Odomirok 8-9

Question 1

Underwriting income formula

Answer 1

Earned premium - loss & LAE incurred - other underwriting expenses incurred

Question 2

List some factors that can be used to allocate expenses

Answer 2

Premium, claim count or headcount

Question 3

List some problems that may arise if expenses are not accurately allocated

Answer 3

• Distorted profitability measures
• Inefficient allocation of resources
• Anti-selection

Question 4

The Exhibit of Net Investment Income divides the investment income from bonds into

Answer 4

• Interest received during the year
• Interest due & accrued
• Current year’s amortization/accretion
• Interest paid for accrued interest on dividends

Question 5

Describe interest paid for accrued interest on dividends

Answer 5

Required whenever an insurer purchases a bond between coupon payments. It needs to pay the seller for the coupons that were earned while they owned the bond

Question 6

Why is amortization or accretion of bonds required?

Answer 6

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

Question 7

Formula to derive realized gain when bond is sold

Answer 7

Amount received - adjusted carrying value

Question 8

Define redeemable preferred stock

Answer 8

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

Question 9

Define perpetual preferred stock

Answer 9

Preferred stock with no maturity date (ie can not be redeemed by the issuer)

Question 10

How can a derivative qualify to be a “highly effective” hedge?

Answer 10

If the insurer can demonstrate that a derivative has significantly reduced a particular risk exposure

Question 11

Describe hedge accounting treatment

Answer 11

The derivative receives the same accounting treatment as the hedged asset

Question 12

How are derivatives that do not qualify for hedge accounting treated?

Answer 12

Mark-to-market accounting (any changes in fair value are recorded as unrealized gains)

Question 13

2 types of investment guidelines that are permitted by the NAIC Model Investment Law

Answer 13

• Defined limits: quantitative limits

- Prudent person: a principles based approach, which enables the insurer to develop its own guidelines

Question 14

List some components of Other Income

Answer 14

• 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)
• Dividends to policyholders
• Federal & foreign income taxes

Question 15

Equation to derive current year’s surplus from prior value

Answer 15

= Prior year’s surplus + Current year’s net income + Other surplus changes + additional capital contributions + stockholder dividends

Question 16

Describe accounting treatment when stocks are issues

Answer 16

• The amount collected associated with the par value is recorded as paid in capital
• The excess is paid-in surplus