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
Q1
Q2
Q3
Liabilities
Q4
Q1
Q2
Surplus
Q3
Q4
P&C Industry Asset Distribution for
2001
P & C Industry Asset Distribution for 2001
2%
2%
5%
Bonds
9%
Stocks
4%
Mortgage Loans on Real Estate
5%
Real Estate
Cash
Other Invested Assets
Agents Balances
1%
54%
0%
Reinsurance Recoverables
Income Tax Recoverables
18%
Other Assets
P&C Industry Invested Asset
Distribution for 2001
P & C Industry Invested Asset Distribution for 2001
1%
0%
6%
4%
Bonds
22%
Stocks
Mortgage Loans on Real Estate
Real Estate
Cash
Other Invested Assets
67%
Reinsurance Leverage
Reliance Asset Distribution
24%
Bonds
Stocks
Reinsurance Recoverables
6%
70%
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
P & C Industry Asset Distribution for 2001
2% 2%
Reliance Asset Distribution
5%
Bonds
9%
24%
Stocks
4%
Mortgage Loans on Real Estate
5%
Real Estate
Bonds
Cash
Stocks
Other Invested Assets
Reinsurance Recoverables
Agents Balances
1%
54%
0%
Reinsurance Recoverables
Income Tax Recoverables
18%
6%
Other Assets
70%
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
2002 Premium Leverage
(Gross Premiums / Net Premiums)
100.0%
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
Leverage Raio
50
20
15
12
10
8
7.
5
7
6.
5
6
5.
5
5
4.
5
4
3.
5
3
2.
5
2
1.
5
0.0%
1
Cumulative Percent of Gross Premium Written
90.0%
Reserve Leverage
2002 Reserve Leverage
(Gross Reserve / Net Reserves)
100.0%
90.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
Leverage Ratio
50
20
15
12
10
8
7.
5
7
6.
5
6
5.
5
5
4.
5
4
3.
5
3
2.
5
2
1.
5
0.0%
1
Cumulative Percent of Gross Reserves
80.0%
Risk Based Capital
Percent of P&C Companies in the RBC Ranges
12.00%
8.00%
2002
2001
6.00%
4.00%
2.00%
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
11
00
12
00
13
00
14
00
15
00
16
00
17
00
18
00
19
00
20
00
21
00
22
00
23
00
24
00
25
0
>2 0
50
0
,0
0
0
0.00%
<10
0
Percent of Companies
10.00%
RBC% (Outliers Have Been Removed)
Risk Based Capital
Percent of Earned Premium by RBC% for P&C Companies
25.00%
15.00%
2002
2001
10.00%
5.00%
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
11
00
12
00
13
00
14
00
15
00
16
00
17
00
18
00
19
00
20
00
21
00
22
00
23
00
24
00
25
0
>2 0
50
0
,0
0
0
0.00%
<10
0
% of Earned Premium
20.00%
RBC% (No Outliers)
,0
0
0
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
11
00
12
00
13
00
14
00
15
00
16
00
17
00
18
00
19
00
20
00
21
00
22
00
23
00
24
00
25
0
>2 0
50
0
<10
0
Cumulative % of Earned Premium
Risk Based Capital
Cumulative Percent of Earned Premium by RBC% for P&C Companies
120.00%
100.00%
80.00%
60.00%
2002
2001
40.00%
20.00%
0.00%
RBC%
,0
0
0
0
10
0
20
0
30
0
40
0
50
0
60
0
70
0
80
0
90
0
10
00
11
00
12
00
13
00
14
00
15
00
16
00
17
00
18
00
19
00
20
00
21
00
22
00
23
00
24
00
25
0
>2 0
50
0
<10
0
Cumulative % of Net Reserves
Risk Based Capital
Cumulative Percent of Net Reserves by RBC% for P&C Companies
120.00%
100.00%
80.00%
60.00%
2002
2001
40.00%
20.00%
0.00%
RBC%
Risk Based Capital
CORRELATIONS
Risk Based Capital
Premium Leverage:
0.0%
Reserve Leverage:
0.0%
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
A
B C D
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