Odomirok.21-Tools

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

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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.

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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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]

Gov - 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:

Deficient reserves

Underpricing

New entrant to market

Growth too rapid

(because insolvency puts you in deep doo-doo.)

And just a few more "crap" reasons that have appeared in examiner's reports:

• Catastrophe
• Reinsurer insolvency
• Asbestos
• Poor investment results

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