Odomirok - Insurance Expense Exhibit (IEE) Flashcards
What information is shown on the Insurance Expense Exhibit (IEE) versus the Income Statement
IEE shows statutory profit (loss), both direct & net of reinsurance, by line of business whereas the Income Statement shows only aggregate information net of reinsurance.
IEE = By Line, Income Statement = Combined
Who are the users of the IEE?
6
- actuary
- policyholder
- investor
- competitor
- regulator
- rating agency
Why does an actuary use the IEE?
- to review premiums, losses, expenses by line
- benchmark the company performance against industry
Why would a policyholder look at the IEE?
- To look at expenses by line.
- It could impact purchase decision as lower expenses may mean lower rates.
Why do investors review the IEE?
- examine profitability versus premium growth by line
- may affect investment decision if growth is in unprofitable lines
Why would a competitor review another companies IEE?
- examine profit & expenses by line
- may affect market entry decision in lines where profits are high
Why do regulators review the IEE’s of insurance companies?
- Looking data/trends by line of business
- Could highlight solvency and/or rate concerns by line that the income statement would mask on an aggregate basis.
Why do rating agencies look at the IEE?
- Profit by line
- Highlights subsidies from strong lines to weak lines or are all lines independently strong.
Don’t want to see subsidies.
What are the 4 parts of the IEE
Part 1: Allocation of Expenses into 22 expense groups
Part 2: Pre-Tax Profit Net of Reinsurance
Part 3: Pre-Tax Profit Direct of Reinsurance (ex Investment Gains)
Part 4: Interrogatories
What is the IEE methodology for allocating surplus by line of business?
- Calculate the all lines surplus ratio
- SR = m(s) / [m(Loss) + m(LAE) + m(UPR) + Net CY EP]
- Take the all lines surplus ratio and apply it line specific inputs
- LOBA = SR x [m(LossA)+m(LAEA)+m(UPRA) + Net CY EPA)]
Where m(x) = Average(XCY , XPY)
What are some advantages of the IEE method for allocating surplus?
- not distorted by Reinsurance
- uses 2 years of data to smooth results (reduces distortions)
- easy to obtain Data (from annual statement)
- easy to Calculate & compare across companies & lines of business
What are some of the issues of the IEE method for allocating surplus?
- It’s retrospective. Does not account for future growth.
- It’s formulaic. Does not account for managment input
- Does not account for risk characteristics of LOB (ie short / long tailed)
- Does not account for catastrophe potential.
What are differences between IEE surplus allocation and ratemaking surplus acclocation?
- Type of Method
- IEE is retrospective and looks to historical data
- Ratemaking is prospective. What should it be in the future.
- Data Used
- IEE uses loss reserves, UPR, and EP to allocate surplus
- Ratemaking uses inputs that better align surplus to the inherent risk of a line of business, such as catastrophe risk and generally riskiness of line.
- Also, Short vs. Long tailed, high freq/low sev vs. low freq/high sev (the latter considered to be riskier)
Think internal risk models for rate making allocation of surplus.
What is the IEE methodology for allocating Investment Gain by line of business?
- Calculate the all lines Net Investment Gain Ratio (NIGR)
- NIGR = NIG / [m(Loss) + m(LAE) + m(UPR) + m(S) + m(re) - m(ab)]
- Take the all lines NIGR and apply it to line specific inputs
- NIGLOB A = NIGR x [m(LossA) + m(LAEA) + m(UPRA) + m(SA) + m(reA) - m(abA)]
Where m(x) = Average(XCY , XPY)
How do we calculate the Investment Gain due to Insurance Transactions and allocate by line?
- Recall that Net Investment Gain Ratio equals
- NIGR = NIG / [m(Loss) + m(LAE) + m(UPR) + m(S) + m(re) - m(ab)]
- Now need to calculate the Net investment Gain attributable to Insurance Transactions (NIGIT)
- NIGIT(a) = NIGR x FAIT(a)
- where FAIT(a) = m(LossA) + m(LAEA) + m(UPRA) + m(reA) - m(abA) - (PPE for UEP)A
- where (PPE for UEP)A = PPERA x m(UPRA)
