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Premium Deficiency Reserves

Premium Deficiency Reserves. Today’s discussion facilitated by: Mary D. Miller, Moderator, Ohio Department of Insurance John G. Aquino, AON Re Services Ralph S. Blanchard, Travelers Property Casualty Corp. A Brief History. 1982 – FAS 60 required for GAAP reporting

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Premium Deficiency Reserves

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  1. Premium Deficiency Reserves

  2. Today’s discussion facilitated by: Mary D. Miller, Moderator, Ohio Department of Insurance John G. Aquino, AON Re Services Ralph S. Blanchard, Travelers Property Casualty Corp

  3. A Brief History 1982 – FAS 60 required for GAAP reporting • 1984 – AICPA Issues Paper – No Action by FASB • 1990’s – NAIC Codification Project adopts wording from AICPA Audits of Property and Liability Insurance Companies

  4. A Brief History • 1999 –CATF Working Group recommends: • No discounting beyond what is allowed for losses incurred • No prohibition of offsets • Groupings legitimately reflect differences in operating expenses and pricing adequacy • Statutorily mandated reserves should be available to offset a PDR, but only on the affected lines.

  5. A Brief History • 1999 (cont) CATF Working Group also considers need for PDR if company issues policies it cannot cancel, even if no premium has been recorded. • 1999 (cont) AAA studies potential impact. Uses public data from 1998 IEE for 50 large companies. Includes general expenses, not just “maintenance costs.”

  6. A Brief History Results of AAA Calculations • If calculated on line by line basis with no discounting, almost every company needs a PDR – amounted to 15% of one company’s surplus. • On an aggregate basis with discounting, few companies need a PDR. CATF defers action

  7. When is a Premium Deficiency Reserve Required? SSAP No. 53 When the anticipated losses, loss adjustment expenses, commissions and other acquisition costs, and maintenance costs exceed the recorded unearned premium reserve and any future installment premiums on existing policies.

  8. What Else Does SSAP 53 Say? • Insurance contracts shall be grouped in a manner consistent with how policies are marketed, serviced, and measured. • Deficiencies in one grouping shall not be offset by anticipated profits in other policy Groupings. • Ifanticipated investment income is utilized as a factor in the calculation, it must be disclosed.

  9. Where do we go from here? • The Opinion Instructions Working Group has PDR on agenda for 2002-2003. A recommendation is likely. • Whether or not the opinion covers it, codification requires all companies to carry the reserve, if needed. • AAA is considering a Standard of Practice.

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