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Solvency Surveillance: What Is Working What Is Not

Solvency Surveillance: What Is Working What Is Not . Chet Szczepanski Chief Actuary Pennsylvania Insurance Department. Hindsight:. Yes, always 20 /20 But, must learn from the past!. Pennsylvania Experience. PIC Reliance PHICO Legion ?. Pennsylvania Experience. PIC:

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Solvency Surveillance: What Is Working What Is Not

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  1. Solvency Surveillance:What Is WorkingWhat Is Not Chet Szczepanski Chief Actuary Pennsylvania Insurance Department

  2. Hindsight: • Yes, always 20 /20 • But, must learn from the past!

  3. Pennsylvania Experience • PIC • Reliance • PHICO • Legion • ?

  4. Pennsylvania Experience PIC: • Medical malpractice writer • Discounted reserves • Reserve deficiencies • Downgraded • Doctor’s did not care • Speed Up in Court Decisions (Liquidity!) • RBC caught them!

  5. Pennsylvania Experience Reliance • Multi-line writer • Business is rating sensitive • Heavily leveraged by reinsurance • Heavily leveraged by holding company debt

  6. Pennsylvania Experience Reliance (continued) • Unicover • Reserve deficiencies • Downgraded • Liquidity, liquidity, liquidity

  7. Pennsylvania Experience PHICO • Medical malpractice writer • Rapid expansion into new markets • Reserve deficiencies • Downgraded • Doctors did not care • Liquidity not a problem

  8. Pennsylvania Experience • Legion • Multi-line writer • Business is rating sensitive • Heavily leveraged by reinsurance • Downgraded • Reserves? • Liquidity, liquidity, liquidity

  9. Pennsylvania Experience Common Themes: • Reserve deficiencies • Ratings downgrades • Reinsurance • Liquidity

  10. P&C Industry Asset Distribution for 2001

  11. P&C Industry Invested Asset Distribution for 2001

  12. Reinsurance Leverage

  13. Reinsurance Leverage • Add rating sensitive business • Mix in a downgrade • $1,000,000,000 or more in Statutory Deposits • $500,000,000 in one Stock • Liquidity?

  14. Reinsurance Leverage

  15. Reinsurance Leverage Let’s define two ratios: • Premium Leverage = Gross Premium Written / Net Premium Written • Reserve Leverage = Gross Loss & LAE Reserves / Net Loss & LAE Reserves

  16. Premium Leverage

  17. Reserve Leverage

  18. Risk Based Capital

  19. Risk Based Capital

  20. Risk Based Capital

  21. Risk Based Capital

  22. Risk Based Capital

  23. IRIS Ratio 1: Gross Premium to Policyholders’ Surplus Usual Range < 900%

  24. IRIS Ratio 3: Surplus Aid to Policyholders’ Surplus Usual Range < 15% Focus on Ceded Commissions

  25. IRIS Ratio 7: Liabilities to Liquid Assets Usual Range < 105% Focus on Net not Gross Leverage

  26. Conclusions? • Risk Based Capital tends to be Balance Sheet centered • Risk Based Capital does not measure reinsurance leverage and liquidity • IRIS also tends to be Balance Sheet centered (7 of 11 ratios) • IRIS also does not adequately measure reinsurance leverage and liquidity

  27. Graph Theory and The Latest Crisis

  28. The Actuarial Profession’s Response: • Take the initiative to identify risks and recommend solutions • Greater diligence in reserve reviews and ASOP’s • Move beyond the balance sheet

  29. Conclusion: • Regulation is at a crossroad • We face a challenge and an opportunity • We must be proactive and move beyond the balance sheet • Must learn from each crisis

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