IEE

Question 1

info in AS can be used to monitor profitability of insurer but

Answer 1

large portion is provided on aggregate basis and this does not satisfy needs of all users

Question 2

IEE

Answer 2

Insurance Expense Exhibit

provides details info about expenses of insurer

needs to be filed by 4/1

IEE is tied to stat accting so uses undiscounted reserves

incd losses are shown on CY basis and treats investment income as revenue item

Question 3

uses of IEE

Answer 3

monitor financial health, monitor rate adequacy, determine lines that were profitable and use this to make business decisions, help determine how much to invest in insurer, source of prem, loss and expenses for benchmarking

Question 4

investment income can’t specifically be allocated to policies so cannot be calc by line for AS but

Answer 4

regulators want to see if LOB rates are excessive or inadequate and can be hidden when looking at overall #s and management wants to be able to eval LOB to determine whether LOB is meeting desired profit levels

Question 5

Part1 allocation to expense groups

Answer 5

lists each class of expense and allocates it to function expense category

operating expenses to be allocated to 1 of 22 categories (separate rows) and expenses are allocated: LAE, other UW expenses, and investment expenses (separate columns)

Question 6

other UW is split into & differences to part3 of U&IE

Answer 6

acquisition, field supervision, & collection expenses, gen expenses, and taxes, licenses, & fees

-looks similar to part3 of U&IE except U&IE has only 1 other UW expenses, IEE does not include amnts unpaid, amnts relating to uninsured plans or total expenses paid, amnts in IEE are in 000s

Question 7

Part2 allocation to lines net of reinsurance

Answer 7

allocates net WP, net EP, dividends paid to PH, incd loss, unpaid loss, UEPR, agents’ balances, other UW expenses, other income less other expenses, pre-tax profit or loss excl investment gain, investment gain on funds attributable to ins transactions, profit or loss excl investment gain attributable to capital and surplus, investment gain attributable to capital and surplus, total profit or loss

-breaks down functional expense by LOB on net basis (incl UW and total profits)

Question 8

pretax profit excluding invest gain

Answer 8

pretax profit excluding invest gain=EP – PH dividends – incd loss & DCC & A&O – comm&brokeage expenses incd – tax, licenses and fees incd – other acq incd, gen expense incd + other income less other expenses

Question 9

investment gain

Answer 9

investment gain = invest gain on funds attributable to ins transactions + invest gain attributable to capital and surplus

Question 10

step1&2 of allocation of investment gain

Answer 10

1. allocate mean surplus to line = mean net reserves + mean net UEPR + EP for year
2. allocate ceded reins premiums payable to line = based on distribution of ceded WP

Question 11

step3 of allocation of investment gain

Answer 11

calc investment gain ratio = net invest gain (before capital gains tax and excl unrealized)/total investable assets

Total investable assets=mean net reserves+mean net UEPR+mean ceded reins prem payable+mean PH surplus-mean agents’ balances

**based on entire book of business, not individual line

net investment gain = curr yr net investment income + curr yr realized capital gains

Question 12

step4 of allocation of investment gain

Answer 12

calc invest gain on funds attributable to ins transactions for each line = invest gain ratio * funds attributable to ins transactions for each line

Funds to ins transactions= mean net reserves+mean net UEPR*(1-prepaid expenses/WP)-(mean agents’ balance – mean ceded reins prem payable)

Prepaid expenses=comm&brokerage incd+tax,licenses,fees incd+other acq expenses+0.5*gen exp incd

Question 13

step5&6 of allocation of investment gain

Answer 13

step5: calc total invest gain = invest gain ratio * investable funds associated with LOB

investable funds = mean net reserves+mean net UEPR-mean agents’ balances+mean ceded reins prem payable+allocated PHS

step6: calc invest gain attributable to capital and surplus = total investment gain – investment gain on funds attributable to ins transactions

Question 14

IEE uses what to allocate profit & comparison to pricing

Answer 14

uses retrospective approach so IEE is best used as a retrospective measure of profitability

• allocates profit that has emerged unlike pricing that focuses on estimated future profit
• based on historical reserves as opposed to potential future reserves that will be held for NB
• total profit can be calc after investment gains have been allocated, by adding pretax profit excl invest gain to investment gains from both sources

Question 15

Part3 allocation to lines of business direct

Answer 15

allocates profit on direct basis to LOB

• breaks down functional expense by LOB on direct basis (incl UW profit but not total profits)
• investment gain is excl from profit as it is earned on actual assets held by insurer (do not hold assets on a direct basis since some are ceded), therefore this is an artificial measure that does not generate investment income
• data is not readily available from AS bc on direct basis

Question 16

Interrogatories

Answer 16

: provides info on some of the detail in parts 1-3 and discloses whether any items require special comment or explanation, any items allocated using methods not defined in instructions, and explanations if yes

Question 17

Pre-tax Profit or Loss, excluding all investment gain or loss

Total Profit

Answer 17

EP-Incd Loss-Expenses-PH dividends

Total Profit = (Pre-tax Profit/loss excluding all investment gain/loss) + investment gain/loss

investment gain comes from calculation using investment gain ratio

Question 18

IEE approach to allocating surplus

Answer 18

retrospective measure where as pricing is prospective

does not consider how much capital is required to support a line like pricing does

allocation of surplus may not be
appropriate for the company, if the company expects major changes (growth or
change in mix of business) in the coming years and surplus being allocated is actual surplus which might not be same as needed surplus

The IEE allocates surplus by loss reserves, unearned premium reserves, and earned premium for each line of business / IEE allocates by formula while Ratemaking may use different allocation methods to better allocate surplus to
inherent risk of the line, such as accounting for catastrophe exposure

Question 19

why it may not be appropriate to rely fully on the IEE to determine rate adequacy
of a line of business

Answer 19

The IEE is retrospective. The numbers in the IEE may therefore not be applicable if
there are changes (for example, it won’t account for growth, change in mix of
business, etc).

no adjustment for the inherent risk of certain lines

It would be more appropriate to look at insurer’s calculation of required return on
capital for that line. This can be compared to the projected rate of return to
determine if the rates are adequate.

Question 20

argument against this IEE method of surplus allocation

Answer 20

-Does not consider the amount of risk inherent in a LOB.
-Retrospective approach: doesn’t account for rapid growth in premium, and
changes in mix of business.
-Surplus is not actually allocated to each line. When one line has a deficit, surplus
from another line can still be used to offset this deficit.
-Some lines of business will have more volatile results & therefore should require
more surplus e.g. low frequency, high severity lines

Question 21

method for allocating surplus that may be more appropriate than IEE

Answer 21

-Allocate surplus based on internal model: this will reflect the various risks that are
not implicit in the reserves
-Using prospective pricing models to assess riskiness & cost of capital. This better
reflects risk than just using premium & reserves.

Question 22

difference in how the IEE and the Exhibit of Premiums and Losses present data.

Answer 22

-There is no investment gain allocated to capital and surplus calculation on stat page
14, but it is included in the IEE
-The difference in how they group the LOBs
-IEE is countrywide, while stat page 14 shows state by state information
-In IEE expenses are further broken down by acquisition expenses, commission,
taxes, and general expenses
-IEE = Net and direct; Page 14 = Direct

Question 23

differences between the expense information shown in the Insurance
Expense Exhibit (IEE) and the Underwriting and Investment Exhibit

Answer 23

-IEE includes expenses by LOB
-IEE further allocates underwriting expenses into three components: 1. Acquisition,
field supervision and collection expenses, 2. General expenses, 3. Taxes, licenses
and fees

-IEE breaks LAE into DCC & A&O, U&IE does not

• U&IE has total expense PAID calculated (Paid, unpaid, & incurred amounts), IEE has incurred figures only
• U&IE is to the dollar, IEE is in thousands
• IEE has direct and net breakouts, U&IE only has net

Question 24

argument for and argument against excluding unrealized capital gains
and losses from the total investment gain allocated in the IEE

Answer 24

-Unrealized capital gains are excluded because they are a direct credit or charge to surplus and don’t flow through the income statement. Consistent with Statement
of Income.
-Unrealized gains can be volatile/uncertain – including would increase the
variability/uncertainty of income
-Unrealized gains may not be readily available since the assets must be sold first

-The inclusion of only realized capital gains in investment income often distorts
profitability measurements that are motivated by taxes and cash needs.
-Including unrealized gains would provide a more complete picture of investment
performance / profitability
-The assets will be sold eventually, so including them would be closer to the “going concern” view of GAAP, and more realistic.
-If they are not included, it can be difficult to compare investment results of
different companies. Most non-insurance companies are on a GAAP basis.

Question 25

argument in favor of and argument against the method used to allocate
surplus by line of business in the IEE

Answer 25

• Simple/ easy to compute, Comparable/ standard across companies, competitors, and lines, Formulaic/ objective/ can’t be manipulated, Data readily available from Annual Statement, Easy to explain, Not distorted by reinsurance, Allocates more surplus to lines with higher reserves or larger lines, Using two years will smooth the results, does not require projections
• Does not consider the risk characteristics/inherent risk of line, Fails to recognize catastrophe potential, Does not recognize cost of capital/required capital, Does not recognize potential for adverse development, Retrospective/ not prospective method, Is distorted if there is a change in mix of business or rapid growth/shrinking, Can’t be used for ratemaking, Does not consider management/ actuarial opinions, Time period is too short to reflect trends/future, Does not reflect surplus generated by line, Method is arbitrary

Question 26

how prepaid expenses are treated differently between the
calculation of funds attributable to insurance transactions and the calculation of
total investable funds

Answer 26

Prepaid expenses in the unearned premium reserve are explicitly removed in the
calculation of funds attributable to insurance transactions because they have
already been expensed and are not an investible asset

These expenses are not explicitly removed in the calculation of total investible funds
because they are already been subtracted in the calculation of policyholders’
surplus, which is a component of the calculation