CAS Regulatory Framework and Compliance 3 — Questions and Answers
Question 1: What is the Risk-Based Capital (RBC) ratio threshold below which regulators may take mandatory control of a property-casualty insurer?
- Below 300% of Authorized Control Level RBC
- Below 200% of Authorized Control Level RBC
- Below 100% of Authorized Control Level RBC
- Below 70% of Authorized Control Level RBC (Correct answer)
Correct answer: Below 70% of Authorized Control Level RBC
When an insurer's RBC ratio falls below 70% of the Authorized Control Level, the regulator is mandated to take control of the company.
Question 2: Under the NAIC's Uniform Certificate of Authority Application (UCAA) process, what does a 'primary state' designation mean?
- The state where the insurer writes the most premium
- The state of domicile that leads the insurer's financial examination (Correct answer)
- The state with the strictest regulatory requirements for the insurer
- The first state that granted the insurer a license
Correct answer: The state of domicile that leads the insurer's financial examination
The primary state in the UCAA process is the state of domicile, which takes the lead role in coordinating financial regulation and examinations for that insurer.
Question 3: Which actuarial standard of practice (ASOP) most directly governs an actuary's responsibilities when signing an insurance company's Statement of Actuarial Opinion?
- ASOP No. 9 — Documentation and Disclosure
- ASOP No. 36 — Statements of Actuarial Opinion Regarding Property/Casualty Loss and LAE Reserves (Correct answer)
- ASOP No. 25 — Credibility Procedures
- ASOP No. 41 — Actuarial Communications
Correct answer: ASOP No. 36 — Statements of Actuarial Opinion Regarding Property/Casualty Loss and LAE Reserves
ASOP No. 36 provides guidance specifically for actuaries opining on property/casualty loss reserves in the Annual Statement, establishing standards for scope, procedures, and disclosures.
Question 4: What is the primary distinction between an 'admitted' and a 'non-admitted' (surplus lines) insurer?
- Admitted insurers are federally regulated; non-admitted are state regulated
- Admitted insurers are licensed and subject to rate/form regulation; non-admitted have more flexibility but less guaranty fund protection (Correct answer)
- Non-admitted insurers must follow stricter rate filings than admitted carriers
- Admitted insurers can only write commercial lines; non-admitted write personal lines
Correct answer: Admitted insurers are licensed and subject to rate/form regulation; non-admitted have more flexibility but less guaranty fund protection
Admitted carriers are licensed by the state and subject to rate/form regulation plus guaranty fund coverage, while surplus lines carriers have more pricing flexibility but policyholders lack guaranty fund protection.
Question 5: Which of the following is a key requirement under the Nonadmitted and Reinsurance Reform Act (NRRA) of 2010 for surplus lines transactions?
- Surplus lines tax must be paid to every state where the risk is located
- Only the home state of the insured has regulatory authority for surplus lines transactions (Correct answer)
- Surplus lines brokers must be licensed in all states where risk exposure exists
- Federal regulators must pre-approve all surplus lines placements
Correct answer: Only the home state of the insured has regulatory authority for surplus lines transactions
The NRRA established that only the insured's home state has regulatory jurisdiction and the right to collect premium taxes on surplus lines transactions, simplifying multi-state regulation.
Question 6: Under state insurance regulation, what is the 'unfair discrimination' prohibition in rate making?
- Prohibiting any variation in rates between different policyholders
- Prohibiting rates that do not reflect actuarially justified differences in expected losses (Correct answer)
- Requiring all insurers to charge the same rate for identical risks
- Prohibiting the use of credit scores in personal lines rating
Correct answer: Prohibiting rates that do not reflect actuarially justified differences in expected losses
Unfair discrimination prohibits charging different rates to policyholders with the same expected loss costs; rate differences must be justified by actuarially sound loss experience.
Question 7: What is the purpose of the NAIC's Own Risk and Solvency Assessment (ORSA) requirement for large insurers?
- To require external auditors to certify reserve adequacy annually
- To have insurers internally assess their risk profile and capital needs relative to their risk appetite (Correct answer)
- To establish minimum premium-to-surplus ratios for all lines of business
- To mandate third-party validation of all actuarial reserve opinions
Correct answer: To have insurers internally assess their risk profile and capital needs relative to their risk appetite
ORSA requires large insurers to conduct and document their own forward-looking assessment of material risks and the capital needed to remain solvent under various scenarios.
CAS Regulatory Framework and Compliance 3
What is the Risk-Based Capital (RBC) ratio threshold below which regulators may take mandatory control of a property-casualty insurer?