NAIC.SSAP-65

This statement establishes statutory accounting principles for property and casualty insurance contracts.

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Study Tips

The CAS syllabus citation for this article is confusing. The syllabus says this is a new reading, however, it actually isn't. The year of publication for the manual changes each year but the content generally does not. We will let you know if there is a major change.

This SSAP seems more important than some of the others, but it's never been tested (since at least prior to 2012). If you're playing to odds, limit yourself to 1 hour here. I pulled a few factoids from the reading for the BattleCards but you may want to skim the reading in case you have a different opinion on what might be important.

BattleTable

• this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

Overview

Types of P&C contracts: occurrence, claims-made, extended reporting

Discounting: when are reserves discounted...

   - when payments are fixed and reasonably determinable (Ex: structured settlements)

     (LAE is not discounted)

Structured Settlements: if an annuity is purchased to fund a structured settlement, describe the accounting treatment...

   - if insurer is the payee ==> no reduction to reserve

   - if claimant is the payee ==> reserves are reduced in the amount that the annuity provides for funding of future payments

Long-Duration Contracts: contracts with terms of at least 13 months and cannot be cancelled or modified by the insurer (Ex: home warranty, mechanical breakdown)

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The 3 Tests for Long-Duration Contracts

There is a calculation problem embedded in this reading regarding unearned premium reserves for long-duration contracts. I think it's a low-probability question because long-duration contracts is a fairly specialized topic, but if the examiners are looking for a new type of problem this might be a candidate.

Question: given the information below for a long-duration contract, calculate the unearned premium reserve (UEP)

• Each "test" in the table is a different estimate of the unearned premium reserve for a particular policy year (PY). We will discuss these tests further, but for now just accept these reserve estimates as given.

PY	test 1	test 2	test 3
current	100	98	105
1st prior	85	83	83
2nd prior	70	76	75
3rd prior	40	38	39
4th prior	10	10	10

• It's actually a very simple problem (if you're given the "test" estimates).

→ for the most recent 3 policy years, simply take the maximum of the 3 tests:

• UEP (current) = 105
• UEP (1st prior) = 85
• UEP (2nd prior) = 76

→ for older policy years, the UEP is combined into a single number that is the maximum of the aggregate for each test:

• UEP (older years)

= max ( test1(3rd prior) + test1(4th prior)  ,  test2(3rd prior) + test2(4th prior)  ,  test3(3rd prior) + test3(4th prior) )

= max ( 40 + 10 , 38 + 10, 39 + 10)

= max ( 50 , 48 , 49 )

= 50

• One small point is that you can set the UEP higher than these calculated amounts, but they cannot be set lower. So the total UEP here must be at least 105 + 85 + 76 + 50 = 316.

Ok that's pretty easy, but what are these 3 "tests"?

Question: briefly describe the 3 tests for P&C long-duration contracts according to SSAP-65

Test 1:

• management’s best estimate of the amounts refundable to the contract-holders at the reporting date

→ the term 'amounts refundable' seems strange to me – isn't that just the liability payments?

Test 2:

• (gross premium) x [ (projected future loss) / (projected total loss) ]

→ projected future loss relates to the unexpired term of the contract

Test 3:

• (projected future loss) – (investment income) – (PV of premiums)

→ the full explanation is much more detailed but it's extremely unlikely you'd need to know it

As I mentioned before, I think this is an unlikely question but I included it because I found it interesting. The SSAPs are usually deadly boring and at least this provides the opportunity for a little bit of math.

Did you notice something missing from the explanations of these tests? They don't really tell how to come up the estimates. Test 1 just says management's best estimate. WTF is that? Test 2 requires projected future loss but again, where would that value come from? Same problem with Test 3. Anyway, a good Bloom's Taxonomy question might be to combine SSAP-65 with a question on premium liabilities for long-duration contracts, but that's beyond the scope of the syllabus.

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