Odomirok 8-9 Flashcards
Underwriting Income formula
Earned Premium - Loss & LAE Incurred - Other Underwriting Expenses Incurred
List some factors that can be used to allocate expenses
Premium, claim count or headcount
List some problems that may arise if expenses are not accurately allocated
- distorted profitability measures
- inefficient allocation of resources
- anti-selection
The Exhibit of Net Investment Income divides the investment income from bonds into
- Interest received during the year
- Interest due & accrued
- Current year’s amortization/ accretion
- Interest paid for accrued interest on dividends
Describe interest paid for accrued interest on dividends
Required whenever an insurer purchases a bond between coupon payments. It needs to pay the seller for the portion of the next coupon payment earned by the seller.
Why is Amortization or accretion of bonds required
The coupon rate is different to the market interest rate at the time the bond is purchased. The amortization produces an amortized cost equal to the face value at maturity
Formula to derive realized gain when bond is sold
Amount received - adjusted carrying value
Define redeemable preferred stock
Preferred stock that is redeemable at the option of the issuer at a specified maturity date, or after a specified period of notice, for a specified price
Define perpetual preferred stock
Preferred stock with no maturity date (i.e., can not be redeemed by the issuer)
How can a derivative qualify to be a “highly effective” hedge
If the insurer can demonstrate that a derivative has significantly reduced a particular risk exposure
Describe hedge accounting treatment
The derivative receives the same accounting treatment as the hedged asset
How are derivatives that do not qualify for hedge accounting treated
Mark-to-market accounting (any changes in fair value are recorded as unrealized gains)
2 types of investment guidelines that are permitted by the NAIC Model Investment Law
- Defined Limits: quantitative limits
- Prudent Person: a principles based approach, which enables the insurer to develop its own guidelines
List some components of Other Income
- Net Gain from Agents’ or Premium Balances Charged Off
- Finance & Service Charges not included in Premiums
- Aggregate Write-ins for Miscellaneous Income (Gain on sale of equipment, Retroactive Reinsurance gain, Gain on Foreign Exchange, Corporate Expenses, Fines & penalties)
Equation to derive Current Year’s surplus from prior value
= Prior Years Surplus + Current Years Net Income + Other Surplus Changes + Additional Capital Contributions - Stockholder Dividends
