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

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Presentation transcript:

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

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

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

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

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

Pennsylvania Experience Common Themes: Reserve deficiencies Ratings downgrades Reinsurance Liquidity

P&C Industry Asset Distribution for 2001

P&C Industry Invested Asset Distribution for 2001

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?

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

Premium Leverage

Reserve Leverage

Risk Based Capital

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

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

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

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

Graph Theory and The Latest Crisis

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

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