THE CENTER FOR PROFESSIONAL EDUCATION 1 Presentation Questions and Answers St. John’s University...

THE CENTER FOR PROFESSIONAL EDUCATION

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Presentation

Questions and Answers

St. John’s University

Monday, November 16


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ERM Solvency

Financial Solvency. The ability of an insurance company to meet all financial responsibilities and pay all claims promised under its various policies.

Technical Solvency. A situation where an insurance company has an adequate surplus to provide a cushion of support for future claims.

Technical Insolvency. A situation where an insurer fails to meet the minimum surplus requirements established by the regulators.


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Continuing Solvency

A situation where an insurance company meets minimum standards for both cash flows and asset cushion. The guidelines are: Adequate Cash Flows. The cash from

operations must cover operating expenses and losses incurred.

Adequate Equity. Contributed capital and surplus must be sufficient to support the level of premiums and other activities.


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Question

An executive made the following recommendation. Is the statement consistent with the expectations of enterprise risk management? Explain.

We should accept this project. It offers a 15% annual return over the next five years. This compares to 12% that we are earning on current business activities.”


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Answer

It is not consistent with ERM because it does not consider the risk of the new project. Risk. The level of risk determines the

acceptability of projects and activities. Return. The entity pursues projects only

when the forecasted return is appropriate for the level of risk that is accepted.

If the new project poses the same or less risk as current projects, it would be acceptable.


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Factors Affecting Solvency

Sound Underwriting Practices. An insurer should follow policies that provide sufficient funds to pay claims on a timely and consistent basis.

Sound Investments. The insurer should invest assets carefully in a balanced relationship of risk and return.

Cost Control. An insurer should have systems and processes that control operating and other costs.

Strong Internal Auditing Procedures. The insurer should conduct periodic and surprise audits of areas where policies are issued, claims paid, or money processed.


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Presentation

Silicosis Asbestosis


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Expansion of Liability 责任扩展

Companies can expect continuing efforts by individuals and their lawyers to expand their legal liability with creative interpretations of the law. One opportunity arises from the Racketeer Influenced and Corrupt Organizations Act ( RICO), a U.S. federal law that provides for extended penalties for criminal acts performed as part of an ongoing criminal organization. Passed in 1970 to fight organized crime, the law has been used in a number of lawsuits against businesses. In 1996, it was expanded to include violations of federal immigration law.

通过对法律的创新解释，将公司的法律责任扩展。《诈骗影响和腐败组织法》对仍在继续的犯罪组织规定了扩展惩罚。该法律于1970 年通过，旨在打击犯罪团伙，并已在多起公司的诉讼案中应用。 1996 年，被进一步扩展，包括进了违反联邦移民法的规定。

Center for Professional Education


Silicosis 矽肺病

In 2005, “Silicosis was a big deal in the United States. It was:

2005 年，矽肺病在美国很受关注。这是： An occupational lung disease caused by inhaling silica dust

working in quarries. 一种在采石场工作时吸入硅尘而导致的职业肺病，

A cause of persistent coughing , chest pain, fever., and death. 会引发长时间咳嗽、胸痛、高烧等症状，甚至死亡。

The focus of silica lawsuits that began in 2001 in Mississippi. 对矽杮诉讼案的关注 2001 年开始于密西西比州。

By 2005, hundreds of cases with thousands of plaintiffs

clogged the courts. 至 2005 年，法院堆积了来自几千名原告的数百份诉讼案。

9Center for Professional Education


Question 问题

External evidence did not seem to justify such an explosion of silicosis claims. Legal observers wondered what was happening. In 2005, a federal judge consolidated 9,000 lawsuits and met with lawyers handling the cases. What did she learn?

外部证据不足以解释矽肺案的爆发。法律界一直在猜测究竟发生了什么事。 2005 年，一名联邦法官收集了 9000 份案例，与一些律师共同进行处理。她从中发现了什么？



Answer 回答

The judge learned; 法官发现： A small number of doctors diagnosed Silicosis.

一小部分医生作出了矽肺病的诊断。 Lawyers never met with patients.

律师从未见过病人。 Doctors never met with patients.

医生从未见过病人。 Secretaries completed the paperwork.

书面材料由秘书完成。



Question 问题

Were most of the “victims” healthy prior to developing silicosis?

在患矽肺前，大部分“受害者”是否健康？



Answer 回答

Apparently not. 显然不是。 Two-thirds of the victims had previously been diagnosed in

earlier lawsuits as having asbestosis. 三分之二的受害者在之前的诉讼案中曾被诊断为患有石棉肺。

Asbestosis is also as an occupational lung disease arising from long-term, heavy exposure to asbestos. 石棉肺也是一种职业性肺病，由长期暴露在大量石棉环境中引起。

The earlier lawsuits forced 70 companies into bankruptcy and created billions of dollars of legal fees. 早先的诉讼案使 70 多家公司破产，并产生了几十亿美元的法律费用。



Question 问题

With respect to the earlier asbestosis, were things getting better for the “victims?”

有关先前的石棉案，那些“受害者”的情况是否有所好转？



Answer 回答

Apparently yes. 是的。 Most lawsuits contained the same doctors and patients.

大部分诉讼中涉及到同样的医生和病人。 The same doctors read the same X-rays. 同样的医生使

用了同样的 X 光检查。 Plaintiffs were diagnosed with asbestosis but not

silicosis in the earlier lawsuits. 在先前的诉讼案，原告被诊断为石棉肺，但没有矽肺。

Now they were diagnosed with silicosis but not asbestosis. 现在他们被诊断为矽肺，但没有石棉肺。



Question 问题

What did the judge do?

法官做了什么？



Answer (1) 回答

The judge dismissed the case. 法官撤销了案件。 She accused the doctors and lawyers of committing

fraud. 她指控医生和律师犯有欺诈罪。 She issued sanctions against the filing of future

lawsuits. 她针对今后的此类诉讼下达了禁制令。 She required some lawyers to pay the legal costs of the

defendants. 她要求一些律师支付辩护人的法律费用。



Answer (2)

5,500 silicosis claims were filed in Texas after 2005:

Texas 2005 tort reform requires medical evidence of a "minimum level of impairment.”

54 plaintiffs attempted to meet the standard. 24 did so. 99 percent of the lawsuits were likely fraud. None of the trial lawyers have been charged

with attempted fraud.

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Judicial Hell Holes 司法地狱

The American Tort Reform Association identifies judicial hell holes as places where judges systematically apply laws and court procedures in an unfair and unbalanced manner, generally against defendants in civil lawsuits. Over the past few years, ATRA reports that abuses have decreased across-the-board. As an example, Madison County, historically the preeminent Hellhole, has significantly improved in fairness due to the efforts of some in the Illinois judiciary over the past two years.

美国民事侵权改革协会（ ATRA)认为司法地狱指法官以不公平、不均衡的方式应用法律和法庭程序，一般是针对民事诉讼案中的辩方。在过去的几年中， ATRA报告的司法滥用总体上已有减少。例如，麦迪逊县曾是一个出名的司法地狱，但由于伊利诺斯州司法系统在过去两年中的努力，现在公正性已得到大幅改善。



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Question 问题

What are the judicial hell holes on the ATRA list in 2009 and 2010?

ATRA在 2009和 2010 年列出的司法地狱有哪些？


THE CENTER FOR PROFESSIONAL EDUCATION 21

Answer (1) 回答（ 1 ）

Top four in 2009: 2009 年前 4 位：South Florida. High awards, improper evidentiary rulings, high

payouts. In 2006 $145 billion award (tobacco). 南弗罗里达。高裁决额，不合理的证据裁决，高花费。 2006 年裁决额1450 亿美元（烟草）

West Virginia. Alliances and close personal connections among personal injury lawyers and local judges. 西弗吉尼亚。人身伤害案律师和当地法官的联盟和密切个人关系。

Cook County, Ill. Burdensome discovery, evidentiary rulings favor plaintiffs over defendants, claims with no connection to the county. 库克县。取证昂贵，证据性裁决，有利于原告，处理与本县无关的案件。

Atlantic County, NJ. A center for mass tort actions against pharmaceutical companies. 大西洋县。针对医药公司的大量侵权行为。



Answer (2) 回答（ 2 ）

2010 List of Judicial Hell Holes

2010年司法地狱名单 1 Philadelphia, Pennsylvania 费城，宾夕法尼亚州 2 California. Particularly Los Angeles and Humboldt

Counties 加利福尼亚州。尤其是洛杉矶和洪堡县 3 West Virginia 西弗吉尼亚州 4 South Florida 南佛罗里达 5 Cook County, Illinois 伊利诺伊州库克县 6 Clark County, Nevada 内华达州克拉克县



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Presentation

Accounting for Solvency

ERM and Solvency

16 November 2015


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Five Categories of Accounts

An insurance company has five categories of accounts. Asset. A financial resource. Liability. A debt or obligation to pay a claim. Equity (capital). A source of assets from owners or

policyholders and retained earnings from prior profits. Revenue. An inflow of assets, not limited to cash, in

exchange for coverage or services rendered. Expense. A consumption of any asset while

conducting business, whether in cash or the reduction of asset value through non-cash means.


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Admitted Asset

A high-quality asset that meets requirements of regulators and appears on a regulatory balance sheet. Liquidity. Easily converted to cash in a short

period of time. Certainty. Highly likely to be converted to

cash at their reported values if they are needed to pay claims.


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Nonadmitted Asset (1)

Fails to meet standard of admitted asset. Furniture, Equipment, and Computers. Not

very marketable at accounting values. Funds Deposited with Unauthorized

Parties. Example: Not licensed locally. Uncertain Collectibles. Includes overdue

receivables, balances due from agents or brokers, and overdue interest and dividends.


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Nonadmitted Asset (2)

Fails to meet standard of admitted asset. Furniture, Equipment, and Computers. Not

very marketable at accounting values. Funds Deposited with Unauthorized

Parties. Example: Not licensed locally. Uncertain Collectibles. Includes overdue

receivables, balances due from agents or brokers, and overdue interest and dividends.

Only admitted assets count towards solvency.


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Question

Identify as (1) resource; (2) risk factor (3) margin of safety; or (4) measure of efficiency. Admitted assets. Other assets.


Accounting and Cash Flow (1)

A company has three major lines of business:

Line of Business Profits Life Insurance and Annuities.

Medium Health Care Insurance. Low Reinsurance and Partnerships. High

It has $300,000 of new capital. Where should it invest the money?

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Answer

Admitted assets. Liquid resources to meet obligations.

Other assets. Efficiency.


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Insurer Asset Accounts

Cash and Equivalents. Bank and money market balances.

Financial Securities. Bonds, mortgages, loans, common stock.

Premiums Due. Money due from policyholders, agents or brokers who have not yet paid the premiums.

Reinsurance Recoverable. Monies due from agents or reinsurance companies.

Interest Due. Interest and dividends due from investments at the end of an accounting period.

Other Assets. Equipment, fixed assets, and other financial resources.


Question (1)

What kind of account is premiums due?• Asset (See previous slide)• Liability• Capital• Revenue• Expense

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Question (2)

What kind of account is premiums due?• Asset (Watch out for trick question?) • Liability• Capital• Revenue• Expense

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Answer (1)

It depends upon who owes whom?• Premiums Due. • Reinsurance Recoverable.• Interest Due.


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Answer (2)

Are the payments on time?• Premiums Due. • Reinsurance Recoverable.• Interest Due.


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Reserves and Capital

Reserves. • Risk factor. • Margin of safety. • Reflection of resources.

Capital (surplus). • Margin of safety.


Question

Which insurer is financially stronger?

Insurer #1 Insurer #2

Cash and Securities 300m 400m

Other Assets 40m 20m

Total Assets 340m 420m

Reserves 250m 380m

Capital 90m 40m

Total 340m 420m

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Symptoms

Financial analysis must be careful to distinguish between the cause of a problem and a symptom of it. Cause. An event that produces a result or

problem. Symptom. A visible indicator that a problem

exists.


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Question

Identify each of the following as a cause or a symptom of a problem. Low level of underwriting profit. _______ Too many low-yield bonds. _______ High underwriting costs. _______ Inadequate cash to pay claims. _______ Excessive overdue premiums

_______


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Answer

All are symptoms of a problem.


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Income Statement Accounts

Premiums. Primary cash flow resource.Investment income. Resource (cash flow).Losses. Risk factor.Expenses. Efficiency factor.


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Question

A insurance company is losing $1 million a day on underwriting activities.

• The company has $5 billion in liquid securities.• How much time does it have before it is

insolvent?


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Business Risks and Solvency

Underwriting Risks. The insurer estimates losses in an uncertain world. If the losses exceed the estimates, the insurer can face solvency pressures.

Investment Risks. If earnings on investments drop unexpectedly, financial solvency problems can occur.

Changing Circumstances. If global warming, droughts, pollution, and other factors change the pattern of losses and cause misjudgments on policy pricing and likely losses, financial problems can arise.


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Capacity

Capacity refers to the amount of business that should be done by an insurance company. Two factors are: Capacity Related to Capital. Capital refers

to contributed capital, surplus, and other ownership accounts. Companies with a high percentage of capital compared to total assets have capacity to safely expand underwriting.

Capacity Related to Assets. A large asset base also indicates a high capacity.


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Capital to Assets

• Total Capital/Total Assets • Measures margin of safety between total

assets and reserves and other obligations. • High ratio indicates more capacity than low

ratio.


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Change in Surplus

End Surplus – Start Surplus

Starting Surplus

Measures growth or decline in surplus. Growing surplus, rising capacity.Declining surplus, declining capacity:

Potential instability if surplus is growing or declining too quickly.


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Return on Capital

Measures both profitability and capacity. The ratio is:

Net Income/Total Capital

A high return provides a margin of safety for expanding underwriting activities.

A low or negative ratio is a constraint on adding new business.


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Question

An insurer had surpluses as follows. What is a concern that you might have about its surplus?

Year –2 Year –1 Year 0

Starting Surplus 67000 52260 38672

Change in Surplus -7.3% -22.0% -26.0%


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Answer

Rapid decline in surplus. Are losses exceeding expectations?

Did the company book too much income in prior periods?

Has the company accepted excess risks? Are its policies priced correctly?


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Question

What is a guideline for the largest negative change in surplus that should take place in a year?

The largest rise?


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Answer

Possible Answers are:

10 to 20% decline. Surplus is a cushion. It should not be wiped out in 2-3 years.

30 to 40% rise. This could happen under normal conditions in a year of few losses.


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Question

An insurer had the following. What is a concern that you might have about its management?


Net Income 22000 14080 9011

Capital 114400 123552 133436

Return on Capital 19.2% 11.4% 6.8%


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Answer

Why is net income dropping so quickly while capital is rising?

Will the company be a sound investment if the trend continues?


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Question (1)

A company is evaluating the establishment of an insurance company with a contributed capital of $6 million.

Competing investments for the funds offer returns as shown on the next slide.

What expected return on capital would be attractive for this investment?


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Question (2)

Competing Expected

Investments Return

Mutual Fund 7.0%

Commercial bank 6.0%

Internet Real Estate Sales 14.0%

Foreign Exchange Trading 23.0%

Computer Service Center 11.0%

Britain Government Bonds 8.0%


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Answer

It depends upon perceived risk.

For a captive company with proper reinsurance, the risk is low. A return slightly higher than government bonds is fair.

For an insurer accepting market risks, the return should match similar risk investments. If the computer service center is a similar risk, 11 percent would work.


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Question

An insurer had the following. What is a concern about its capacity?


Assets 85000 88400 91936

Premiums Earned 46750 60308 77797

Assets to Premiums 1.82 1.47 1.18


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Answer

Premiums rising faster than assets.

Is the company growing too fast?


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Question



Reserves 140000 217000 347200

Premiums Earned 91000 94640 98426

Reserves to

Premiums Earned 1.54 2.29 3.53


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Answer

• Reserves rising faster than premiums. • Is the company paying its losses? • Was it failing to establish adequate reserves

and thus had to make accounting adjustments to reserves?

• Are losses greater than forecasted?


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Question



Premiums Written 140000 189000 113400

Change in Writings 8.8% 35.0% -40.0%


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Answer

• Why the sizeable fluctuation in premiums written from period to period?

• Is the company entering and leaving lines of business?

• Is the business stable?


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Answer (1)

An insurer charged three clients $100000 each, a total of $300000, to provide coverage.

• A broker gave the money to the insurer.• The insurer discovered the premiums were too

high and gave $50000 back to the broker.• The broker remitted $10000 to each insured and

kept the balance.• The clients thus paid $270000.• The broker kept $20000, totaling $290000.• What happened to the remaining $10000?


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Answer (2)

Not a serious question. A brain teaser to lighten the final discussion.

Subtracting from $300,000 is a decoy.

Once the $30,000 is refunded, only $270,000 is paid.

$250,000 is premiums and $20,000 goes to the broker.

THE CENTER FOR PROFESSIONAL EDUCATION 1 Presentation Questions and Answers St. John’s University...

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