Income Flashcards
Income Statement
*contains the revenue, expenses & net income
*3 types of income
Underwriting income
Investment income
Other income
Net Income
Net Income = UW Income + Investment Income + other Income – PH dividends - Tax
Underwriting Income & other UW expenses
Underwriting Income = EP – Loss & LAE Incd – Other UW Expenses Incd
Loss & LAE Incd = paid + change in case
Other UW expenses:
*expenses are a component of the premium
*If the allocation is not accurate, subsidies may arise that may cause problems, including:
- distortion of the profitability measures
- inefficient allocation of resources
- anti-selection
Investment Income
*Insurers have an opportunity to earn investment income because there is a delay between time that the prem is collected and when the losses are paid
*2 components of investment income in the income statement:
Net investment income earned
Net realized capital gain (position is closed for a profit)
Investment Guidelines
Insurers should ensure that the investments conform to their investment guidelines. Guidelines are governed by state investment laws
NAIC Model Investment Law
*NAIC Model Investment Law allows the insurer to adopt either of the following 2 types of investment guidelines:
Defined Limits: quantitative limits
Prudent Person: a principles based approach, which enables the insurer to develop its own guidelines. The insurer should strive for the protection of the PH and consider the investment expertise and resources available
Other Income
Net Gain from Agents’ or Premium Balances Charged Off: If the insurer believes that the balances won’t be collected, it needs to recognize them as a loss. This particular component includes any balances that had previously been written off and later collected.
Finance & Service Charges not included in Premiums: includes the service charges that the insurer adds to the prem that is paid in installments
Aggregate Write-ins for Miscellaneous Income
Capital & Surplus Account
*provides sources of the surplus change in addition to those reflected in the income statement
*can be used to reconcile the beginning to the ending surplus
Current Year’s surplus
Current Year’s surplus = Prior Year’s Surplus + Current Year’s Net Income + Other Surplus Changes + Additional Capital Contributions – Stockholder Dividends
Other Surplus Changes
- Change in Unrealized Capital Gains (profitable position that has yet to be sold in return for cash)
- Change in Net Unrealized Foreign Exchange Capital Gains
- Change in Net Deferred Income Tax
- Change in Nonadmitted Assets
- Change in Provision for Reinsurance
- Cumulative Effect of Changes in Accounting Principles
- Capital Changes & Surplus Adjustments
- Capital paid in
- Surplus paid in
2 definitions of surplus
*Balance Sheet definition: surplus = assets – liabilities
*Income Statement definition: surplus = prior years surplus + current year’s income
*These 2 definitions would equivalent if all balance sheet transactions also flow through the income statement
In order to reconcile the income statement definition surplus with the balance sheet definition surplus
it is necessary to adjust the income statement definition surplus for transactions that do not flow through the income statement. These are either:
Direct credits (increases) to surplus
Direct charges (reductions) to surplus
*Exhibits from the Annual Statement will account for the difference: Exhibit of Non-Admitted Asset; or Capital and Surplus account
Non Admitted Assets examples
- Premium that is over 90 days overdue
- Interest Due & Accrued over 90 days overdue
- 10% of the unsecured Accrued Retrospective prem that is due to the insurer
- permanent excess of book over the market value
- Furniture, equipment & supplies
