A10. Odomirok 18

Question 1

When does the IEE need to be filed

Answer 1

4/1 following the Annual Statement date.

Question 2

List the 3 parts of the IEE

Answer 2

1. Part 1: Allocation of other underwriting expenses
2. Part 2: Allocation of pretax profit by line, on a net basis
3. Part 3: Allocation of pretax profit by line, on a direct basis

Question 3

What categories are expenses divided into in Part 1 of the IEE

Answer 3

• LAE
• Other Underwriting Expenses (further allocated into Acquisition, Field Supervision and Collection Expenses/General Expenses/ Taxes, Licenses and Fees)
• Investment Expenses

Question 4

List some uses of the IEE

Answer 4

• Regulators: monitor the financial health of the insurer. It may indicate trends by line of business may threaten the solvency of the entire insurer
• Regulators: monitor rate adequacy.
• Stakeholders: determine the lines that were profitable, and use this knowledge to help make business decisions
• Investors: help determine how much to invest in the insurer
• Actuaries: source of premium, losses and expenses for benchmarking

Question 5

What is surplus allocated proportional to

Answer 5

Mean net loss and LAE reserves + Mean UPR + EP for the year

Question 6

What categories does the IEE divide the investment gain into

Answer 6

• Investment Gain on Funds Attributable to Insurance Transactions
• Investment Gain Attributable to Capital and Surplus

Question 7

Equation for Investment gain on funds attributable to insurance
transactions

Answer 7

=Investment gain ratio * Funds attributable to insurance transactions for the line

Where the funds attributable to insurance transactions for each line:
=Mean net loss and LAE reserves + Mean UPR * [1 - (prepaid expenses / written prem)] - (Mean net agents’ balances. - ceded reinsurance premiums payable)

Question 8

Equation for Investment gain ratio

Answer 8

= Net investment gain / Total investable assets

Where Total investable assets = Mean net loss and LAE reserves + Mean net unearned premium reserves + Mean ceded reinsurance premiums payable + Mean policyholders’
surplus - Mean agents’ balances

Question 9

Formula for Total Investment Gain

Answer 9

=company’s investment gain ratio * investable funds associated with the LOB

Where investable funds associated with the LOB = Mean net loss and LAE reserves + Mean UPR - Mean net agents’ balances + Ceded reinsurance premiums payable + Allocated
PHS.

Question 10

Formula for Prepaid Expenses

Answer 10

Commission and Brokerage expenses incurred + Taxes, licenses and fees incurred + Other acquisition, field supervision and collection expenses + (1/2) * general expenses incurred

Question 11

IEE as a profitability measure

Answer 11

Best used as a retro measure of profitability. Should not be used for pricing, as it is based on historical reserves as opposed to future potential reserves

Question 12

Wny no allocation of income for Part III?

Answer 12

Part 3 is on a direct basis. Companies do not hold assets on a direct basis and therefore it is an artificial measure that does not generate investment income.