A3. Odomirok 8&9

Question 1

List some factors that can be used to allocate expenses

Answer 1

Premium, claim count or headcount

Question 2

Underwriting income formula

Answer 2

EP-LLAE Incurred - Other UW Expenses incurred

Question 3

The exhibits of Net investment income divide the investment income from bonds into

Answer 3

• interest received during the year
• interest due and accrued
• current year’s amortization/accretion
• interest paid for accrued interest on dividends

Question 4

List some problems that may arise if expenses are not accurately allocated

Answer 4

• distorted profitability measures
• inefficient allocation of resources
• anti-selection

Question 5

Why is Amortization or accretion of bonds required?

Answer 5

The coupon rate is different to the market interest rate at the time the bond is purchased. The amortization produces an amortized cost equal to the face value at maturity.

Question 6

Describe interest paid for accrued interest on dividends

Answer 6

Required whenever an insurer purchases a bond between coupon payments. It needs to pay the seller for the coupons that were earned while they owned the bond.

Question 7

Formula to derive realized gain when bond is sold

Answer 7

Amount received - adjusted carrying value

Question 8

Define redeemable preferred stock

Answer 8

Preferred stock that is redeemable at the option of the insurer at a specified maturity date, or after a specified period of notice, for a specified price

Question 9

How can a derivative qualify to be a “highly effective” hedge?

Answer 9

If the insurer can demonstrate that a derivative has significantly reduced a particular risk exposure.

Question 10

Define perpetual preferred stock

Answer 10

Preferred stock with no maturity date (i.e, can not be redeemed by the issuer)

Question 11

How are derivatives that do not qualify for hedge accounting treated?

Answer 11

Mark-to-market accounting (any changes in fair value are recorded as unrealized gains)

Question 12

Describe hedge accounting treatment

Answer 12

The derivative receives the same accounting treatment as the hedged asset.

Question 13

List some components of other income

Answer 13

• Net Gain from Agents’ or Premium Balances Charged Off
• Finance and service charges not included in premiums
• Aggregate Write-ins for Miscellaneous Income (Gain on sale of equipment, Retroactive Reinsurance gain, Gain on Foreign Exchange, Corp Expenses, Fines and penalties)
• Dividends to policyholders
• Federal and Foreign Income Taxes

Question 14

2 types of investment guidelines that are permitted by the NAIC Model Investment Law

Answer 14

• Defined limits: quantitative limits

- Prudent Person: a principles based approach which enable the insurer to develop its own guidelines

Question 15

Describe accounting treatment when stocks are issued

Answer 15

• The amount collected associated with the par value is recorded as paid in capital
• The excess is paid-in surplus

Question 16

Equation to derive Current Year’s surplus from prior value

Answer 16

Prior Year’s Surplus + Current Year’s Net Income + Other Surplus Changes + Additional Capital Contributions + Stockholder Dividends