Odomirok 8-9

Question 1

Underwriting income formula

Answer 1

Earned premium - incurred loss - other underwriting expense incurred

Question 2

Problems that may arise if expenses are not accurately allocated

Answer 2

• distorted profitability measures
• inefficient allocation of resources
• adverse selection

Question 3

The exhibit of Net Investment Income divides investment income from bonds into

Answer 3

• Interest received during the year
• Interest due and accrued
• Current years amortization/accretion
• Interest paid for accrued interest on dividends

Question 4

Describe interest paid for accrued interest on dividends

Answer 4

• 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 5

Why is amortization/accretion of bonds required

Answer 5

Coupon rate is different to the market interest rate at the time the bond is purchased
The amortization produces amortization cost equal to the face value at maturity

Question 6

Formula to derive realized gain when bond is sold

Answer 6

Amount received - adjusted carrying value

Question 7

Redeemable preferred stock vs perpetual preferred stock

Answer 7

Redeemable: redeemable at option of issuer at a specified maturity date for specified price
Perpetual: no maturity date, non redeemable

Question 8

How can a derivative qualify to be a ‘highly effective” hedge

Answer 8

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

Question 9

Hedge accounting treatment

Answer 9

Derivative receives same accounting treatment as hedged asset

Question 10

How are derivatives that do not qualify for hedge accounting treated

Answer 10

Mark to market accounting (any changes in fair value treated as unrealized capital gain)

Question 11

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

Answer 11

• Definite Limits: rule based, quantitative limits
• Prudent person: principle based, insurer able to develop its own guidelines, act like a reasonable person and act in policyholders best interest

Question 12

Components of other income

Answer 12

• Net gain from agents or premium balances charged off
• Fee for premium paid in installments
• Agg write-ins for misc. income (gain on sale of equipment, retroactive reinsurance gain, gain on foreign exchange, fines & penalties)

Question 13

Equation for current year’s surplus from prior value

Answer 13

Prior surplus + net income + other changes in surplus + additional capital contributions - stockholder dividends

Question 14

Accounting treatment when stocks are issued

Answer 14

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

Question 15

Net income

Answer 15

UW income + investment income + other income - dividends to policyholders - fed & foreign income tax

Question 16

Two components of investment income

Answer 16

• Investment income earned

- Realized capital gains

Question 17

Adjusted carrying value of bonds
NAIC 1-2
NAIC 3-6

Answer 17

NAIC 1-2: amortized cost

NAIC 3-6: min(amortized cost, fair value)

Question 18

What is generated with unrealized capital gain/loss

Answer 18

• DTA/DTL = tax rate*change in unrealized capital gain/loss

- Increase in unrealized capital gains

Question 19

Valuation of common stock

Answer 19

Market value

Question 20

Affect on surplus:

Change in stock dividend resulting in a transfer from surplus to capital

Answer 20

No change to surplus

Question 21

Affect on surplus:
Increase in provision for reinsurance
Increase in nonadmitted assets
Increase in agents balances >90 days overdue
Increase to net deferred

Answer 21

Decrease
Decrease
Decrease
Increase

Question 22

Some factors that can be used to allocate expenes

Answer 22

Based on pertinent factors/ratios; premium claim count or headcount