Ch 1 | Introductory Insurance Accounting

Question 1

5 basis assertions of accounting

Answer 1

financial information is…
complete
valued correctly
exists
belongs to the company
properly classified, described, and disclosed

Question 2

What should information in the financial reports be? (3)

Answer 2

transparent
intelligible
clearly disclosed

Question 3

What is the “Relevance” principle about?

Answer 3

information must be…
timely
have predictive value
provide useful feedback about previously made decisions

Question 4

What is the “faithful representation” principle about?

Answer 4

information needs to be…
verifiable
complete
neutral
represents what it claims to represent

Question 5

For accounting information to be decision useful, what should it be?

Answer 5

understandable
relevant
reliable
comparable and consistent
unbiased

Question 6

What does GAAP focus on?

Answer 6

value or performance of an org as a going concern
meaning, assume it will operate indefinitely

Question 7

What does SAP place emphasis on?

Answer 7

realizable values for asset sale and liability settlement
more interested in runoff values than going-concern values

Question 8

What sources do the rules on which accounting frameworks are based originate from?

Answer 8

The rules on which accounting frameworks are based originate from accounting or securities standards boards, laws and regulations, professional associations, or internal management.

Question 9

GAAP hierarchy

Answer 9

(1) organization in charge of securities regulation for the jurisdiction in question
(2) rules set by the specified accounting standard setter for the jurisdiction

Question 10

How do the benefits and drawbacks of fair value differ from those of historical value?

Answer 10

Fair value is based on present value, so it is more relevant than historical value. However, because it can only be estimated, it is less reliable than historical value.

Question 11

what is multi-recognition accounting?

Answer 11

accounting for assets/liabilities differently upon inception vs later on

Question 12

2 common examples of deferral-matching

Answer 12

DAC => asset with no intrinsic value, can’t be sold
UEPR

Question 13

When is an asset considered impaired?

Answer 13

no longer expected to produce the same economic benefits as when acquired
results from discrepancies in income statement vs BS valuations
for example, if IS is historical cost, BS is FV and FV has permanently declined, impairment flows through to IS

Question 14

reporting segment level definition

Answer 14

the level at which company leadership manages operations and measures performance
may be defined by product, geography, customer, or other similar criteria, alone or in combination with other factors

Question 15

What are some possible disadvantages to both principle- and rule-based standards?

Answer 15

To the extent that principle-based standards rely on individual judgment to interpret and implement them, they could ostensibly be used to manipulate financial results. Disadvantages of rule-based standards include a lack of flexibility regarding changing conditions and new products, hence requiring almost continual maintenance. A concern also exists that rule-based standards may be subject to manipulation, as entities may attempt to adhere to the literal wording of the standard while violating its intent.

Question 16

When can you include audit premium in EP/WP?

Answer 16

if reasonably estimate IN THE AGGREGATE

Question 17

When can you include reinstatement premium in EP/WP?

Answer 17

A reinstatement premium obligation may be likely or nearly certain given the current loss reserves, but the actual payment is not due until paid losses breach the attachment point, which could be many years in the future.

Question 18

What are some examples of policies in which the insurance protection is not evenly spread over the policy term?

Answer 18

Examples include:

Policies that cover seasonal risks, such as snowmobile policies, for which the risk is concentrated in the winter months.

Aggregate excess policies that insure losses above a specified amount over the policy period. The risk on these policies is greater toward the end of the policy term than at the beginning.

Warranty policies, under which warranty claims (and mechanical breakdowns) usually increase as the product under the warranty ages.

Financial guarantee and other performance bonds, where initial underwriting should make immediate nonperformance unlikely, resulting in greater likelihood of nonperformance as the contract ages.

Question 19

Why may multi-year policies not earn premium uniformly?

Answer 19

with inflation, expected losses higher in future years, thus concentrated EP in later years

Question 20

main reason for PDRs

Answer 20

to prevent bias in future earnings. UEPR not sufficient to cover anticipated losses / expenses

Question 21

what is a bordereau

Answer 21

A report the primary insurer provides periodically to the reinsurer that contains a history of all loss exposures reinsured under the treaty.

Question 22

bank deposit approach for deposit accounting

Answer 22

Under the bank deposit approach, the initial deposit grows with interest credited at an interest rate determined in advance (with possible additional deposits, depending on the contract terms) and declines with withdrawals.

The defining characteristic of the bank deposit approach is that the ending deposit for a reporting period is dependent solely on the beginning balance, the credited rate for the period, and any deposits or withdrawals during the period. It’s not dependent on the particular pattern of cash flows that led to the beginning balance or on the projected cash flows for the period beyond the ending balance.

Question 23

prospective approach for deposit accounting

Answer 23

The defining characteristic of the prospective approach is that the current value of the deposit is set equal to the present value of future payments, regardless of the initial deposit or past payments.

The interest rate is generally a market rate. It may be based on risk-free rates and locked in at inception so that it does not change over time. Conceptually, it’s also possible for a prospective method to use a market rate that’s updated for each reporting period.

Question 24

retrospective approach for deposit accounting

Answer 24

The defining characteristic of the retrospective approach is that the deposit is a function of the initial deposit, past payments, and the current estimate of all future payments.

Under this method, the interest rate is the rate for which the discounted value of past payments and estimated future payments would equal the initial deposit. The interest rate can change whenever estimated cash flows under the contract change.

This method could conceivably generate a negative rate if applied to a contract in which the projected outflows no longer exceed the initial inflows.