Insurance Concepts Board Workshop December 8, 2003
Insurance Industry Insurance Industry Property & Casualty Life & Health Examples: Examples: • Group health plan • Auto • Term life policy • Worker’s Compensation • Disability • Medical Malpractice • Credit life • Homeowners Board Workshop December 8, 2002 2
Citizens: Lines of Business Citizens: Lines of Business Line # Line of Business Description 1 Fire Coverage protecting the insured against the loss to real or personal property from damage caused by the peril of fire or lightning, including business interruption, loss of rents, etc. 2 Allied Lines Coverages which are generally written with property insurance, e.g., glass, tornado, windstorm and hail; sprinkler and water damage; explosion, riot, and civil commotion; growing crops; flood; rain; and damage from aircraft and vehicle, etc. 3 Homeowners Multiple-Peril A package policy combining broad property coverage for the personal property and/or structure with broad personal liability coverage. Coverage applicable to the dwelling, appurtenant structures, unscheduled personal property and additional living expense are typical. Includes mobile homes at a fixed location. Board Workshop December 8, 2002 3
P&C Industry Information P&C Industry Information • AM Best accumulates P&C industry information and publishes this information annually in Best’s Aggregates and Averages. • Consolidated industry assets $952 billion (Citizens $4 billion) • Consolidated written premiums $323 billion (Citizens over $1 billion) • The top ten P&C insurers net premiums comprise nearly 46% of the industry. Board Workshop December 8, 2002 4
State Regulation State Regulation • Insurer Solvency Solvency is the adequacy of an insurer’s net financial resources (capital and surplus) to support the nature and volume of business the insurer is writing. Solvency is monitored to protect the policyholders to assure that insurers have adequate funds to pay claims. Insurers are required to file Quarterly and Annual Statements with the State. • Forms and Rates All policy forms and policy rates must be filed with the State prior to use. • Market Conduct I nsurance companies are monitored by the State for their compliance with Statute, treatment of policyholders, and adherence to the filed forms & rates. • Licensing All agent and agency licenses are issued by the State. Board Workshop December 8, 2002 5
Involuntary Markets Involuntary Markets • States also establish market mechanisms that provide basic insurance coverages to those that might not otherwise be able to obtain reasonably priced coverage. Florida has established the following: Automobile Joint Underwriting Association Worker’s Compensation Joint Underwriting Association Citizens Property Insurance Corporation - Citizens is the largest residual market mechanism and is larger than all the others combined Board Workshop December 8, 2002 6
Statutory vs vs GAAP Accounting GAAP Accounting Statutory • Citizens currently produces financial reports using two different bases of accounting: Statutory and GAAP. Financial reports filed with the state insurance department are compiled on a statutory accounting basis. Statutory Accounting GAAP Accounting Designed to evaluate financial condition under a Designed to measure solvency at a point in time going concern assum ption Designed for use by regulators Intended for use by investors and management Focus is on the income statement – performance Focus is on the balance sheet – asset and measurement and matching revenues with liability measurement expenses Board Workshop December 8, 2002 7
Structure of the Annual Statement Structure of the Annual Statement I Primary Financial Statements (Pages 2-5) Financial Exhibits (Pages 6-13) II III Underwriting and Investment Other Financial Exhibits (Pages 12,13) • Exhibit of Net Investment Income Exhibits (Pages 6-11) • Premiums • Exhibit of Capital Gains (Losses) • Losses • Exhibit 1 – Analysis of • Expenses Nonadmitted Assets IV Corporate Disclosure Information (Pages 14 and 16-26) V Investment Summaries and Verifications (Pages 15 and 27-39) Annual Statement Detail Schedules (Pages 40-114 and E01-E26) VI VII VIII IX Reinsurance Loss and Loss Miscellaneous Investment Expense Analysis Information Detail Schedule F Schedule P Schedules H, T, Y Schedules A-E (Pages 40-47) (Pages 51 – 109) Supp. Exh. Inter. (Pages E01-E26) (Pages 48-50 and 110-114) Board Workshop December 8, 2002 8
Fundamental Accounting Concepts Fundamental Accounting Concepts • Assets, as applicable to an insurance company, are all funds, property, goods, securities, investments, rights of action or resources of any kind owned by the insurance company. • Liabilities, as applicable to an insurance company, are any legally enforceable obligations (for example, amounts owed to policyholders that have not been paid yet). • An insurance company’s Balance Sheet shows what the company OWNS (assets) and what the company OWES (liabilities) at a certain point in time . • In contrast, an insurance company’s Income Statement shows activity of the insurance company (revenues less expenses) during a certain time period (year to date for Citizens). Board Workshop December 8, 2002 9
Significant Statutory Accounting Concepts Significant Statutory Accounting Concepts • Premium Recognition –Premiums Written –Earned Premiums –Unearned Premiums –Ceded Premium • Losses –Loss reserves (Case and IBNR) –Losses Incurred • Loss Adjustment Expenses • Investment Valuation • Nonadmitted Assets • Other Insurance Liabilities • Other Income Statement Items Board Workshop December 8, 2002 10
Premiums Premiums • Premiums collected from policyholders in exchange for insurance protection are the primary source of revenues for an insurance company. Premiums are usually received on or near the effective dates of the policies but since protection is provided over the policy terms, these premiums must also be earned over time as insurance coverage is provided. – Premiums Written: Premiums are recorded in full as written at the beginning of the policy terms (effective dates). Premiums written therefore relate to the underwriting commitments given to policyholders at that time. Found on the Income Statement. – Earned Premiums: Premium income is earned over the policy term in direct relationship to the amount of insurance protection provided. Earned Premiums therefore relate to the portions of the above underwriting commitments fulfilled during the period. Found on the Income Statement. – Unearned Premiums: Represent the amount of premiums written that relate to the unexpired portion for all policies (unfulfilled commitments) at the balance sheet date. A liability on the Balance Sheet. Also, Unearned premiums are shown net of ceded unearned premiums for statutory financials. – Ceded Premium: Amount of premiums paid to assuming company (reinsurer) in exchange for that company accepting all or part of insurance (or reinsurance) on a risk. (Opposite of assume.) Found on the Income Statement as reduction to Premiums Written. Board Workshop December 8, 2002 11
Premiums, cont’d Premiums, cont’d The following is premium data from Citizens’ September 30, 2003 statutory financial statements: Statutory Basis - Unaudited Year to Date as of September 30, 2003 Personal Commercial High Lines Lines Risk Consolidated Account Account Account Selected Income Statement Data: Premiums Written - Direct 876,666,880 364,976,074 58,546,155 453,144,651 Change in Direct UPR (165,687,900) (100,483,339) (11,079,991) (54,124,570) Premiums Ceded (Reinsurance) (182,421,765) (63,371,860) (5,256,907) (113,792,998) Change in Ceded UPR 66,042,327 26,289,816 1,752,511 38,000,000 Net Premiums Earned $594,599,542 $227,410,691 $43,961,768 $323,227,083 Premiums Ceded Detail: FHCF (CAT Fund) ceded premiums 158,250,000 38,992,466 5,257,534 114,000,000 CAT Fund reimbursement received in 2003 (453,247) (245,618) (627) (207,002) Atlantic Preferred Assumption activity 24,625,011 24,625,011 - - Total Premiums Ceded $182,421,765 $63,371,860 $5,256,907 $113,792,998 Selected Balance Sheet Data: Direct Unearned Premiums 563,927,575 227,752,088 32,755,668 303,419,819 Ceded Unearned Premiums (66,730,978) (26,978,467) (1,752,511) (38,000,000) Net Unearned Premiums per Stat Balance Sheet $497,196,597 $200,773,621 $31,003,157 $265,419,819 Policies in Force 9/30/03: 748,157 324,757 3,886 419,514 Board Workshop December 8, 2002 12
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