9 - Odomirok.18 - IEE

Question 1

What information is shown on the Insurance Expense Exhibit (IEE) versus the Income Statement?

Answer 1

IEE shows statutory profit (loss), both direct & net of reinsurance, by line of business whereas the Income Statement shows only aggregate information net of reinsurance.

important to know IEE shows profits and expenses by line of business

Question 2

Identify uses of the IEE to actuary

Answer 2

• examine premium, loss, expenses by line
• benchmark company performance by line

Question 3

Identify uses of the IEE to policyholder

Answer 3

• examine expenses by line
• may affect purchase decision because lower expenses mean lower rates

Question 4

Identify uses of the IEE to investor

Answer 4

• examine profitability versus premium growth by line
• may affect investment decision if growth is in unprofitable lines

Question 5

Identify uses of the IEE to competitor

Answer 5

• examine profit & expenses by line
• may affect market entry decision in lines where profits are high

Question 6

Identify uses of the IEE to regulator

Answer 6

• examine data/trends by line
• highlights solvency and/or rate concerns by line that the income statement may mask

Question 7

Identify uses of the IEE to rating agency

Answer 7

• examine profit by line
• highlights subsidies from strong lines to weak (or are all lines independently strong)

Question 8

What does Part 1 of the IEE show?

Answer 8

• allocates expenses (from Part 3) into 22 different expense groups
• doesn’t show profit (loss)

Question 9

What does Part 2 of the IEE show?

Answer 9

• shows pre-tax profit (loss) net of reinsurance (see columns 41, 42)

Question 10

What does Part 3 of the IEE show?

Answer 10

• shows pre-tax profit (loss) direct of reinsurance (see columns 33, 34)
• excludes all investment gain

Question 11

What does IEE Interrogatories show?

Answer 11

• explanatory notes for Parts 1,2,3 (comes before Parts 1,2,3)
• interrogatory question #4 is very important: provides info on the allocation of profits & expenses to line
• if the allocation is done in a standard way then no further info is required (this is the case with Liberty Mutual)

Question 12

Identify advantages & disadvantages for this method of surplus allocation

Answer 12

advantages [Hint: R2-DC]
- not distorted by Reinsurance
- uses 2 years of data to smooth results (reduces distortions)
- easy to obtain Data (from annual statement)
- easy to Calculate & compare across companies & lines of business

disadvantages [Hint: FARCe → May the FARCe be with you ]
- does not reflect Future business or growth (it is retrospective)
- does not allow for Actuarial/management input (method is formulaic)
- does not reflect Risk characteristics of line of business (Ex: short vs long-tail)
- does not recognize Catastrophe potential
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Question 13

Investment Gain - Part 1
Net Investment Gain Ratio formula

Answer 13

NIGR = NIG / TIA

NIG = Net Investment Gain
TIA = Total Investable Assets = m(L) + m(LAE) + m(UEP) + m(re) + m(S) – m(AB)

Question 14

Investment Gain - Part 2
Net Investment Gain attributable to Insurance Transactions

Answer 14

NIGITa = NIGR * FAITa

FAITa = m(La) + m(LAEa) + m(UEPa) + m(rea) - m(ABa) - (PPE for UEP)a

(PPE for UEP)a = PPERa * m(UEPa)

PPERa = (net acquisition expense)a / NWPa

Question 15

Pre-tax Total Profit (Loss) formula

Answer 15

(Pre-tax profit excluding InvGain) + InvGain(Insurance Transactions) + InvGain(Capital & Surplus)

Question 16

Difference between IEE and Part 3 (Expenses) of U&IE (Underwriting & Investment Exhibit)

Answer 16

In particular, IEE separates other U/W expenses further into:
*acquisition, field supervision, and collection expenses
*general expenses
*taxes, licenses, and fees

LOB breakout:
- IEE shows expenses by LOB, U&IE doesn’t
reinsurance:
- IEE shows direct & net, U&IE shows net only
display format:
- IEE in 000’s, U&IE to nearest dollar