Part 7US - IRIS Test 11

[looploop]

We (me and my co-workers) have a question on the assumed reinsurance payable (item 2 on page 3). Is this included in the calculation? Feldblum does not mention this in the Schedule P paper, he actually says to use item 1 and item 3. However, if you look at past CAS exam problems, the solution includes item 2 in the calculation. What are your thoughts?

Thanks,
2nd time part 7 taker pulling my hair out.

[Basso]

We (me and my co-workers) have a question on the assumed reinsurance payable (item 2 on page 3). Is this included in the calculation? Feldblum does not mention this in the Schedule P paper, he actually says to use item 1 and item 3. However, if you look at past CAS exam problems, the solution includes item 2 in the calculation. What are your thoughts?

I think test 11 is the estimated current reserve deficiency test, and I have an IRIS ratio publication from 2001 that explains this test, but calls it IRIS ratio 12. I'm pretty sure these are the same thing because I think two of the ratios are used for the same 'test.'

Anyway, the instructions for Losses & LAE have AS references and are:2nd PY: Pg3, Col 1, Lines 1+2&PY: Pg 3, Col 1, Lines 1+2

[edited when I realized the line numbers had changed in 2001.]
I think at the time, line 2 was the LAE, and reinsurance payable was was line 1A. I think that still means that the reinsurance payable is not included in the test since the line instructions would include line 1A. Since there is no instruction anywhere that I know of on the syllabus that says to include it, I will not include it on the exam, and will write in stating why it should not be included.

Source:
NAIC Financial Analysis Solvency Tools
Insurance Regulatory Information System (IRIS)
2001 Property/Casualty Edition
NAIC no longer has this article on their website :(


Good luck with the exam.

[looploop]

I just found this in Feldblum Schedule P article.

"Line 1 shows total net loss reserves, including reinsurance payable on assumed unpaid losses...

Looks like line 2 IS included.

[PAC]

The current P/C AS displays line 2 (old line 1A) as reinsurance payable on paid loss and loss adjustment expenses.

These are amounts already paid by the cedant and billed to, but not yet paid by, the assuming company. That is, an accounting payable not an actuarial accrual.

I would use the method cited by DogBoy and note "as per AS instructions"

[Basso]

Okay, I've thought about this a bit longer. The reserves being measured in this calculation are: Case & IBNR reserves, net of reinsurance recoverable/payable on UNPAID losses. Per chapter 22, those amounts are offsets to the loss and lae line of the BS. The reinsurance payable on PAID losses is the questionable item.

The items on lines 1 & 3 are estimates, and the intent of the test is to determine the accuracy of the insurance company's estimates of reserves. Reinsurance payable on paid losses is NOT an estimate, it is a contractual liability of known amount. As such, it has no bearing on the ability of the company to estimate reserves. For that reason, I think it makes sense that it is not included. If it were included, I think you would also need to net out Pg 2 line 14, so that all the amounts were net of reinsurance. If you added only Pg 3 line 2, you would have a mix between direct and net.

[N9]

I would argue to the contray of what DogBoy said. I think "Reinsurance payable on paid losses" should be treated as CASE RESERVES on losses assumed for schedule P purposes, which is subject to future developments like any case reserves do. If that's the case, then it certainly should be part of the carried reserves, and should be included in IRIS test 11.

[Colymbosathon ecplecticos]

NR, if that were the case you could strengthen your IRIS scores by paying faster. That makes no sense.

[Basso]

I would argue to the contray of what DogBoy said. I think "Reinsurance payable on paid losses" should be treated as CASE RESERVES on losses assumed for schedule P purposes, which is subject to future developments like any case reserves do. If that's the case, then it certainly should be part of the carried reserves, and should be included in IRIS test 11.

reinsurance payables on paid losses are not case reserves, these are contractual liabilities that have a certain amount, as defined by the reinsurance contract. To the extent of future development would be expected, it should be included in the IBNR reserve, since the reserves include reinsurance payables on UNPAID losses. In other words, if future development on the primary losses is expected, it is held in reserve by the reinsurer as a reserve on unpaid losses, and hence is already included in line 1.

[N9]

OK. Looks like DogBoy is right. Then, Part 7 committee members better get this issue straight. Fall 2002, Question # 75 gave information on "Reinsurance Payable on Paid Losses", it should NOT be included in IRIS 11 test, the sample solution provided is wrong on that.

Mr. Feldblum's article on the syllabus clearly said "Reinsurance Payable on Assumed UNPaid Losses" should be included, NOT "Reinsurance Payable on Paid Losses".

[looploop]

So did anyone appeal this question? If there is a similar question on this years exam and I do not include line 2 and the CAS solutions again include it, then I have every right to appeal. Right? And the CAS will have to toss it out from all the old exams as well. Hmmm, I wonder how many people failed in 2002 due to this?!!

OK I'm done.

[Colymbosathon ecplecticos]

From the CAS website:The sample essay answers are actual responses that have received credit and are illustrative of successful answers, although they may not be considered perfect answers.

So, there is no reason to think that the key was wrong and certainly no reason to think that anybody failed that should have passed.

[Basso]

The schedule P article (http://www.casact.org/pubs/forum/91wforum/91wf001.pdf) was different on the 2002 exam. It stated (I believe incorrectly) on page 24:

Unpaid losses and loss adjustment expenses are reported on page 3. "Liabilities, Surplus and Other Funds," lines 1. 1A, and 2. Line 1 shows total loss reserves, including reinsurance payable on unpaid losses. Line 1A adds reinsurance payable on paid losses, and line 2 adds reserves for unpaid loss adjustment expenses (both allocated and unallocated). [emphasis added].

I have written the CAS for clarification on this issue. I'll let you know if I get a response.

[Wigmeister General]

Why don't you just ask the NAIC?

[Ex-parrot]

That would be fine... if one was interested in learning. Since the NAIC doesn't grade exams, it would also be pointless in this context.

[Wigmeister General]

On the contrary. In this instance, the IRIS tests are defined by the NAIC. If they say it is a certain way, then it's that way. The CAS would have to accept that as the only correct answer.

[Basso]

On the contrary. In this instance, the IRIS tests are defined by the NAIC. If they say it is a certain way, then it's that way. The CAS would have to accept that as the only correct answer.

Unless the question says "According to Feldblum's 1991 publication on Schedule P" or something like that, and the article on the syllabus is wrong. The actual NAIC calculation is NOT on the syllabus, but Feldblum's reference to it is. Therefore, the old exam question has the correct solution to the question given, but the procedure used is not consistent with my reading of the NAIC rules.

[Ex-parrot]

On the contrary. In this instance, the IRIS tests are defined by the NAIC. If they say it is a certain way, then it's that way. The CAS would have to accept that as the only correct answer.
They would accept their model answer first. If it doesn't match the NAIC answer, one would have to fight the appeal battle for the correct answer to be recognized.

[Wigmeister General]

They might accept their model answer, but they would more likely throw out the question entirely to save face. After all, how can you explain to the regulatory actuaries that you've accepted a wrong answer on this calculation?

[lori darling]

i'm getting in on this discussion a little late...but just wanted to add that the NAIC defines the IRIS ratio as lines 1 plus 3 and does NOT include line 2 (reins payable on paid losses). i almost fell out of my chair when i saw that solution for the 2000 exam. it was defined that way for 12/31/2000 also; not sure about 1999 and prior but can't imagine it being different.

by the way, the current IRIS ratio 12 = the old IRIS 11. they finally made net premium to surplus its own ratio (#2 vs. old #1A) in 2001 which bumped all the ratio #s up.