Lecture 5 Financial Statements - Ratio Analysis for Insurance

Question 1

what is underwriting?

Answer 1

a process which is involved in the acceptance of risk

• judgement on exposure and hazards
• calculation of premium
• information obtained from proposal form from customers that help to assess probable maximum loss (PBL)

Question 2

what is the aim of reinsurance?

Answer 2

• limit the cost of large claims/events to an amount which the insurer can meet without financial strain
• transfers risk from direct insurer to the reinsurer

Question 3

what are the types of reinsurance?

Answer 3

• proportional (receive a fixed percentage from each premium, and then pay the percentage covered of the claim) vs non-proportional (pay when exceeds the minimum amount of the total claims)
• facultative contract : case by case, for large and unusual case
• treaty contract: automatic cover, simplified administration

Question 4

what is underwriting results

Answer 4

profit/loss minus claims, underwriting expenses and reinsurance costs

Question 5

what is provision?

Answer 5

money set aside for paying the claims

Question 6

what is in technical accounts?

Answer 6

underwriting related activities

Question 7

what is in non- technical accounts?

Answer 7

non-insurance items

Question 8

What are the main assets of insurance company?

Answer 8

• investments

- have minimum tangible non-current assets

Question 9

what are the main liabilities of insurance company?

Answer 9

• future claims
• covered by technical provisions & general insurance provisions ( unexpired risk reserves and outstanding claims reserves)

Question 10

Challenges in insurance accounting

Answer 10

• underlying contracts (liabilities) fall due outside the accounting period and are uncertain in size
• -> need actuarial estimates
• premium transfer/ profit to shareholders may endanger the financial stability of the company and the ability to meet future liabilities
• -> usually over - provide provision so that profit is understated

Question 11

what is the purpose of ratio analysis?

Answer 11

• as part of supervisory process to review the insurance company’s financial performance
• give early warnings
• enable compliance with regulations and laws

Question 12

what aspects are analyse?

Answer 12

• business trends and volumes : premiums
• profitability
• technical provision
• assets
• insolvency and capital

Question 13

Stress testing?

Answer 13

• look for turning points

Question 14

What is parent company and subsidiary company?

Answer 14

parent company: holds a controlling interest of another entity by owning 50% of the entity’s common stock

subsidiary company: whose stock the parent company owns
–> remains separate legal entities from the parent company

Question 15

what is consolidated accounts/financial statements?

Answer 15

• combine the financial positions and earnings report of the parent company with those of its subsidiaries
• exclude the effect of transaction between consolidated entities
• produce in addition to the parent and subsidiaries’ financial report
• provide a more comprehensive an realistic picture of the financial health and profitability of the consolidated group

–> must show all acquired assets and liabilities at fair market values & goodwill

Question 16

What is goodwill?

Answer 16

the excess of the acquisition cost over the sum of fair values of the identifiable individual assets less liabilities