Some discussion of PDR has begun between the NAIC Casualty Actuarial Task
Force and the Academy's Committee on Property-Liability Financial Reporting.
The CATF agenda so far this year includes brief reports. The basic idea is
that an insurer should recognize the obligation it assumes when it issues a
policy, so if anticipated future losses and expenses exceed unearned premium,
you need to recognize a liability. You can exclude prepaid acquisition
expense. Perhaps the major issues at the moment are how refined the
calculations need to be ("groupings") and whether discounting is imaginable.
The NAIC's Statement of Statutory Accounting Principles (SSAP) Number 53 says:
"For purposes of determining if a premium deficiency exists, insurance
contracts shall be grouped in a manner consistent with how policies are
marketed, serviced and measured. A liability shall be recognized for each
grouping where a premium deficiency is indicated. Deficiencies shall not be
offset by anticipated profits in other policy groupings."
For statutory purposes, we should design the grouping to identify blocks of
business where the company's sales and operating expense, expected losses, and
pricing strategy could cause a strain on surplus. This is likely to be more
refined than GAAP, where groupings might match broad market sectors about
which shareholders can question management. Should we compute SAP reserves by
line by state? Schedule P line groups? How might groupings differ between
companies?
The CATF subgroup and CoPLFR recommend discounting not be allowed any further
than permitted for losses and expenses incurred. For losses that have not
even happened, that means virtually none. Discounting would create a serious
discontinuity as premium is earned. Discounting is seldom a viable
consideration when we must transfer the business of a troubled company to
others; hence, it is not a welcome word in the statutory mindset.
We are also considering recommending that offsets not be prohibited between
groupings. It would be nice to have some published papers describing why
offsets should be allowable. We have a few simple reasons. What would be
yours?
You might know some accountants that innocently believe SAP premium deficiency
reserves will be the same as the GAAP reserves. If statutory practice
adheres to its proper mindset, SAP reserves may need to be substantially
greater than GAAP reserves. Will you find this troubling?
By the way, just how should we determine anticipated future losses and
expenses?
Our profession could benefit from some chatter on the matter. I look forward
to solution contributions.
Michael Lamb
Great State of Oregon
Visit the CAS Web Site at http://www.casact.org
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