Lecture 4 Flashcards
how do you derive profits on a GAAP basis?
match revenue with expenses
since commissions to agents need to be taken into account when pricing the premium (this is an expense that the insurer needs to account for), we have to derive GAAP profits a certain way.
what are the two ways that we could do this?
- adjust the expenses in the calculation so that they are charged on a GAAP basis (lower the expense charged in the first year and raise the expense charged in the subsequent years)
- create a DAC reserve (an acquisition expense reserve) that offsets these expenses. no adjustment to the expenses charged is needed
what is the gross premium formula? what is the benefit premium formula? what is the DAC premium formula?
write it out
what are the types of receipts and disbursements in life insurance?
disbursements: death/lapse benefits, acquisition expenses (commissions, u/w expenses)
receipts: premiums
how is profit determined in the life insurance industry?
profits = receipts - disbursements - increase in reserve
increase in reserve = an expense for the insurer
how is statutory profit calculated?
stat profit = premium + investment income - benefits - expenses & taxes - increase in reserves
what does solvency mean?
possession of assets in excess of liabilities
what happens with stat profit every year?
it is added to stat surplus (or required surplus) every year
what is the basis for establishing a company’s overall solvency?
stat (required) surplus
what is surplus strain?
when stat profits are negative in the first few years, this is common
what can surplus strain limit?
the amount of business a company can write
what are the two differences between GAAP and stat profits?
- GAAP profits are based on the company’s BE assumptions + MfAD but stat profits have prescribed assumptions (US) or prescribed method (CAN)
- GAAP profit contains the deferred and capitalized acquisition costs (DAC)
what is the formula for GAAP profit?
PROFIT = stat profit + change in DAC
Why are GAAP profits usually higher than stat profits?
because the assumptions for GAAP reserves are less conservative than those for stat, which results in GAAP > stat
if the assumptions between stat and GAAP reserves are the same, what do the profits look like in comparison?
GAAP higher in early years and lower in the later years
WHY?
