAS, MAAA, ''EY''

[https://battleacts.discourse.group/c/candidates-6u/odomirok-1-5-intro/231'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/odomirok-1-5-intro ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Introduction to Financial Reporting'''

The first five chapters of the financial reporting text cover basic accounting principles.

Financial reporting communicates a company's '''financial health and results''', governed by standards like:

* Statutory Accounting Principles (SAP)
* Generally Accepted Accounting Principles (GAAP)
* International Financial Reporting Standards (IFRS).

Each framework has '''distinct rules and objectives''' such as:

* SAP's conservative approach for regulatory oversight
* GAAP's alignment with financial performance.

'''Actuaries play a crucial role''' in estimating liabilities and ensuring compliance with these standards, essential for effective financial analysis and regulatory compliance.

|}

==Study Tips==

Spend no more than 15 minutes on this reading. You probably already know these basic accounting concepts, but it won't hurt to review them.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=1-5-Intro&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/odomirok-1-5-intro/231'''Forum''']

==In Plain English!==

This is a good time to review ''[[Odomirok.8-9-IS#SAP_versus_GAAP | SAP versus GAAP 8-9]]'' from ''[[Odomirok.8-9-IS]]''.

Note that this is also discussed in ''[[Odomirok.22-23-GAAP#SAP_vs_GAAP | SAP versus GAAP 22-23]]'' from ''[[Odomirok.22-23-GAAP]]''.

The quiz below covers a few more basic accounting concepts.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Odomirok&suffix=1-5-Intro&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

FIO.DoddFrank

2026-01-27T15:55:36Z

Graham:

'''Reading''': Annual Report on the Insurance Industry Completed Pursuant to Title V of the Dodd-Frank Wall Street Reform and Consumer Protection Act, September 2022
* Sections I, IA and I-B1.

'''Author''': Federal Insurance Office (FIO)

[https://battleacts.discourse.group/c/candidates-6u/fio-doddfrank/230'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/fio-doddfrank ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Insurance Industry Report (as required by Dodd-Frank)'''

The report highlights '''FIO's roles''' including :
: '''[1]''' ''monitoring the insurance sector'' '''[2]''' ''advising on policy issues'' '''[3]''' ''coordinating federal efforts in international insurance matters''

It also outlines '''FIO's responsibilities''' in:
: '''[1]''' ''data collection'' '''[2]''' ''reporting'' '''[3]''' ''contributing to regulatory efforts'' '''[4]''' ''administration of the Terrorism Risk Insurance Program''

|}

==Pop Quiz==

==Study Tips==

The Dodd-Frank Wall Street Reform and Consumer Protection Act is mentioned in several other readings and has occasionally been tested. You can use the wiki search bar to find the other places where it has been mentioned. The Act has been modified since its introduction in 2010 so some readings may not be up to date. You will always receive credit on the exam however if your answer is consistent with the syllabus readings even if that answer is outdated.

This isn't on the exam but I was curious, so I looked up what the changes in Dodd-Frank since 2010. Here's what I found:

* ''There have been changes and updates to the Dodd-Frank Act since it was enacted in 2010. One notable amendment is the Economic Growth, Regulatory Relief, and Consumer Protection Act signed into law by President Donald Trump on May 24, 2018.''

* ''This law rolled back some of the regulations of the Dodd-Frank Act for small and medium-sized banks. It increased the threshold for banks "too big to fail" from $50 billion in assets to $250 billion, meaning fewer institutions are subject to stringent stress testing and other regulatory measures. Smaller banks, those with less than $10 billion in assets, also got relief from some regulations.''

'''Estimated study time''': 20 mins ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
||
||
||
||
||

|}

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FIO&suffix=DoddFrank&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/fio-doddfrank/230'''Forum''']

==In Plain English!==

===Section I - Introduction===

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires the Federal Insurance Office (FIO) to submit an '''annual report''' on the insurance industry to:

* the President
* the Senate Committee on Financial Services of the House of Representative
* the Senate Committee on Banking, Housing, and Urban Affairs

Note that the FIO was created by the Dodd-Frank Act.

===Section I-A - Structure of this Report===

This section is just 1 paragraph and contains no useful information.

===Section I-B1===

Alice, Ian, and I had a little trouble writing the content for this section. It was largely just a bullet point list so how do you make sense of that? Well, we fired up the coffee-maker, pulled an all-nighter and we decided the first thing you have to know is this:

* Insurance regulation in the U.S. is primarily managed by individual states, District of Columbia, and five U.S. territories, '''but''' the FIO plays a significant federal role.

And here is a simplified cohesive summary of the remaining content in this section:

: '''Context''':
:* U.S. insurance regulation involves both state and federal entities, with the Federal Insurance Office (FIO) providing federal oversight.

: '''Federal Insurance Office (FIO)''':
:* Established by the Dodd-Frank Act, the FIO fills in gaps not covered by state regulation.

: '''Monitoring and Risk Assessment''':
:* FIO monitors the insurance industry for systemic risks and coordinates with the Federal Reserve on stress testing.

: '''Accessibility and Fairness''':
:* FIO ensures that underserved communities have access to affordable insurance products.

: '''International Coordination''':
:* FIO represents the U.S. in international insurance forums such as the IAIS.

: '''Data Collection and Reporting''':
:* FIO collects, analyzes, and reports insurance sector data to inform federal insurance policies.

: '''Advisory and Recommendations''':
:* FIO advises the Secretary of the Treasury and recommends designations of insurers for Federal Reserve regulation.

And here are some question we made up to test your understanding. If you can answer these questions, you should be in good shape for most exam questions on this topic.

:{| class='wikitable'
|-
|| '''Question''': Briefly describe the main responsibilities of the Federal Insurance Office in the U.S. insurance regulatory framework. [Hint: '''AMERica''']
|}

:* '''A'''nalyze and report industry data
:* '''M'''onitor systemic risks in the insurance industry
:* '''E'''nsure insurance accessibility for underserved communities
:* '''R'''epresent the U.S. in international insurance matters

:{| class='wikitable'
|-
|| '''Question''': Briefly describe how the FIO contributes to risk assessment in the insurance sector.
|}

:* identifies potential systemic risks
:* coordinates stress-testing with the Federal Reserve

:{| class='wikitable'
|-
|| '''Question''': Briefly describe the role of the FIO in promoting accessibility and fairness in the insurance industry.
|}

:* monitors the accessibility of affordable insurance for underserved communities.

:{| class='wikitable'
|-
|| '''Question''': Describe how the FIO functions in an advisory capacity and how it influences the regulation of certain insurers?
|}

:* advises the Secretary of the Treasury on insurance matters
:* recommends designations of insurers for Federal Reserve regulation

Actually, this didn't take us all night. [https://battleacts6us.ca/animations/132356-sleep.mp4 We went to bed at 9:00PM! 😴]

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FIO&suffix=DoddFrank&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=FIO&suffix=DoddFrank&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/fio-doddfrank/230'''Forum''']

==POP QUIZ ANSWERS==

NAIC.SSAP-65

2026-01-27T15:53:52Z

Graham:

'''Reading''': Statement of Statutory Accounting Principles 65, “'''Property and Casualty Contracts''',” paragraphs 1-46.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-65 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - P&C Contracts'''

SSAP-65 establishes '''guidelines''' for property and casualty insurance contracts, focusing on:

:* occurrence and claims-made policies,
:* discounting practices
:* structured settlements.

It specifies that liabilities for insurance events '''should be recorded''' either when they occur or are reported, depending on the policy type.

The document also outlines the proper accounting treatment for:
:* extended reporting endorsements
:* discounting rules for loss reserves
:* the handling of structured settlements.

'''Additionally''', it addresses high deductible policies, asbestos and environmental exposures, and the immediate recognition of policyholder dividends as liabilities once declared.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested ''(since at least prior to 2012)''. If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

==BattleTable==

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2012_2-Fall)/(2012_2-Fall)_(16).pdf E] '''(2012.Fall #16)'''
|| '''net income''' - calculate
|| '''surplus''' '''1''' - calculate
| style="background-color: lightgrey;" |
| style="background-color: lightgrey;" |

|}

:: '''1''' Note that the application of the DTA surplus charge for part (b) in the sample answers is in error. The change in DTA should be added to surplus, not subtracted from it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

==In Plain English!==

===Overview===

'''Types of P&C contracts''': occurrence, claims-made, extended reporting

'''Discounting''': when are reserves discounted...
:    - when payments are fixed and reasonably determinable ''(Ex: structured settlements)''
:      ''(LAE is not discounted)''

'''Structured Settlements''': if an annuity is purchased to fund a structured settlement, describe the accounting treatment...
:    - if insurer is the payee ==> no reduction to reserve
:    - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

'''Long-Duration Contracts''': contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer ''(Ex: home warranty, mechanical breakdown)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

===The 3 Tests for Long-Duration Contracts===

There is a calculation problem embedded in this reading regarding ''unearned premium reserves for long-duration contracts''. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

:{| class='wikitable'
|-
| '''Question''': given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)
|}

:* Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

::: {| class='wikitable' style='text-align: center;'
|-
! PY !! test 1 !! test 2 !! test 3
|-
| '''current''' || 100 || 98 || 105
|-
| '''1st prior''' || 85 || 83 || 83
|-
| '''2nd prior''' || 70 || 76 || 75
|- style='border-top: 2px solid;'
| '''3rd prior''' || 40 || 38 || 39
|-
| '''4th prior''' || 10 || 10 || 10
|}

:* It's actually a very simple problem ''(if you're given the "test" estimates)''.

:: → for the most recent 3 policy years, simply take the maximum of the 3 tests:
::* UEP (current) = 105
::* UEP (1st prior) = 85
::* UEP (2nd prior) = 76

:: → for older policy years, the UEP is combined into a single number that is the maximum of the ''aggregate'' for each test:
::* UEP (older years)
::: = '''max (''' test1(3rd prior) + test1(4th prior) ''' , ''' test2(3rd prior) + test2(4th prior) ''' , ''' test3(3rd prior) + test3(4th prior) ''')'''
::: = max ( 40 + 10 , 38 + 10, 39 + 10)
::: = max ( 50 , 48 , 49 )
::: = 50

:* One small point is that you can set the UEP ''higher'' than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

:{| class='wikitable'
|-
| '''Question''': briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65
|}

:: '''Test 1''':
::* management’s best estimate of the amounts refundable to the contract-holders at the reporting date
::: → ''the term 'amounts refundable' seems strange to me – isn't that just the liability payments?''

:: '''Test 2''':
::* (gross premium) x [ (projected future loss) / (projected total loss) ]
::: → ''projected future loss relates to the unexpired term of the contract''

:: '''Test 3''':
::* (projected future loss) – (investment income) – (PV of premiums)
::: → ''the full explanation is much more detailed but it's extremely unlikely you'd need to know it''

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? ''They don't really tell how to come up the estimates.'' Test 1 just says ''management's best estimate''. WTF is that? Test 2 requires ''projected future loss'' but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-65&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-65/227'''Forum''']

NAIC.SSAP-63

2026-01-27T15:53:07Z

Graham:

'''Reading''': Statement of Statutory Accounting Principles 63, “'''Underwriting Pools''',” paragraphs 1-11.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-63/226'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-63 ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - Underwriting Pools'''

The Statement of Statutory Accounting Principles No. 63 outlines the principles for '''underwriting pools and associations''', categorizing them as:

* involuntary pools - ''provides insurance to high-risk individuals''
* voluntary pools - ''formed without state mandates''
* intercompany pools - ''involve affiliated entities sharing business through reinsurance agreements''

|}

==Pop Quiz==

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This reading is only 3 pages and consists of 11 paragraphs of information related to underwriting pools. My strategy for learning this material is to read these paragraphs and look for items that would make good exam questions. Then I'll make BattleCards those items. For a reading this short, I'm aiming for a basic understanding for what's covered and 6-8 relevant facts to memorize.

'''Estimated study time''': 30 minutes ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
||
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-63&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

==In Plain English!==

===Basic Information===

This SSAP establishes statutory accounting principles for underwriting pools and associations. There are 3 types of underwriting pools and associations:

: '''(a)''' involuntary
: '''(b)''' voluntary
: '''(c)''' intercompany

Voluntary and involuntary pools are part of the '''Relevant Comments''' section of the SAO, which was introduced in ''[[Odomirok.16-17-SAO#Miscellaneous | Odomirok.16-17-SAO - Miscellaneous]]''. Intercompany pooling is a part of the '''Scope''' section of the SAO andwas introduced in ''[[Odomirok.16-17-SAO#The_Boring_Details_.28Yawn.29 | Odomirok.16-17-SAO - The Boring Details]]''.

Here is a brief description of each type of pool:

: '''(a)''' involuntary pool
:: - stated-mandated ''(participation is manadatory)''
:: - provides coverage to high-risk customers who can't otherwise find coverage ''(Ex: young drivers or those with poor driving records)''
:: - premiums & losses are shared according to participants' share of the voluntary market
:: - also called residual market plans ''(see [[Cook.Personal]])''

: '''(b)''' voluntary pool
:: - not state-mandated ''(participation is voluntary)''
:: - provides greater capacity for risks with very high insurable values ''(Ex: aircraft, nuclear)''
:: - premium & loss-sharing mechanism not specified

: '''(c)''' intercompany pool
:: - relates to business pooled among affiliated entities ''(see [[Odomirok.15-P#Inter-Company_Pooling | Inter-Company Pooling on Schedule P]])''
:: - premiums & losses are shared according to a quota-share reinsurance agreement
::    ''(pooled business is ceded to the '''lead''' entity, then retroceded back to the pool participants in accordance with their quota-share)''
:: - see ''[https://battleacts.discourse.group/t/naic-ssap-63/2663 this forum post]'' for a question on intercompany pooling from an SOA exam

===Accounting===

Here's a factoid that seems like it might be important:

:{| class='wikitable'
|-
|| '''Question''': how are U/W results for voluntary & involuntary pools accounted for: gross or net
|}

:* gross
:: → this means that premiums, losses, expenses are recorded separately in financial statements not netted against each other
:: → business ceded to a pool is treated as "normal" reinsurance

And one more:

:{| class='wikitable'
|-
|| '''Question''': are equity interests in a pool treated as admitted or non-admitted assets
|}

:* admitted
:: ''(this is a "cash advance" to provide funding for the pool and is separate from receivables and payables related to a pool's underwriting results)''

:{| class='wikitable'
|-
|| '''Question''': can members of a pool be subject to ''[https://www.investopedia.com/terms/j/joint-and-several-liability.asp joint & several liability]''
|}

:* yes! (seems a little unfair doesn't it? click on the link above if you're not sure what this is)''

===Disclosures===

There's a long paragraph within SSAP-63 about disclosures but most of it is pretty obvious and you could guess most of it. If a reporting entity is part of a pooling arrangement where participants cede substantially all of their business to the pool, the financial statements shall include:

* description of the terms of the arrangement including lines of business covered
* identification of the lead entity and all participants including pooling percentages
* amounts due to/from lead entity and all participants
* other arrangements that fall outside of the normal pooling agreement including reinsurance with non-affiliated reinsurers

I think that's about it for the important things from this reading.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-63&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

=== Lower Probability Exam Items ===

And here are a few other tidbits just to round out this wiki article. Just read them over a few times.

{| class="wikitable"
! Lower-Value Topic
! Question
! Answer
|-
| Intercompany pooling mechanics
| How does an intercompany underwriting pool typically operate from a reinsurance perspective?
| It operates as a quota share arrangement: business is ceded to the lead entity and then retroceded back to pool participants based on their shares.
|-
| Liability in intercompany pools
| In an intercompany pool, which entity has direct liability to policyholders?
| Only the policy-issuing entity has direct liability; other participants are liable as reinsurers.
|-
| Gross vs net reporting
| Do intercompany pooling transactions get reported on a gross or net basis?
| Gross basis, consistent with voluntary and involuntary pools.
|-
| Equity interests collectibility
| If equity interests or deposits receivable from a pool may be uncollectible, when is a write-off required versus disclosure?
| If uncollectible is probable → write off. If reasonably possible → disclose under SSAP 5R.
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-63&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

NAIC.SSAP-55

2026-01-27T15:51:43Z

Graham:

'''Reading''': Statement of Statutory Accounting Principles 55, “'''Unpaid Claims, Losses and Loss Adjustment Expenses''',” paragraphs 1-6 and 11-19.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-55/225'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-55 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/520_Recording_Liabilities_(v01).mp4 '''(5:00) → Unpaid Claim Estimates - General Overview''']   
([[Videos |Click here for all currently available videos.]])
{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - Unpaid Loss & LAE'''

* This statement establishes statutory accounting principles for '''recording liabilities for unpaid losses''' and loss adjustment expenses for property and casualty insurance contracts.

* It requires insurers to recognize these costs '''when an insured event happens''' and to establish liabilities for any unpaid claims.

* The guidance emphasizes the need for '''accurate estimates''' based on past data and current trends, and it requires '''detailed disclosures''' in financial statements to keep things transparent.

|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

Spend 5 minutes max on this reading.

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}
[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-55&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-55/225'''Forum''']

==In Plain English!==

=== Things You Should Learn ===

Loss Adjustment Expenses (LAE) are classified into '''2 categories''':

* '''DCC''' ''(Defense & Cost Containment)'': covers defense, litigation, and medical cost containment expenses, whether internal or external
* Examples:
::    - litigation management
::    - rehab nurses

* '''A&O''' ''(Adjusting & Other)'': expenses other than DCC
* Examples:
::    - adjuster fees
::    - attorney fees

There was a question on this topic from an old SOA exam. See ''[https://battleacts.discourse.group/t/categorizing-expenses/2677 this forum discussion]''.

=== Lower Probability Exam Items ===

{| class="wikitable"
! Topic
! What students should know
! Why it’s worth knowing
|-
| '''Reserves are generally not discounted'''
| Unpaid claims / loss reserves are '''not discounted''' unless another SSAP explicitly allows it (e.g., SSAP 54R, 65).
| Common conceptual multiple-choice trap (discounted vs. undiscounted).
|-
| '''Booking within a range = best estimate'''
| If management develops a reasonable range of reserve estimates, they must record their '''best estimate within the range'''. No explicit PAD is required.
| Aligns with frequently tested accounting theory concepts.
|-
| '''Midpoint rule (rare case)'''
| Only if '''no value in the range is more likely than another''', the '''midpoint must be booked'''. The guidance says this situation is rare.
| Very “rule-based” detail that exam writers like to test.
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-55&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

NAIC.SSAP-53

2026-01-27T15:50:50Z

Graham:

'''Reading''': Statement of Statutory Accounting Principles 53, “'''Property Casualty Contracts—Premiums''',” paragraphs 1-18.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-53/224'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-53 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/510_Premiums_(v01).mp4 '''(5:15) → Premiums - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - Contracts/Premiums'''

* This statement establishes general statutory accounting principles for the '''recording''' and '''recognition of premium revenue''' for property and casualty contracts. It details the methods for accounting for various types of premiums such as:
:: → ''written premiums, earned but unbilled premiums, and advance premiums'',
* and sets forth the requirements for establishing liabilities like the unearned premium reserve and premium deficiency reserve.

|}
==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

I could barely find anything worthy of an exam question in this reading but I didn't want to leave the wiki page completely blank so: '''''2 BattleCards, 10 minutes max'''''

==BattleTable==

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}
[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-53&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-ssap-53/224'''Forum''']

==In Plain English!==

=== Things You Should Learn ===

'''Earned But Unbilled Premium''' ''(EBUB)'' is an estimate of audit premium for WC:
* '''adjust''' written/earned premium by the EBUB amount, then...
* '''adjust''' the EBUB amount after policy expiration, according to an audit
* '''recognize''' EBUB immediately in financial statements

A '''Premium Deficiency Reserve''' ''(PDR)'' is a liability equal to the amount by which future outflows exceed future inflows

* outflows include: losses, loss adjustment expenses, commissions and other acquisition costs, maintenance costs (4 items)
* inflows include: recorded unearned premium reserve, future installment premiums on existing policies (2 items)

''(The PDR is essentially a reserve for future claims corresponding to the the unearned portion of existing policies. This is in contrast to the "normal" claims liability which relates to covered events that have already occurred.)''

According to paragraph 17 in SSAP-53:

* ''When the anticipated losses, loss adjustment expenses, commissions and other acquisition costs, and maintenance costs exceed the recorded unearned premium reserve, and any future installment premiums on existing policies, a '''premium deficiency reserve''' shall be recognized by recording an additional liability for the deficiency, with a corresponding charge to operations.

=== Lower Probability Exam Items ===

This is another wiki article that was so short that Ian-the-Intern and I decided to pull out some extra information. These items are not in the Battle Cards because we didn't want you to stress out and try to memorize all of them. They are pretty obvious and probably won't be tested. Just read them over a few times. It just gives you a little extra flavor for the kinds of things included in the SSAP-53 document.

{| class="wikitable"
! Topic omitted from study guide
! Where in SSAP 53
! What the source says
! Why it may still matter (slightly)
|-
| '''Definition of written premium'''
| paragraph 3
| Written premium is the contractually determined amount charged for the effective period, subject to later audit adjustments.
| Foundational definition; helps distinguish written vs earned vs EBUB if tested indirectly.
|-
| '''Workers’ compensation installment recording'''
| paragraph 4
| WC premiums may be recorded on an installment basis aligned with billing frequency rather than fully at inception.
| Common exam distraction topic when comparing premium timing methods.
|-
| '''Prepaid legal expense plans'''
| paragraph 5
| Premiums recognized on a gross basis when due, but no earlier than the coverage effective date.
| Niche exception; unlikely alone, but could appear in a “which is correct?” list.
|-
| '''Unearned premium reserve methods'''
| paragraph 6–8
| Unearned premium reserve must be established using either daily pro rata or monthly pro rata methods, with prescribed mechanics.
| Core P&C concept; mechanics often tested elsewhere even if not labeled SSAP 53.
|-
| '''Monthly pro rata fractions'''
| paragraph 8(b)
| Example unearned fractions: January 1/24, February 3/24, March 5/24 for one-year policies.
| Classic calculation trap; very testable in isolation.
|-
| '''Endorsements and coverage changes'''
| paragraph 9
| Additional premiums from endorsements recorded on the endorsement effective date and unearned portion reserved.
| Reinforces timing logic and consistency with unearned premium treatment.
|-
| '''Earned but uncollected premium'''
| paragraph 14
| Premium is earned while coverage remains in force even if not yet collected; charged to expense if uncollectible.
| Important distinction from EBUB; conceptual clarity question potential.
|-
| '''Advance premiums'''
| paragraph 15
| Premiums paid before the effective date are liabilities and not income until due.
| Simple liability vs income classification issue.
|-
| '''Perpetual fire insurance deposits'''
| paragraph 16
| At least 90% of premium deposits must be reported as a liability.
| Highly specific, but a clean rule if tested.
|-
| '''PDR disclosure when investment income is used'''
| paragraph 18
| Disclosure required if anticipated investment income is used in PDR calculations, even if no reserve is recorded.
| Subtle disclosure rule; most exam-worthy nuance in the section.
|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-53&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

Cedar.ReinsAccting

2026-01-27T15:42:37Z

Graham:

'''Reading''': Reinsurance Accounting & Strategy for the Actuary (January 2020)

'''Author''': Derek Cedar, FCAS, CERA & Andrew Thompson, FCAS

[https://battleacts.discourse.group/c/candidates-6u/cedar-reinsaccting/219'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/cedar-reinsaccting ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Reinsurance Accounting'''

* This reading explains how reinsurance allows insurers to '''manage risk''' and adhere to internal and external constraints.
* It discusses the '''functions''' and '''financial implications''' of reinsurance, including detailed examples of the accounting treatments for reinsurance transactions and their impacts on financial statements
* Also emphasized is the need for a comprehensive understanding of:
:* ''legal, regulatory, economic, tax, financial aspects of reinsurance''

|}

==Pop Quiz==

==Study Tips==

This reading by Cedar & Thompson, new for 2021.Spring, is one of my favorite readings. It's very organized and it replaces an older reinsurance reading by ''[[BK.Reins | Blanchard & Klann]]''. This older reading was #47 on the ''[[BattleBriefings | Ranking Table]]'' which means it was not heavily tested. The percentage weights for Exam 6 topics listed in the syllabus have not changed so I'm assuming Cedar & Thompson will not be heavily tested going forward, unless of course the syllabus weightings change. You can see from the current ''[[BattleBriefings | Ranking Table]]'' that there are 3 other reinsurance readings that are heavily tested. There are a total of 6 reinsurance readings and they are highlighted in orange in the rankings so you can easily find them.

Anyway, the ranking is important because studying this reading thoroughly would take a significant amount of time. Based on past exams, it's more strategic to do the following:

* if you have '''30 minutes''': study the 'Intro' section of this wiki article - ''functions of reinsurance''
* if you have '''2 hours''': add the 'Simplified Examples' section - ''one example for each of the functions of reinsurance''
* if you have '''2-3 days''': add a detailed study of the all the examples - ''you will need the source text for this - Cedar & Thompson explain the examples very well''

Some of the examples are easier than others, and not all of them involve calculations. The first 6 examples have calculations showing the '''financial impacts of reinsurance''' but #7, 8, 9 do not. Also, some of the calculations overlap with other syllabus readings so it won't all be completely new although some of it is quite involved. But remember that it has historically been a low-ranked reading so if you decide to take the time to study this material thoroughly, make sure you've already covered all the higher-ranked readings first.

Even if you don't have time to study this reading thoroughly, you could still probably take a pretty good guess if a calculation problem appeared on the exam. That's because if you generally understand how reinsurance works, and you're solid on the financial accounting chapters of Odomirok, you just need to put those 2 things together.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| Here's a direct link to the source text on the CAS site, valid as of Jan 14, 2021:   ''[https://www.battleacts6us.ca/pdf/Cedar_2020.pdf Reinsurance Accounting & Strategy for the Actuary]''
|}

{| class='wikitable' style='background-color: red;'
|-
|| '''Late syllabus change for Spring 2021 Exam:'''
|}

: → ''[https://www.battleacts6us.ca/pdf/6U_Cedar_and_Thompson_errata.pdf Errata sheet]'' added for this reading. (Click link)

'''Estimated study time''': 30 minutes - 3 days depending on the level of detail ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading. This reading however is a replacement for ''[[BK.Reins | Blanchard and Klein - Reinsurance]]'' so you can scan the old BattleTable for that reading to see the kinds of questions that are likely to be asked.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
|| see ''[[BK.Reins | Blanchard & Klann]]''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/cedar-reinsaccting/219 '''Forum''']

==In Plain English!==

===Functions of Reinsurance===

Let's start with the most important memory item from this reinsurance reading.

:{| class='wikitable'
|-
|| '''Question''': identify 9 functions of reinsurance [Hint: '''F-cat-SWIPLES''']   or   see ''[https://battleacts.discourse.group/t/9-functions-of-reinsurance-mneumonic/2838 this forum post]'' for some alternate hints - scroll all the way down!
|}

:: (9)   →   '''F'''ronting arrangements
::::: –
:: (2)   →   '''cat'''astrophe protection
::::: –
:: (3)   →   '''S'''urplus relief & capital efficiency
:: (6)   →   '''W'''ithdrawal from market
:: (8)   →   '''I'''nternal reinsurance transactions
:: (7)   →   '''P'''ools - mandatory & voluntary
:: (1)   →   '''L'''arge line capacity
:: (5)   →   '''E'''nter market and/or U/W guidance
:: (4)   →   '''S'''tabilize results

The numbers preceding the bullet points refer to the numbering used in the Cedar & Thompson source text. I changed the order so the hint, '''F-cat-SWIPLES''', would spell a word, sort of. Sometimes people post better hints in the forum. If you come up with something better, please go ahead and post! I will link to it from here. This reordering doesn't change the content of course, but it might be slightly confusing if you try to read the source text.

Aside from being able to list the 9 functions, you must also be able to give a brief explanation for each. There's an easy little web-based problem in the quiz to help you solidify your basic understanding but let's first quickly go through each function in the correct order. '''These descriptions are all common sense and once you've read through them once, I think you'll remember them.'''

:: (1) Large line capacity - ''insurer can write higher limit policies but then offload some of the risk to the reinsurer''
:: (2) Catastrophe risk protection - ''cats are a significant risk to solvency because they generate a large number of simultaneous claims''
:: (3) Surplus relief and capital efficiency - ''insurer cedes losses to reinsurer to reduce liabilities and strengthen surplus relative to net liabilities''
:: (4) Stabilize results - ''reinsurance mitigates adverse loss volatility''
:: (5) Enter market and/or underwriting guidance - ''reinsurers may have expertise in new market where the primary insurer is inexperienced''
:: (6) Withdrawal from market - ''insurer may wish to eliminate an entire business segment and focus on new, more profitable market segments''
:: (7) Pools - mandatory & voluntary - ''risks that insurers don't want to underwrite are ceded to reinsurance pools (ensures all customers have access to coverage)''
:: (8) Internal reinsurance transactions - ''individual business units with lower tolerance than overall company may cede their losses internally (within the same legal entity)''
:: (9) Fronting arrangements - ''to issue policies on behalf of clients with no access to properly licensed insurance companies''

====Fronting Arrangements====

Just a quick note on number (9), fronting arrangements. In ''[[Odomirok.14-F#Introduction | miniBattleQuiz 1 of Odomirok.14-F]]'', we touched on the concept of fronting carrier:

* an insurer that cedes a large portion of its business (>75%) so the reinsurer can avoid regulatory oversight
* may occur when the reinsurer is not authorized to conduct business in the ceding insurer's jurisdiction

For some reason, it took me a moment to wrap my head around how a fronting arrangement works but Cedar & Thompson have a good example:

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a U.S. insurer wants to insure a multinational company that has a small number of properties in Japan (most of the multinational's properties are in the U.S. so there's no problem with those)
:* the U.S. insurer is not licensed to write business in Japan

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* a Japanese insurer issues the policy to the multinational company for the properties located in Japan (the Japanese insurer is the fronting carrier)
:* the Japanese insurer then cedes 100% of the risk to the original U.S. insurer (the U.S. insurer is considered the reinsurer for these risks)

This cooperative effort between the Japanese and U.S. insurers is a fronting arrangement. It's perfectly valid because the U.S. insurer isn't attempting to enter the Japanese market in any serious way. They merely want to provide a convenient service for their existing U.S. client who just happens to have a small number of properties in Japan.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Simplified Examples===

====1. Large Line Capacity====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* an attractive opportunity to underwrite high value properties is presented
:* but underwriting authority / risk appetite is $100 million for a single policy

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase per-risk insurance to limit individual account exposure

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - all individual losses above $100 million are ceded to reinsurer

:: '''negative effects'''
::: - net losses, COR (Combined Operating Ratio) are HIGHER with reinsurance

:: '''positive effects'''
::: - net premiums are higher
::: - net expenses are lower
::: - net income is HIGHER ''(the source text provides a numerical example to illustrate this)''
::: - reinsurance made premium growth possible

====2. Catastrophic Risk Protection====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* company writes 10 billon of property insurance along the coast of Florida
:* but one large hurricane could cause the company to become insolvent

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase annual aggregate excess-of-loss treaty covering losses from hurricanes

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - company is responsible for the first $500 million of losses from each hurricane
::: - company must then meet its $2 billion deductible before reinsurance kicks in

:: '''negative effects'''
::: - low severity hurricane season → balance sheet surplus is lower with reinsurance ''(the reinsurance premium was higher than the recoverables)''

:: '''positive effects'''
::: - medium & high severity hurricane seasons → balance sheet surplus is HIGHER with reinsurance ''(the reinsurance recoverables were higher than the premium)''

:: '''comments'''
::: - the text example considered specific balance sheet items to calculate the surplus positions both with and without reinsurance
::: - balance sheet items included '''assets:''' ''cash & invested assets, reinsurance recoverables'', '''liabilities:''' ''LAE, unearned premium''
::: ''(similar to the analysis for [[Cedar.ReinsAccting#5._Market_Entrance_and_Underwriting_Guidelines | Example 5 - Market Entrance and Underwriting Guidelines]])''

====3. Surplus Relief and Capital Efficiencies====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a certain minimum capital is required to write a certain insurance policy
:* therefore the insurer would like to optimize the cost of obtaining capital

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* issue equity or debt to raise capital
:* purchase reinsurance ''(this option essentially uses the reinsurer's surplus to underwrite a portion of the primary insurer's risks)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - net cost of treaty   =   $45 - $15   =   $30
::: - but the treaty provides a $500 '''reduction''' in capital requirements for the primary insurer

:: '''negative effects'''
::: - without reinsurance, the cost-of-capital is '''9.6%'''

:: '''positive effects'''
::: - with reinsurance, the cost-of-capital is reduced to '''8.9%'''

:: '''comments'''
::: - the text calculates the cost-of-capital as a weighted average of the costs for 3 items: ''equity, debt, reinsurance
::: - the %-costs of equity & debt are same both with and without reinsurance, but the amount of equity & debt required is lower when reinsurance is used
::: - the overall weighted average for the scenario WITH reinsurance turns out to be lower as stated above (8.9%)

====4. Stabilization of Results====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* large year-to-year volatility in earnings
:* this volatility impacts the investment community's valuation of the company stock

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* evaluates various reinsurance retention levels to improve earnings stability

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - scenario 1: low-retention treaty that kicks in at $4 billion and provides $8 billion in coverage ''(treaty costs $3.2 billion)''
::: - scenario 2: HIGH-retention treaty that kicks in at $8 billion and provides $4 billion in coverage ''(treaty costs $1.0 billion)''
:::: ''(the scenario of "no reinsurance" is not considered)''

:: '''negative effects'''
::: - low-retention treaty has lower earnings over a 5-year time horizon
::: - HIGH-retention treaty has a HIGHER standard deviation with respect to earnings over a 5-year time horizon

:: '''positive effects'''
::: - low-retention treaty has lower standard deviation with respect to earnings over a 5-year time horizon
::: - HIGH-retention treaty has a HIGHER earnings over a 5-year time horizon

:: '''comments'''
::: - low-retention treaty does indeed reduce volatility of earnings ''(if earnings are measured by standard deviation)''
::: - the insurer sacrifices higher earnings for greater stability by choosing the low-retention treaty

:: '''further key comments'''
::: - stability can mean different things for different situations
::: - therefore stability should be defined by specifying the '''metric''' to be stabilized and the '''time horizon''' over which stability is required
::: - examples of metrics: COR, earnings
::: - examples of time horizon: quarterly, annual, longer-term such as 5 years

====5. Market Entrance and Underwriting Guidelines====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a U.S. based company is interested in writing a new cyber risk product

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* use quota share reinsurance to facilitate market entrance

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - 80% quota-share → primary insurer cedes 80% of premium and loss on new cyber-liability business
::: - reinsurer pays a ceding commission of 20% to cover the primary insurer's cost of writing new business

:: '''negative effects'''
::: - without reinsurance, NWP is HIGHER for the primary insurer

:: '''positive effects'''
::: - with reinsurance, NWP is lower so NWP-to-surplus ratio is also lower ''(less pressure on surplus)''
::: - the primary insurer can also be more confident that the new cyber-liability policies are properly priced
::: - the primary insurer has a "safe space" to build a credible database of cyber experience

:: '''comments'''
::: - the text example considered specific balance sheet items to calculate the surplus positions both with and without reinsurance
::: - balance sheet items included '''assets:''' ''cash & invested assets, reinsurance recoverables'', '''liabilities:''' ''LAE, unearned premium''
::: ''(similar to the analysis for [[Cedar.ReinsAccting#2._Catastrophic_Risk_Protection | Example 2 - Catastrophic Risk Protection]])''

====6. Withdrawal from a Market Segment====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* new management wants to exit the workers compensation market
:* instead: focus on growing its home and auto market

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase retroactive reinsurance for the balance sheet WC reserves ''(removes liabilities from the balance sheet)''
:* discontinue writing new and renewal business prospectively

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''

::: -purchase retroactive reinsurance agreement, effective December 31st, 2016, to reinsure all legacy WC balance sheet liabilities
::: - cost of treaty is $2 million
::: - liabilities to be transferred is $2.47 million

:: '''negative effects'''
::: - without reinsurance, it may take many years for the WC liabilities to be "run off"
::: - with reinsurance, there is a cost for this retroactive reinsurance policy

:: '''positive effects'''
::: - with reinsurance, primary insurer gets rid of WC liabilities immediately

:: '''comments'''
::: - this example is the most complex of the 9 examples in the Cedar & Thompson reading
::: - the '''point of the example''' is really to demonstrate the difference between SAP and GAAP accounting
::: - retroactive policies require the insurer to use retroactive accounting as covered in ''[[NAIC.SSAP-62R]]''
::: - '''GAAP:''' the retroactive reinsurance rules attempt to align earnings in order to provide insight to the investment community
::: - '''GAAP:''' prevents insurers from artificially boosting earnings via retroactive reinsurance ''(by unlocking and recognizing the discount embedded in the reserves at the onset of a deal)''
::: - '''More information:''' click the link ''[[Odomirok.22-23-GAAP#Ceded_Reinsurance_-_Retroactive:_2017.Fall_Q12 | Odomirok.22-23-GAAP – 2017.Fall Q12]]'' for more details on SAP vs GAAP retroactive reinsurance accounting

====7. Pools - Manadatory and Voluntary====

:{| class='wikitable' style="background-color: blue;"
|-
|| '''Public Policy Issue''':
|}

:* a state wants to ensure that property insurance is available for all residents
:: ''(including those not desired by the voluntary market)''
:* note that this is not a business issue - it is a '''public policy issue''' ''(that's why Alice used a different color for the little box above!)''

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* insurance companies must participate in a state ''[[Cook.Personal#FAIR_Plans | FAIR Plan]]'' ← click link to review FAIR plans
:: ''(a FAIR plan insures homes not able to obtain insurance in the voluntary market)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''types of pools'''
::: - mandatory: carriers must participate in the mandatory pools to provide insurance for these "uninsurable" risks
::: - voluntary: often used to share risks too large for a single insurer / or reinsurer to cover alone ''(Ex: nuclear, aircraft, or energy risks)''

:: '''negative effects'''
::: - insurers may have a slightly worse balance sheet by having to participate in mandatory pools

:: '''positive effects'''
::: - mandatory pools ensure coverage is available to everyone
::: - voluntary pools allow insurers to share large risks

:: '''comments'''
::: - auto insurance and homeowners insurance pools are discussed further in ''[[Cook.Personal]]''

====8. Internal Reinsurance Transactions====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* business unit appetite is only $20 million dollars per exposure
:* corporate appetite is $50 million dollars per exposure

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase internal reinsurance as an alternative to buying reinsurance externally
:: ''(allows the business unit to leverage the higher risk appetite of the whole company)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - business unit purchases internal reinsurance that kicks in at $20 million and provides $30 million reinsurance cover ''(to the $50 million corporate limit)''
::: - premiums and losses are pooled among business units '''within the same legal entity'''

:: '''negative effects'''
::: - none

:: '''positive effects'''
::: - corporate entity retains ''(hopefully!)'' profitable business rather than ceding it to an external reinsurer

:: '''comments'''
::: - don't forget that the business units must be '''within the same legal entity'''
::: ''(this strikes me as a fact that might be important)''

====9. Fronting Arrangements====

* ''[[Cedar.ReinsAccting#Front_Arrangements | Fronting Arrangements]]'' was discussed at the beginning of this wiki article. Just click the link to go to it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

===Summary===

As I said in the ''[[ Cedar.ReinsAccting#Study_Tips | Study Tips]]'', this material has historically been low-ranked and hasn't appeared very often on exams. That doesn't mean it won't appear more often in the future but if you're playing the odds, there is a lot of other material we know is likely to appear on the exam so you should study all of the higher-ranked material first.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/cedar-reinsaccting/219 '''Forum''']

==POP QUIZ ANSWERS==

Cedar.ReinsAccting

2026-01-27T15:41:18Z

Graham:

'''Reading''': Reinsurance Accounting & Strategy for the Actuary (January 2020)

'''Author''': Derek Cedar, FCAS, CERA & Andrew Thompson, FCAS

[https://battleacts.discourse.group/c/candidates-6u/cedar-reinsaccting/219'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/cedar-reinsaccting ''   (Or click here for Legacy Forum – no longer monitored)'']

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Reinsurance Accounting'''

* This reading explains how reinsurance allows insurers to '''manage risk''' and adhere to internal and external constraints.
* It discusses the '''functions''' and '''financial implications''' of reinsurance, including detailed examples of the accounting treatments for reinsurance transactions and their impacts on financial statements
* Also emphasized is the need for a comprehensive understanding of:
:* ''legal, regulatory, economic, tax, financial aspects of reinsurance''

|}

==Pop Quiz==

==Study Tips==

This reading by Cedar & Thompson, new for 2021.Spring, is one of my favorite readings. It's very organized and it replaces an older reinsurance reading by ''[[BK.Reins | Blanchard & Klann]]''. This older reading was #47 on the ''[[BattleBriefings | Ranking Table]]'' which means it was not heavily tested. The percentage weights for Exam 6 topics listed in the syllabus have not changed so I'm assuming Cedar & Thompson will not be heavily tested going forward, unless of course the syllabus weightings change. You can see from the current ''[[BattleBriefings | Ranking Table]]'' that there are 3 other reinsurance readings that are heavily tested. There are a total of 6 reinsurance readings and they are highlighted in orange in the rankings so you can easily find them.

Anyway, the ranking is important because studying this reading thoroughly would take a significant amount of time. Based on past exams, it's more strategic to do the following:

* if you have '''30 minutes''': study the 'Intro' section of this wiki article - ''functions of reinsurance''
* if you have '''2 hours''': add the 'Simplified Examples' section - ''one example for each of the functions of reinsurance''
* if you have '''2-3 days''': add a detailed study of the all the examples - ''you will need the source text for this - Cedar & Thompson explain the examples very well''

Some of the examples are easier than others, and not all of them involve calculations. The first 6 examples have calculations showing the '''financial impacts of reinsurance''' but #7, 8, 9 do not. Also, some of the calculations overlap with other syllabus readings so it won't all be completely new although some of it is quite involved. But remember that it has historically been a low-ranked reading so if you decide to take the time to study this material thoroughly, make sure you've already covered all the higher-ranked readings first.

Even if you don't have time to study this reading thoroughly, you could still probably take a pretty good guess if a calculation problem appeared on the exam. That's because if you generally understand how reinsurance works, and you're solid on the financial accounting chapters of Odomirok, you just need to put those 2 things together.

{| class='wikitable' style='background-color: navajowhite;'
|-
|| Here's a direct link to the source text on the CAS site, valid as of Jan 14, 2021:   ''[https://www.battleacts6us.ca/pdf/Cedar_2020.pdf Reinsurance Accounting & Strategy for the Actuary]''
|}

{| class='wikitable' style='background-color: red;'
|-
|| '''Late syllabus change for Spring 2021 Exam:'''
|}

: → ''[https://www.battleacts6us.ca/pdf/6U_Cedar_and_Thompson_errata.pdf Errata sheet]'' added for this reading. (Click link)

'''Estimated study time''': 30 minutes - 3 days depending on the level of detail ''(not including subsequent review time)''

==BattleTable==

No past exam questions are available for this reading. This reading however is a replacement for ''[[BK.Reins | Blanchard and Klein - Reinsurance]]'' so you can scan the old BattleTable for that reading to see the kinds of questions that are likely to be asked.

: {| class='wikitable' style='width: 1000px;'

|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
|| see ''[[BK.Reins | Blanchard & Klann]]''
||
||
||
||

|}

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://battleacts.discourse.group/c/candidates-6u/cedar-reinsaccting/219 '''Forum''']

==In Plain English!==

===Functions of Reinsurance===

Let's start with the most important memory item from this reinsurance reading.

:{| class='wikitable'
|-
|| '''Question''': identify 9 functions of reinsurance [Hint: '''F-cat-SWIPLES''']   or   see ''[https://www.battleacts6us.ca/vanillaforum6us/discussion/457/9-functions-of-reinsurance-mneumonic this forum post]'' for some alternate hints - scroll all the way down!
|}

:: (9)   →   '''F'''ronting arrangements
::::: –
:: (2)   →   '''cat'''astrophe protection
::::: –
:: (3)   →   '''S'''urplus relief & capital efficiency
:: (6)   →   '''W'''ithdrawal from market
:: (8)   →   '''I'''nternal reinsurance transactions
:: (7)   →   '''P'''ools - mandatory & voluntary
:: (1)   →   '''L'''arge line capacity
:: (5)   →   '''E'''nter market and/or U/W guidance
:: (4)   →   '''S'''tabilize results

The numbers preceding the bullet points refer to the numbering used in the Cedar & Thompson source text. I changed the order so the hint, '''F-cat-SWIPLES''', would spell a word, sort of. Sometimes people post better hints in the forum. If you come up with something better, please go ahead and post! I will link to it from here. This reordering doesn't change the content of course, but it might be slightly confusing if you try to read the source text.

Aside from being able to list the 9 functions, you must also be able to give a brief explanation for each. There's an easy little web-based problem in the quiz to help you solidify your basic understanding but let's first quickly go through each function in the correct order. '''These descriptions are all common sense and once you've read through them once, I think you'll remember them.'''

:: (1) Large line capacity - ''insurer can write higher limit policies but then offload some of the risk to the reinsurer''
:: (2) Catastrophe risk protection - ''cats are a significant risk to solvency because they generate a large number of simultaneous claims''
:: (3) Surplus relief and capital efficiency - ''insurer cedes losses to reinsurer to reduce liabilities and strengthen surplus relative to net liabilities''
:: (4) Stabilize results - ''reinsurance mitigates adverse loss volatility''
:: (5) Enter market and/or underwriting guidance - ''reinsurers may have expertise in new market where the primary insurer is inexperienced''
:: (6) Withdrawal from market - ''insurer may wish to eliminate an entire business segment and focus on new, more profitable market segments''
:: (7) Pools - mandatory & voluntary - ''risks that insurers don't want to underwrite are ceded to reinsurance pools (ensures all customers have access to coverage)''
:: (8) Internal reinsurance transactions - ''individual business units with lower tolerance than overall company may cede their losses internally (within the same legal entity)''
:: (9) Fronting arrangements - ''to issue policies on behalf of clients with no access to properly licensed insurance companies''

====Fronting Arrangements====

Just a quick note on number (9), fronting arrangements. In ''[[Odomirok.14-F#Introduction | miniBattleQuiz 1 of Odomirok.14-F]]'', we touched on the concept of fronting carrier:

* an insurer that cedes a large portion of its business (>75%) so the reinsurer can avoid regulatory oversight
* may occur when the reinsurer is not authorized to conduct business in the ceding insurer's jurisdiction

For some reason, it took me a moment to wrap my head around how a fronting arrangement works but Cedar & Thompson have a good example:

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a U.S. insurer wants to insure a multinational company that has a small number of properties in Japan (most of the multinational's properties are in the U.S. so there's no problem with those)
:* the U.S. insurer is not licensed to write business in Japan

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* a Japanese insurer issues the policy to the multinational company for the properties located in Japan (the Japanese insurer is the fronting carrier)
:* the Japanese insurer then cedes 100% of the risk to the original U.S. insurer (the U.S. insurer is considered the reinsurer for these risks)

This cooperative effort between the Japanese and U.S. insurers is a fronting arrangement. It's perfectly valid because the U.S. insurer isn't attempting to enter the Japanese market in any serious way. They merely want to provide a convenient service for their existing U.S. client who just happens to have a small number of properties in Japan.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

===Simplified Examples===

====1. Large Line Capacity====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* an attractive opportunity to underwrite high value properties is presented
:* but underwriting authority / risk appetite is $100 million for a single policy

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase per-risk insurance to limit individual account exposure

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - all individual losses above $100 million are ceded to reinsurer

:: '''negative effects'''
::: - net losses, COR (Combined Operating Ratio) are HIGHER with reinsurance

:: '''positive effects'''
::: - net premiums are higher
::: - net expenses are lower
::: - net income is HIGHER ''(the source text provides a numerical example to illustrate this)''
::: - reinsurance made premium growth possible

====2. Catastrophic Risk Protection====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* company writes 10 billon of property insurance along the coast of Florida
:* but one large hurricane could cause the company to become insolvent

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase annual aggregate excess-of-loss treaty covering losses from hurricanes

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - company is responsible for the first $500 million of losses from each hurricane
::: - company must then meet its $2 billion deductible before reinsurance kicks in

:: '''negative effects'''
::: - low severity hurricane season → balance sheet surplus is lower with reinsurance ''(the reinsurance premium was higher than the recoverables)''

:: '''positive effects'''
::: - medium & high severity hurricane seasons → balance sheet surplus is HIGHER with reinsurance ''(the reinsurance recoverables were higher than the premium)''

:: '''comments'''
::: - the text example considered specific balance sheet items to calculate the surplus positions both with and without reinsurance
::: - balance sheet items included '''assets:''' ''cash & invested assets, reinsurance recoverables'', '''liabilities:''' ''LAE, unearned premium''
::: ''(similar to the analysis for [[Cedar.ReinsAccting#5._Market_Entrance_and_Underwriting_Guidelines | Example 5 - Market Entrance and Underwriting Guidelines]])''

====3. Surplus Relief and Capital Efficiencies====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a certain minimum capital is required to write a certain insurance policy
:* therefore the insurer would like to optimize the cost of obtaining capital

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* issue equity or debt to raise capital
:* purchase reinsurance ''(this option essentially uses the reinsurer's surplus to underwrite a portion of the primary insurer's risks)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - net cost of treaty   =   $45 - $15   =   $30
::: - but the treaty provides a $500 '''reduction''' in capital requirements for the primary insurer

:: '''negative effects'''
::: - without reinsurance, the cost-of-capital is '''9.6%'''

:: '''positive effects'''
::: - with reinsurance, the cost-of-capital is reduced to '''8.9%'''

:: '''comments'''
::: - the text calculates the cost-of-capital as a weighted average of the costs for 3 items: ''equity, debt, reinsurance
::: - the %-costs of equity & debt are same both with and without reinsurance, but the amount of equity & debt required is lower when reinsurance is used
::: - the overall weighted average for the scenario WITH reinsurance turns out to be lower as stated above (8.9%)

====4. Stabilization of Results====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* large year-to-year volatility in earnings
:* this volatility impacts the investment community's valuation of the company stock

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* evaluates various reinsurance retention levels to improve earnings stability

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - scenario 1: low-retention treaty that kicks in at $4 billion and provides $8 billion in coverage ''(treaty costs $3.2 billion)''
::: - scenario 2: HIGH-retention treaty that kicks in at $8 billion and provides $4 billion in coverage ''(treaty costs $1.0 billion)''
:::: ''(the scenario of "no reinsurance" is not considered)''

:: '''negative effects'''
::: - low-retention treaty has lower earnings over a 5-year time horizon
::: - HIGH-retention treaty has a HIGHER standard deviation with respect to earnings over a 5-year time horizon

:: '''positive effects'''
::: - low-retention treaty has lower standard deviation with respect to earnings over a 5-year time horizon
::: - HIGH-retention treaty has a HIGHER earnings over a 5-year time horizon

:: '''comments'''
::: - low-retention treaty does indeed reduce volatility of earnings ''(if earnings are measured by standard deviation)''
::: - the insurer sacrifices higher earnings for greater stability by choosing the low-retention treaty

:: '''further key comments'''
::: - stability can mean different things for different situations
::: - therefore stability should be defined by specifying the '''metric''' to be stabilized and the '''time horizon''' over which stability is required
::: - examples of metrics: COR, earnings
::: - examples of time horizon: quarterly, annual, longer-term such as 5 years

====5. Market Entrance and Underwriting Guidelines====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* a U.S. based company is interested in writing a new cyber risk product

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* use quota share reinsurance to facilitate market entrance

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - 80% quota-share → primary insurer cedes 80% of premium and loss on new cyber-liability business
::: - reinsurer pays a ceding commission of 20% to cover the primary insurer's cost of writing new business

:: '''negative effects'''
::: - without reinsurance, NWP is HIGHER for the primary insurer

:: '''positive effects'''
::: - with reinsurance, NWP is lower so NWP-to-surplus ratio is also lower ''(less pressure on surplus)''
::: - the primary insurer can also be more confident that the new cyber-liability policies are properly priced
::: - the primary insurer has a "safe space" to build a credible database of cyber experience

:: '''comments'''
::: - the text example considered specific balance sheet items to calculate the surplus positions both with and without reinsurance
::: - balance sheet items included '''assets:''' ''cash & invested assets, reinsurance recoverables'', '''liabilities:''' ''LAE, unearned premium''
::: ''(similar to the analysis for [[Cedar.ReinsAccting#2._Catastrophic_Risk_Protection | Example 2 - Catastrophic Risk Protection]])''

====6. Withdrawal from a Market Segment====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* new management wants to exit the workers compensation market
:* instead: focus on growing its home and auto market

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase retroactive reinsurance for the balance sheet WC reserves ''(removes liabilities from the balance sheet)''
:* discontinue writing new and renewal business prospectively

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''

::: -purchase retroactive reinsurance agreement, effective December 31st, 2016, to reinsure all legacy WC balance sheet liabilities
::: - cost of treaty is $2 million
::: - liabilities to be transferred is $2.47 million

:: '''negative effects'''
::: - without reinsurance, it may take many years for the WC liabilities to be "run off"
::: - with reinsurance, there is a cost for this retroactive reinsurance policy

:: '''positive effects'''
::: - with reinsurance, primary insurer gets rid of WC liabilities immediately

:: '''comments'''
::: - this example is the most complex of the 9 examples in the Cedar & Thompson reading
::: - the '''point of the example''' is really to demonstrate the difference between SAP and GAAP accounting
::: - retroactive policies require the insurer to use retroactive accounting as covered in ''[[NAIC.SSAP-62R]]''
::: - '''GAAP:''' the retroactive reinsurance rules attempt to align earnings in order to provide insight to the investment community
::: - '''GAAP:''' prevents insurers from artificially boosting earnings via retroactive reinsurance ''(by unlocking and recognizing the discount embedded in the reserves at the onset of a deal)''
::: - '''More information:''' click the link ''[[Odomirok.22-23-GAAP#Ceded_Reinsurance_-_Retroactive:_2017.Fall_Q12 | Odomirok.22-23-GAAP – 2017.Fall Q12]]'' for more details on SAP vs GAAP retroactive reinsurance accounting

====7. Pools - Manadatory and Voluntary====

:{| class='wikitable' style="background-color: blue;"
|-
|| '''Public Policy Issue''':
|}

:* a state wants to ensure that property insurance is available for all residents
:: ''(including those not desired by the voluntary market)''
:* note that this is not a business issue - it is a '''public policy issue''' ''(that's why Alice used a different color for the little box above!)''

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* insurance companies must participate in a state ''[[Cook.Personal#FAIR_Plans | FAIR Plan]]'' ← click link to review FAIR plans
:: ''(a FAIR plan insures homes not able to obtain insurance in the voluntary market)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''types of pools'''
::: - mandatory: carriers must participate in the mandatory pools to provide insurance for these "uninsurable" risks
::: - voluntary: often used to share risks too large for a single insurer / or reinsurer to cover alone ''(Ex: nuclear, aircraft, or energy risks)''

:: '''negative effects'''
::: - insurers may have a slightly worse balance sheet by having to participate in mandatory pools

:: '''positive effects'''
::: - mandatory pools ensure coverage is available to everyone
::: - voluntary pools allow insurers to share large risks

:: '''comments'''
::: - auto insurance and homeowners insurance pools are discussed further in ''[[Cook.Personal]]''

====8. Internal Reinsurance Transactions====

:{| class='wikitable' style="background-color: powderblue;"
|-
|| '''Business Issue''':
|}

:* business unit appetite is only $20 million dollars per exposure
:* corporate appetite is $50 million dollars per exposure

:{| class='wikitable' style="background-color: palegreen;"
|-
|| '''Reinsurance Solution''':
|}

:* purchase internal reinsurance as an alternative to buying reinsurance externally
:: ''(allows the business unit to leverage the higher risk appetite of the whole company)''

:{| class='wikitable'
|-
|| '''Discussion''':
|}

:: '''treaty'''
::: - business unit purchases internal reinsurance that kicks in at $20 million and provides $30 million reinsurance cover ''(to the $50 million corporate limit)''
::: - premiums and losses are pooled among business units '''within the same legal entity'''

:: '''negative effects'''
::: - none

:: '''positive effects'''
::: - corporate entity retains ''(hopefully!)'' profitable business rather than ceding it to an external reinsurer

:: '''comments'''
::: - don't forget that the business units must be '''within the same legal entity'''
::: ''(this strikes me as a fact that might be important)''

====9. Fronting Arrangements====

* ''[[Cedar.ReinsAccting#Front_Arrangements | Fronting Arrangements]]'' was discussed at the beginning of this wiki article. Just click the link to go to it.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

===Summary===

As I said in the ''[[ Cedar.ReinsAccting#Study_Tips | Study Tips]]'', this material has historically been low-ranked and hasn't appeared very often on exams. That doesn't mean it won't appear more often in the future but if you're playing the odds, there is a lot of other material we know is likely to appear on the exam so you should study all of the higher-ranked material first.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=Cedar&suffix=ReinsAccting&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]'''

  [https://www.battleacts6us.ca/vanillaforum6us/categories/https://www.battleacts6us.ca/vanillaforum6us/categories/cedar-reinsaccting '''Forum''']

==POP QUIZ ANSWERS==

ASOP.20

2026-01-27T15:34:00Z

Graham:

'''Reading''': “Actuarial Standard of Practice No. 20, '''Discounting of Property/Casualty Claim Estimates''',” June 2023.

'''Author''': Actuarial Standards Board of the American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/asop-20/217'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/asop-20 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/450_Discounting_(v01).mp4 '''(4:45) → Discounting - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''ASOP 20 - Discounting'''

* ASOP 20 provides guidance for actuaries on '''discounting claim estimates''', including '''unpaid''' claim estimates and '''future''' claim estimates associated with prospective risk transfer or risk retention, to present value. The standard addresses:

:* ''the selection of discount rates
:* ''assumptions on payment timing''
:* ''consideration of recoverables''
:* ''risk margins''

* It also includes requirements for '''actuarial communications''' and '''disclosures''' to ensure transparency and consistency in the discounted unpaid claim estimates.

|}

==Study Tips==

{| class='wikitable' style='background-color: navajowhite;"
|-
|| Important updates to the June 2023 (from 2011) are these terms:
|}

* "unpaid claim estimate" has been updated simply to "claim estimate"
* "discounted unpaid claim estimate" has been updated simply to "discounted claim estimate"

The 2023 version of ASOP 20 is more comprehensive and detailed compared to the 2011 version, reflecting changes in actuarial practice and standards. The updates ensure that actuaries consider a broader range of factors and provide more detailed and transparent communications.

There are 4 ASOPs: ''(Virtually all of the material in the ASOPs is included in higher-ranked readings.)''

* [[ASOP.20]] ''(Discounting)''
* [[ASOP.36]] ''(SAO)''
* [[ASOP.41]] ''(Communications)''
* [[ASOP.43]] ''(Reserve Estimates)''.

'''Estimated study time''': 30 minutes ''(not including subsequent review time)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* ''this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! part (a) !! part (b) !! part (c) !! part (d)

|-
|| ''no prior questions''
||
||
||
||

|}
[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=20&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-20/217'''Forum''']

==In Plain English!==

=== The Basics of Discounting ===

{| class='wikitable'
|-
| '''Question''': given an undiscounted reserve estimate, what components are required to calculate the corresponding discounted reserve
|}

* payment pattern ''(recoverables should be considered when developing a payment pattern)''
* discount rate

{| class='wikitable'
|-
| '''Question''': briefly describe 3 possible methods for selecting a discount rate
|}

: '''risk-free rate''':
:    - this is the theoretical rate of return of an investment with '''zero risk''' with respect to payment timing and amount
:    - '''in practice''', it would be the rate of return for a very low-risk investment with a timing pattern similar to the payment pattern for the given claim liabilities

: '''portfolio yield''':
:    - this is the average yield on investments within a selected asset portfolio
:    - this method provides better matching of liabilities & assets ''(assuming the timing & value of asset earnings matches the payment pattern of the reserve liabilities)''

: '''selection by another party''':
:    - the actuary uses a rate selected by someone else
:    - the actuary must disclose this ''(or be held responsible for the selection)''

{| class='wikitable'
|-
| '''Question''': identify required disclosures related to an actuary's work involving discounting
|}

: '''Section 4.1''' in the source text for ASOP 20 has a list of 10 items, many of which are obvious. You can give this section of the source text a quick read, but here are a few that Alice picked out. ''(Remember this is a low-ranked reading so it's likely there will be no questions on the exam.)'' Now is also a good time to review the memory tricks '''DAM''' and '''CRISIS-LQ''' from ''[[ASOP.41#Communications | ASOP 41 Communications]]''.

:: '''dates''': accounting date, valuation date, review date
:: '''DAM:''' Data, Assumptions, Methods for the discount rate selection
:: '''uncertainties''' around the payment pattern
:: '''difference''' between discounted & undiscounted reserves
:: '''range''': if a range of estimates is provided, actuary should describe the basis for the range

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=20&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]'''

=== Miscellaneous Facts ===

Here are some miscellaneous facts that are probably good to know. You can review these facts in Battle Quiz #2.

:{| class="wikitable sortable"
! #
! Question
! Answer
|-
| 1
| Does ASOP 20 apply to unpaid claims for '''future''' events?
| No, only to claims from past events.
|-
| 2
| Does ASOP 20 apply to ratemaking discounting?
| No, ratemaking is excluded.
|-
| 3
| Does ASOP 20 apply to recoverables?
| Yes, must consider timing & amount of recoverables.
|-
| 4
| What is the biggest driver of discounted vs undiscounted estimates?
| Timing of payments, not the ultimate total loss amount.
|-
| 5
| According to ASOP 20 (discounting) identify the 3 discount rate basis approaches.
| Risk-free, portfolio yield, rate selected by another party (with disclosure).
|-
| 6
| According to ASOP 20 (discounting) identify the key portfolio approach consideration?
| Match asset duration to claim payment timing & use net investment return.
|-
| 7
| According to ASOP 20 (discounting) identify 3 dates that must be disclosed?
| Accounting date, valuation date, review date.
|}

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=20&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=20&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-20/217'''Forum''']

NAIC.SSAP-9

2026-01-27T15:32:51Z

Graham:

'''Reading''': Statement of Statutory Accounting Principles 9, “'''Subsequent Events''',” paragraphs 1-8.

'''Author''': National Association of Insurance Commissioners, Accounting Practices and Procedures Manual

[https://battleacts.discourse.group/c/candidates-6u/naic-ssap-9/216'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-ssap-9 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/440_Subsequent_Events_(v01).mp4 '''(7:15) → Subsequent Events - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''Accounting Principles - Reinsurance'''
* SSAP-9 is about '''subsequent events''' - things that happen after you've started your analysis so you might have to go back and change what you've done. :-(
* In particular, SSAP-9 '''defines''' subsequent events and sets criteria for their recognition and disclosure in financial statements, covering both Type I (recognized) and Type II (nonrecognized) events.
* '''Type I events''' must be reflected in the financial statements, while '''Type II events''' require disclosure of their nature and financial impact.
|}

==Study Tips==

The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

There was an exam question from way back in 2014. Memorize the definition of subsequent events, do the exam problem, and you're done. ''(30 minutes max on this reading)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* definition of subsequent event & the 2 types
* actions required when a subsequent event occurs

: {| class="wikitable" style="width: 1000px;"
|-
! style='width: 175px;' | reference !! style='width: 175px;' | part (a) !! style='width: 175px;' | part (b) !! style='width: 175px;' | part (c) !! part (d)

|-
|| [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(10).pdf E] '''(2018.Fall #10)'''
|| [[Odomirok.6-7-BS]]
|| [[Odomirok.8-9-IS]]
|| '''required actions''': - for subsequent events '''1'''
| style="background-color: lightgrey;" |

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2014_2-Fall)/(2014_2-Fall)_(14).pdf E] '''(2014.Fall #14)'''
|| '''types''': - of subsequent events
|| '''required actions''': - for subsequent events
| style='background-color: lightgrey;' |
| style='background-color: lightgrey;' |

|}

: '''1''' I believe the answer to part (c.i) in the examiner's report is partially incorrect. Part (c.i) is a Type 2 subsequent event, not Type 1. See ''[https://battleacts.discourse.group/t/exam-problem-2018-fall-10/2595 this forum thread]'' for further discussion. ''(thx a123!)''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-9&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

==In Plain English!==

It's a cold January day and Alice the Actuary is working on year-end reserves. On Jan 15, there were 2 major events:

* an ''insolvency'' pertaining to one of their reinsurers ''(reinsurer accounts for material portion of their reinsurance arrangements)''
* an ''ice-storm'' that will have a material effect on future reserves

These are '''subsequent events''' because they occurred after the balance sheet date but before issuance and audit of the financial reports. The ''insolvency'' is a '''Type I''' subsequent event and the ''ice-storm'' is a '''Type II''' subsequent event. The definitions are as follows:

: '''Type I''': ''(Recognized Subsequent Event)'' an event that provides additional evidence of conditions that existed at the balance sheet date
: '''Type II''': ''(Nonrecognized Subsequent Event)'' an event where the underlying conditions did not exist at the balance sheet date

Alice wasn't surprised about the reinsurer insolvency. She knew that particular reinsurer's surplus had been deteriorating over the past year. That's why it's a Type I event. The insolvency simply provided further evidence of the weak surplus that existed at the balance sheet date. This '''must be recognized''' in the financial statements. For Alice, this may mean increasing the provision for reinsurance in Schedule F.

On the other hand, the ice-storm was not a foreseeable event. The storm did not provide further evidence of conditions at the balance sheet date. It does not have to be recorded in the prior year's financial statements but it must be disclosed in the '''notes''' to the financial statements ''(nature of event, and financial impact if it can be estimated.)''

Part (c) of the following exam problem on the income statement ''(see [[Odomirok.8-9-IS]])'' requires basic knowledge of subsequent events. Take a quick look. It's easy.

: [https://www.battleacts6us.ca/pdf/Exam_(2018_2-Fall)/(2018_2-Fall)_(10).pdf E] '''(2018.Fall #10)'''

Paragraphs 11 & 12 in the source text list examples of Type I and Type II events including these which related to the 2018.Fall exam problem.

: '''Type I''':

:* ''If the events that gave rise to litigation had taken place before the balance sheet date and that litigation is settled, after the balance sheet date but before the financial statements are issued or are available to be issued, for an amount different from the liability recorded in the accounts, then the settlement amount should be considered in estimating the amount of liability recognized in the financial statements at the balance sheet date.''

And in contrast:

: '''Type II''':

:* ''Settlement of litigation when the event giving rise to the claim took place after the balance sheet date but before financial statements are issued or are available to be issued.''

So you have to be careful as to whether the triggering event for the litigation took place before or after the balance sheet to know if it's Type I or Type II. Most of the time it's easy to figure out the type based on the definition of subsequent event. One more example of a Type II event is sale of a bond issued after the balance sheet date but before the financial statement date. Note the bond would have to have been purchased before the balance sheet date.

The quiz covers basic facts on subsequent events.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=SSAP-9&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

NAIC.APPM

2026-01-27T15:28:01Z

Graham:

'''Reading''': Accounting Practices and Procedures Manual, Preamble

'''Author''': NAIC

[https://battleacts.discourse.group/c/candidates-6u/naic-appm/215'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/naic-appm ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts8.ca/6u/video/430_NAIC_APPM_(v01).mp4 '''(6:00) → APPM (Accounting Policies) - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''NAIC Preamble'''

* The NAIC Accounting Practices and Procedures Manual (APPM) provides a '''comprehensive guide to Statutory Accounting Principles''' (SAP) used by insurance companies in the United States.

* It was codified to standardize accounting practices across states, '''ensuring consistency and comparability''' in insurers' financial statements.

* The manual '''emphasizes principles''' such as:
:* ''conservatism''
:* ''consistency''
:* ''recognition''

* These principles aim to maintain regulatory oversight '''focused on solvency''' and the protection of policyholders.

* It also outlines the '''differences''' between SAP and Generally Accepted Accounting Principles (GAAP)

|}

==Study Tips==

The year of publication for the manual changes each year but the content of the article does not. Much of the content of this reading is discussed elsewhere in the syllabus ''(materiality, for example)''. There is a only a small amount to memorize.

'''Estimated study time''': 1 hour ''(not including subsequent review time)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* '''preparing Fin Stmts''' - ''sources of information, materiality considerations''
* codification of SAP - ''reasons''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 175px;" | part (a) !! style="width: 175px;" | part (b) !! style="width: 175px;" | part (c) !! part (d)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(18).pdf E] '''(2015.Spring #18)'''
|| '''codification of SAP''': - reasons
|| '''preparing Fin Stmts:''' - source publications
|| '''preparing Fin Stmts:''' - alternate publications
|| '''preparing Fin Stmts:''' - materiality of errors

|}
[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=APPM&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/naic-appm/215'''Forum''']

==In Plain English!==

'''Codification Project''':

* This project produced a comprehensive guide to SAP that provided a consistent and comprehensive basis of accounting and reporting.
* This guide is called the ''NAIC Accounting Practices and Procedures Manual'' and consists of the various SSAPs.
* The reasons for the codification of SAP are related to uniformity of reporting and are listed in part (a) of the '''2015.Spring''' exam problem.

'''Statements of Statutory Accounting Principles (SSAPs)''':

* These principles constitute an accounting basis for the preparation of SAP statements where state regulations don't exist.
* The concepts underlying SSAPs are:
:    - conservatism ''(estimates should be conservative to protect policyholders)''
:    - consistency ''(regulators need financial information that's comparable across companies)''
:    - recognition ''(solvency assessments are based on the balance sheet, the income statement is secondary)''

'''Hierarchy of Accounting Rules''': ''Higher levels take precedence over lower levels.''

: '''Level 1''': SSAPs ''(which comprise the NAIC Accounting Practices and Procedures Manual)''
: '''Level 2''': Emerging Accounting Issues Working Group
: '''Level 3''': NAIC Annual Statement Instructions
: '''Level 4''': SAP Statement of Concepts
: '''Level 5''': Sources of nonauthoritative GAAP accounting guidance & literature

: ''(see parts (b) & (c) of the '''2015.spring''' exam problem)''

'''Deviations from NAIC APPM ''(Accounting Practices and Procedures Manual )'''''

* If an insurer wants to deviate from APPM or state prescribed accounting practices, the regulator must provide notice 5 days in advance of approval to all states where the insurer is licensed.
* This notice must disclose:
:    - description of the request
:    - quantitative impact

The first quiz is regurgitation of the bullet points from above.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=APPM&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

The second quiz cover the old exam questions.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=APPM&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=2'''mini BattleQuiz 2]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=NAIC&suffix=APPM&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

ASOP.41

2026-01-27T15:27:18Z

Graham:

'''Reading''': “Actuarial Standard of Practice No. 41, '''Actuarial Communications''',” December 2010.

'''Author''': Actuarial Standards Board of the American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/asop-41 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/420_Acturial_Communications_(v01).mp4 '''(3:45) → Actuarial Communications - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''ASOP 41 - Actuarial Communications'''

* ASOP 41 provides guidance for '''actuarial communications''' to ensure clarity, appropriateness, and timely delivery. Actuarial Communications include:
:* ''written, electronic, oral formats

* ASOP 41 emphasizes the need to consider the '''intended users'''. Key requirements include:
:* ''identification of the responsible actuary''
:* ''disclosures of assumptions and methods''
:* ''provisions for dealing with constraints''
:* ''subsequent events''

|}

==Pop Quiz==

'''Note''': For the multiple choice Pop Quiz, please refer only to the first Battle Card in the quiz below. It is for general review once you've studied the whole reading.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

ASOP 41 is titled ''Actuarial Communications''. Much of the ASOP material is also contained in other readings. Occasionally there is an exam question directly from an ASOP that can't be found elsewhere but the ASOPs are primarily of value to a working actuary. They provide a concise summary of important principles.

There are 4 ASOPs:

* [[ASOP.20]] ''(Discounting)''
* [[ASOP.36]] ''(SAO)''
* [[ASOP.41]] ''(Communications)''
* [[ASOP.43]] ''(Reserve Estimates)''.

ASOP 41 is another example of a reading that is really just a bunch of bullet points. The PDF is 22 pages, but the main part of it is only 9 pages. Still, you can't memorize 9 pages. The strategy is to get an overall sense of of what the reading is about, then isolate specific facts that have to be memorized.

'''Estimated study time''': 60 minutes ''(not including subsequent review time)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* disclosures in actuarial communications ''(in various difference circumstances)''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 200px;" | part (a) !! style="width: 200px;" | part (b) !! style="width: 200px;" | part (c)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(21).pdf E] '''(2015.Spring #21)'''
|| '''disclosures''': - actuarial report ''(state insurance dept)'' '''+'''
|| '''course of action''': - non-accommodating report
|| '''disclosures''': - any actuarial communication '''++'''

|}

:: '''+''' The answer is the list from section '''(4.2)'''
:: '''++''' The answer is the list from section '''(4.1.3)'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']

==In Plain English!==

===Intro===

Did anyone else notice the bizarre statement in the 2nd paragraph of Section 1.2:

:{| class="wikitable"
|-
| If any other ASOPs provide information inconsistent with ASOP 41, then those other ASOPs '''supersede''' ASOP 41.
|}

This is not a good start! It means that any information provided in this ASOP is potentially false. Is it that difficult to make all the ASOPs consistent with each other? It's probably the case that ''most'' of the information in ASOP 41 is reliable – nonetheless, the statement above immediately undercuts the confidence of the reader. Now for everything I read, I'll be wondering: ''"Is this really true?"''

Anyway, we have no choice but to proceed...

:{| class="wikitable"
|-
| '''Alice's Pro Tip''': The only sections of ASOP.41 you need to spend more than 10 milliseconds on are '''(4.1), (4.2), (4.3), (4.4)'''. ''(Memorize the lists.)''
|}

===Definitions===

You can skip this section. There are 10 definitions and they are all obvious. ''(Example: Definition (2.4) states that an '''actuarial report''' is a set of actuarial documents that the actuary determines to be relevant to specific actuarial findings that are relevant to an intended user.)''

'''Note''': Section 8.1.2 of [[COPLFR.SAO]], in its discussion of the '''Actuarial Report''' underlying the SAO, states:

: ''The requirements for the '''Actuarial Report''' per the Instructions are much more specific than those contained in ASOP No. 41.''

For a old exam question on that topic see: ''(This question is part of [[BattleTables_-_COPLFR#2016_Exam_Questions | COPLFR]].)''

In the most general sense, an actuarial report is a very detailed explanation of the actuary's work and would normally include the SAO, AOS, as well as further details as indicated further down in this wiki article.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(25).pdf E] '''(2016.Spring #25b)'''

===Analysis===

The full title of this section is ''Analysis of Issues and Recommended Practices''. I've boiled each section down to it's essentials.

:'''(3.1)''' The actuary should communicate clearly with the intended user in a timely manner. ''(I'm glad this ASOP mentioned this because normally I write my actuarial reports unclearly. Joke.)''

:'''(3.2)''' In terms of ''what'' the actuary should communicate, here's a little memory trick: '''DAM''', which stands for ''Data, Assumptions, Methods.''

:'''(3.3)''' If the actuary is pressed for time, they can skip the less important details that would otherwise need to be included in an actuarial report. ''(Use your judgment.)''

:'''(3.4)''' This section talks about disclosures that are required in an actuarial report. I'm not sure why they include this section since disclosures are discussed in detail in section 4 of this ASOP.

:'''(3.5) - (3.8)''' Take a break - skip these sections. ''(I don't see any potential exam questions here, but it's all common sense anyway.)''

If you're uncomfortable skipping (3.5) - (3.8), here's a quick summary:

: '''(3.5)''' If a later actuarial communication has '''materially different''' results or opinions from an earlier one (on the same issue), the actuary must clarify that the earlier opinion is no longer valid and explain why.

: '''(3.6)''' For '''oral communications''', include appropriate disclosures when practical. If the info may be passed on to others, consider issuing a written (or recorded) follow-up.

: '''(3.7)''' Actuaries are not required to address users beyond the intended user(s), but should make documents clear and '''consider adding disclaimers''' or distribution limitations to avoid misinterpretation.

: '''(3.8)''' You're not required to retain all materials, but it's good practice to '''keep enough info''' so another actuary could take over a recurring assignment. Disclosure of these materials is not required.

===Communications===

This is the most important section of this reading. section (4.1) is a long, boring list of items that must be disclosed in ''any'' actuarial report.

:'''(4.1)''' It's obvious you have to state the '''name''' of the actuary doing the work, as well as the '''date''' and '''subject''' of the document. I've taken the other disclosure items listed in the reading, rearranged them, and created a memory trick: '''CRISIS-LQ'''. ''(See [https://battleacts.discourse.group/t/memory-trick/3222 this discussion thread]) ''

::{| class="wikitable"
|- style="background-color: lightgrey"
| || '''item to be disclosed in any actuarial document''' || '''example''' ''(not part of reading, but good to think about)''
|-
| style="text-align: center" | '''C''' || '''C'''onflicts of interest || actuary's spouse is the CFO of the company
|-
| style="text-align: center" | '''R''' || '''R'''isks || earthquakes are unpredictable so reserves have a wide range
|-
| style="text-align: center" | '''I''' || '''I'''ntended user || ''your momma'' 😄
|-
| style="text-align: center" | '''S''' || '''S'''cope || evaluate company's year-end reserves
|-
| style="text-align: center" | '''I''' || '''I'''nfo that actuary used but doesn't assume responsibility for || loss estimates from a catastrophe modeler
|-
| style="text-align: center" | '''S''' || '''S'''ubsequent events || data error in year-end data discovered in January
|-
| style="text-align: center" | '''-''' || - || ---
|-
| style="text-align: center" | '''L''' || '''L'''imitations on applicability of findings || applies only to lime-green, 3-door Bentleys 😄
|-
| style="text-align: center" | '''Q''' || '''Q'''ualifications of actuary || just got his FCAS - woo-hoo!!
|}

In addition to this list, there are 3 special cases where further disclosures are required:

:'''(4.2)''' If there are assumptions/methods prescribed by law, it's ''common sense'' that your report should include

:: ==> name of the law
:: ==> assumptions/methods prescribed by the law
:: ==> that the report-writer actually followed the law.

:'''(4.3)''' This section relates to the second "I" item in the above table: ''Info that actuary used but doesn't assume responsibility for.'' There was a question on this from 2017: ''(from [[BattleTables_-_COPLFR#2017_Exam_Questions | COPLFR]].)''

:: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(24).pdf E] '''(2017.Fall #24bc)'''

:: They presented 2 scenarios and asked what information needs to be disclosed when the actuary relies on someone else's work. I've listed the different cases below, but it's probably easier just to look at the exam question. These choices come from section '''3.4.4 (b)''':

:::* If the work is not material, '''no disclosure'''.
:::* If the work is material, then there are 3 choices:
:::** If the actuary agrees with the work, '''no disclosure'''.   ← ''The examiner's report did not accept this answer. See [https://battleacts.discourse.group/t/2017-fall-24bii/2636 this forum discussion].''
:::** If the actuary doesn't agree with the work, '''disclose'''.
:::** If the actuary cannot judge the work, '''disclose'''.

:: Now, if disclosure is required, what do you have to include? The answer is the
::: ==> extent of reliance
::: ==> assumptions/methods relied upon
::: ==> name of the other party.

:'''(4.4)''' Last section in this reading. All it says is that if you materially deviate from ASOP guidance, you should '''disclose'''.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']

==POP QUIZ ANSWERS==

ASOP.41

2026-01-27T15:26:28Z

Graham:

'''Reading''': “Actuarial Standard of Practice No. 41, '''Actuarial Communications''',” December 2010.

'''Author''': Actuarial Standards Board of the American Academy of Actuaries

[https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']
[https://www.battleacts6us.ca/vanillaforum6us/categories/asop-41 ''   (Or click here for Legacy Forum – no longer monitored)'']

VIDEO →
[https://battleacts6us.ca/video/420_Acturial_Communications_(v01).mp4 '''(3:45) → Actuarial Communications - General Overview''']   
([[Videos |Click here for all currently available videos.]])

{| class='wikitable' style='background-color: navajowhite;
|-
|| '''BA Quick-Summary''': '''ASOP 41 - Actuarial Communications'''

* ASOP 41 provides guidance for '''actuarial communications''' to ensure clarity, appropriateness, and timely delivery. Actuarial Communications include:
:* ''written, electronic, oral formats

* ASOP 41 emphasizes the need to consider the '''intended users'''. Key requirements include:
:* ''identification of the responsible actuary''
:* ''disclosures of assumptions and methods''
:* ''provisions for dealing with constraints''
:* ''subsequent events''

|}

==Pop Quiz==

'''Note''': For the multiple choice Pop Quiz, please refer only to the first Battle Card in the quiz below. It is for general review once you've studied the whole reading.

[https://battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''Multiple Choice (mini BattleQuiz 1)]''' ← for general review of topic

==Study Tips==

ASOP 41 is titled ''Actuarial Communications''. Much of the ASOP material is also contained in other readings. Occasionally there is an exam question directly from an ASOP that can't be found elsewhere but the ASOPs are primarily of value to a working actuary. They provide a concise summary of important principles.

There are 4 ASOPs:

* [[ASOP.20]] ''(Discounting)''
* [[ASOP.36]] ''(SAO)''
* [[ASOP.41]] ''(Communications)''
* [[ASOP.43]] ''(Reserve Estimates)''.

ASOP 41 is another example of a reading that is really just a bunch of bullet points. The PDF is 22 pages, but the main part of it is only 9 pages. Still, you can't memorize 9 pages. The strategy is to get an overall sense of of what the reading is about, then isolate specific facts that have to be memorized.

'''Estimated study time''': 60 minutes ''(not including subsequent review time)''

==BattleTable==

Based on past exams, the '''main things''' you need to know ''(in rough order of importance)'' are:

* disclosures in actuarial communications ''(in various difference circumstances)''

: {| class="wikitable" style="width: 1000px;"
|-
! style="width: 175px;" | reference !! style="width: 200px;" | part (a) !! style="width: 200px;" | part (b) !! style="width: 200px;" | part (c)

|-
| [https://www.battleacts6us.ca/pdf/Exam_(2015_1-Spring)/(2015_1-Spring)_(21).pdf E] '''(2015.Spring #21)'''
|| '''disclosures''': - actuarial report ''(state insurance dept)'' '''+'''
|| '''course of action''': - non-accommodating report
|| '''disclosures''': - any actuarial communication '''++'''

|}

:: '''+''' The answer is the list from section '''(4.2)'''
:: '''++''' The answer is the list from section '''(4.1.3)'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']

==In Plain English!==

===Intro===

Did anyone else notice the bizarre statement in the 2nd paragraph of Section 1.2:

:{| class="wikitable"
|-
| If any other ASOPs provide information inconsistent with ASOP 41, then those other ASOPs '''supersede''' ASOP 41.
|}

This is not a good start! It means that any information provided in this ASOP is potentially false. Is it that difficult to make all the ASOPs consistent with each other? It's probably the case that ''most'' of the information in ASOP 41 is reliable – nonetheless, the statement above immediately undercuts the confidence of the reader. Now for everything I read, I'll be wondering: ''"Is this really true?"''

Anyway, we have no choice but to proceed...

:{| class="wikitable"
|-
| '''Alice's Pro Tip''': The only sections of ASOP.41 you need to spend more than 10 milliseconds on are '''(4.1), (4.2), (4.3), (4.4)'''. ''(Memorize the lists.)''
|}

===Definitions===

You can skip this section. There are 10 definitions and they are all obvious. ''(Example: Definition (2.4) states that an '''actuarial report''' is a set of actuarial documents that the actuary determines to be relevant to specific actuarial findings that are relevant to an intended user.)''

'''Note''': Section 8.1.2 of [[COPLFR.SAO]], in its discussion of the '''Actuarial Report''' underlying the SAO, states:

: ''The requirements for the '''Actuarial Report''' per the Instructions are much more specific than those contained in ASOP No. 41.''

For a old exam question on that topic see: ''(This question is part of [[BattleTables_-_COPLFR#2016_Exam_Questions | COPLFR]].)''

In the most general sense, an actuarial report is a very detailed explanation of the actuary's work and would normally include the SAO, AOS, as well as further details as indicated further down in this wiki article.

: [https://www.battleacts6us.ca/pdf/Exam_(2016_1-Spring)/(2016_1-Spring)_(25).pdf E] '''(2016.Spring #25b)'''

===Analysis===

The full title of this section is ''Analysis of Issues and Recommended Practices''. I've boiled each section down to it's essentials.

:'''(3.1)''' The actuary should communicate clearly with the intended user in a timely manner. ''(I'm glad this ASOP mentioned this because normally I write my actuarial reports unclearly. Joke.)''

:'''(3.2)''' In terms of ''what'' the actuary should communicate, here's a little memory trick: '''DAM''', which stands for ''Data, Assumptions, Methods.''

:'''(3.3)''' If the actuary is pressed for time, they can skip the less important details that would otherwise need to be included in an actuarial report. ''(Use your judgment.)''

:'''(3.4)''' This section talks about disclosures that are required in an actuarial report. I'm not sure why they include this section since disclosures are discussed in detail in section 4 of this ASOP.

:'''(3.5) - (3.8)''' Take a break - skip these sections. ''(I don't see any potential exam questions here, but it's all common sense anyway.)''

If you're uncomfortable skipping (3.5) - (3.8), here's a quick summary:

: '''(3.5)''' If a later actuarial communication has '''materially different''' results or opinions from an earlier one (on the same issue), the actuary must clarify that the earlier opinion is no longer valid and explain why.

: '''(3.6)''' For '''oral communications''', include appropriate disclosures when practical. If the info may be passed on to others, consider issuing a written (or recorded) follow-up.

: '''(3.7)''' Actuaries are not required to address users beyond the intended user(s), but should make documents clear and '''consider adding disclaimers''' or distribution limitations to avoid misinterpretation.

: '''(3.8)''' You're not required to retain all materials, but it's good practice to '''keep enough info''' so another actuary could take over a recurring assignment. Disclosure of these materials is not required.

===Communications===

This is the most important section of this reading. section (4.1) is a long, boring list of items that must be disclosed in ''any'' actuarial report.

:'''(4.1)''' It's obvious you have to state the '''name''' of the actuary doing the work, as well as the '''date''' and '''subject''' of the document. I've taken the other disclosure items listed in the reading, rearranged them, and created a memory trick: '''CRISIS-LQ'''. ''(See [https://www.battleacts6us.ca/vanillaforum6us/discussion/843/memory-trick this discussion thread]) ''

::{| class="wikitable"
|- style="background-color: lightgrey"
| || '''item to be disclosed in any actuarial document''' || '''example''' ''(not part of reading, but good to think about)''
|-
| style="text-align: center" | '''C''' || '''C'''onflicts of interest || actuary's spouse is the CFO of the company
|-
| style="text-align: center" | '''R''' || '''R'''isks || earthquakes are unpredictable so reserves have a wide range
|-
| style="text-align: center" | '''I''' || '''I'''ntended user || ''your momma'' 😄
|-
| style="text-align: center" | '''S''' || '''S'''cope || evaluate company's year-end reserves
|-
| style="text-align: center" | '''I''' || '''I'''nfo that actuary used but doesn't assume responsibility for || loss estimates from a catastrophe modeler
|-
| style="text-align: center" | '''S''' || '''S'''ubsequent events || data error in year-end data discovered in January
|-
| style="text-align: center" | '''-''' || - || ---
|-
| style="text-align: center" | '''L''' || '''L'''imitations on applicability of findings || applies only to lime-green, 3-door Bentleys 😄
|-
| style="text-align: center" | '''Q''' || '''Q'''ualifications of actuary || just got his FCAS - woo-hoo!!
|}

In addition to this list, there are 3 special cases where further disclosures are required:

:'''(4.2)''' If there are assumptions/methods prescribed by law, it's ''common sense'' that your report should include

:: ==> name of the law
:: ==> assumptions/methods prescribed by the law
:: ==> that the report-writer actually followed the law.

:'''(4.3)''' This section relates to the second "I" item in the above table: ''Info that actuary used but doesn't assume responsibility for.'' There was a question on this from 2017: ''(from [[BattleTables_-_COPLFR#2017_Exam_Questions | COPLFR]].)''

:: [https://www.battleacts6us.ca/pdf/Exam_(2017_2-Fall)/(2017_2-Fall)_(24).pdf E] '''(2017.Fall #24bc)'''

:: They presented 2 scenarios and asked what information needs to be disclosed when the actuary relies on someone else's work. I've listed the different cases below, but it's probably easier just to look at the exam question. These choices come from section '''3.4.4 (b)''':

:::* If the work is not material, '''no disclosure'''.
:::* If the work is material, then there are 3 choices:
:::** If the actuary agrees with the work, '''no disclosure'''.   ← ''The examiner's report did not accept this answer. See [https://battleacts.discourse.group/t/2017-fall-24bii/2636 this forum discussion].''
:::** If the actuary doesn't agree with the work, '''disclose'''.
:::** If the actuary cannot judge the work, '''disclose'''.

:: Now, if disclosure is required, what do you have to include? The answer is the
::: ==> extent of reliance
::: ==> assumptions/methods relied upon
::: ==> name of the other party.

:'''(4.4)''' Last section in this reading. All it says is that if you materially deviate from ASOP guidance, you should '''disclose'''.

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=1'''mini BattleQuiz 1]''' '''You must be logged in or this will not work.'''

[https://www.battleacts6us.ca/FC.php?selectString=**&filter=both&sortOrder=natural&colorFlag=allFlag&colorStatus=allStatus&priority=importance-high&subsetFlag=miniQuiz&prefix=ASOP&suffix=41&section=all&subSection=all&examRep=all&examYear=all&examTerm=all&quizNum=all'''Full BattleQuiz]''' '''You must be logged in or this will not work.'''

  [https://battleacts.discourse.group/c/candidates-6u/asop-41/214'''Forum''']

==POP QUIZ ANSWERS==