TIA Section A - 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

If insurer purchases a bond between coupons, it must pay the seller for the portion of the next coupon payment earned by the seller.

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 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

Definite perpetual preferred stock:

Answer 9

Preferred stock with no maturity date (i.e., 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 the hedge accounting treated:

Answer 12

Market-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

1. Defined Limits: quantitative limits
2. 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

Question 15

Examples of Aggregate Write-ins for Miscellaneous Income

Answer 15

Gain on sale of equipment
Retroactive Reinsurance gain,
Gain on Foreign Exchange
Corporate Expenses
Fines & penalties

Question 16

Equation to derive Current Year’s surplus from prior value:

Answer 16

= Prior Years Surplus + Current Years Net Income + Other Surplus Changes + Additional Capital Contributions - Stockholder Dividends

Question 17

Describe accounting treatment when stocks are issued:

Answer 17

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