CIA Premium Liabilities

• claims liabilities
  • portion of insurance contract liabilities on claims incurred on or before val date
  • PV of CFs on claims (and expenses / taxes) incurred before val date
• premium liabilities
  • portion of insurance contract liabilities on unexpired portion of IF policies (to be incurred after val date)
  • portion that are not claim liabilities
  • (after deducting DPAE) PV of CFs on claims (and expenses / taxes) and premium development to be incurred after val date on IF policies
  • premium development incl adjustments on retro-rated premium, contingent profit commissions

• UPR
• DPAE
• Unearned commission
• Premium deficiency
• Ceded deferred premium tax
• Anticipated broker commission
• Expected adjustments to swing-rated policies
• Expected premium changes from audits, late reporting, or endorsements
• Expected adjustments on policies with variable commissions

• Prepaid acquisition expenses related to unexpired portion of policy
• Paid up front but not expensed on IS until premium is earned, with a deferred asset set up on BS, which recognizes prepaid expenses over policy period provided that such costs are recoverable from equity in net UPR
• Incl broker commissions, premium taxes, operating expenses (renewal costs, advertising, licenses and fees)

Gross UPR - Gross policy liabilities in connection with unearned premium

Net UPR + Unearned (reinsurance) commissions - Net policy liabilities in connection with unearned premium

• Max DPAE = max (equity in the UPR, 0)
• If carried DPAE > max DPAE, DPAE would be reduced to max DPAE.
• If equity in net UPR < 0, booked DPAE is reduced to 0 and premium deficiency is set up on BS for difference (amount which, when added to net UPR and unearned commissions, makes an appropriate provision for future costs from expired portion of IF policies)

• Future claims and LAE
• Expected reinsurance costs based on anticipated contracts not yet underwritten
• Maintenance costs (servicing the policies)

• Arise from commission revenue on ceded premium.
• Carried as a liability (payable to reinsurer)
• Incl provision for broker commissions, premium taxes, and other acquisition and servicing expenses

• WP from exposure remaining on unexpired portion of policy
• UPR at valuation date is based on WP, policy term, and an assumed earning pattern

(selected ELR * UPR) by LOB or by business segmentation consistent with analysis of claim liabilities

• Projected LR may be based on
  • AA’s valuation of claim liabilities
  • insurer’s budget
  • ratemaking analysis
• Future expected losses based on recent experience adj'd to earning period of UEP
• AA would consider earning pattern underlying UPR calc, assess whether it reflects exposure to risk, and select assumptions accordingly

• Loss trends to AAD underlying UPR
• legislative change
• Recent court decision re: insurance coverage
• Change in MOB
• On-level to rate level underlying UPR
• CAT and LL loadings
• Seasonality adjustments to indicated ELR
• Policy term assumptions for future period covered by UPR, e.g. trend for remaining policy term

• ALAE: similar to expected loss approach or consistent with AA’s valuation of claim liabilities.
• ULAE: consistent with AA’s valuation of claim liabilities. E.g. ULAE ratio based on history reflecting expected changes in claims practices

How to reflect reinsurance costs:

• proportional: net UEP < gross UEP; gross LR = net LR
• XOL expiring at valuation date, gross UEP = net UEP; ceded UEP = 0 at expiry. But need to consider cost of reinsurance on unexpired portion of policies. assumptions used reflect reinsurance rates and expected recoveries

• % of gross UPR for future cost of servicing IF policies, incl endorsements, mid-term cancellations etc.
• vary by LOB based on:
  • Availability of historical and plan expenses by LOB
  • Distribution model
  • Characteristics of portfolio (2-year contracts)

• Discount rate consistent between premium and claim liabilities, and based on CFs of all policy liabilities
• Payment pattern consistent between premium and claim liabilities, but need an adj to reflect differences in furture AAD for claim liability and for UPR

• btw premium and claim liabilities
• Among LOB
• Among AY, PY, UWY

• Adjustments:
  • Contingent commissions (profitability and volume)
  • Swing-rated -> premium adjustments based on target LR for book reinsured
  • retro-rated; premium is adjusted based on experience
• Premium development:
  • Audit premiums; final not known until expiry;
• Development on reinsurance assumed or ceded:
  • Changes in subject premium unknown until expiry;
  • Swing-rated XOL; rate adjusted based on experience
  • Reinstatement premium for CAT