Basic Odomirok

Question 1

Asset

Answer 1

Resources obtained or controlled by a company as a result of
past events that have a probable future economic benefit to the
company

Question 2

Liability

Answer 2

Probable sacrifices of economic benefits arising from
present obligations of a company to transfer assets or provide services
to other entities in the future as a result of past events

Question 3

Capital & Surplus

Answer 3

Provides transactions that impact surplus (but aren’t shown on income statement)

Question 4

Accounting Principle

Answer 4

a general accounting approach that users must
interpret; more adaptable but lacks uniform interpretation

Question 5

Accounting Rule

Answer 5

a specific guideline users need to follow; easier to
interpret but less adaptable

Question 6

Accounting Treatment of Bonds

Answer 6

1, 2 Amortized Cost
3-6 Min(Amortized Cost, Fair Value)
—————————————————————————————————-
The bond premium (discount), which is the difference between purchase price
and face value, is amortized over life of the bond

Question 7

Accounting Treatment of Stocks

Answer 7

Recorded at cost + fees at purchase, and recorded at fair value after purchase

Question 8

Real Estate Valuation

Answer 8

Properties Occupied by Company = Depreciation Cost – Encumbrances
Properties Held for Production of Income = Depreciation Cost – Encumbrances
Properties Held for Sale = Min(Depreciation Cost, Fair Value) – Encumbrances – Costs to Sell Properties

Question 9

Cash, Cash Equivalents, & Short-Term Investments

Answer 9

a. Definition: Cash and assets that are easily converted to cash
b. Cash Equivalents must have a maturity < 3 months
c. Short-term investments must have maturity < 1 year

Question 10

Uncollected & Deferred Premiums & Agents’ Balances

Answer 10

a. Classifications:
i. Uncollected Premiums & Agents’ Balances: Due before financial statement date
ii. Deferred Premiums: Due after financial statement date
b. Overdue Balances
i. Any balance overdue > 90 days should be considered Non-Admitted Assets

Question 11

Amounts Recoverable from Reinsurers

Answer 11

Includes only recoverable amounts from paid losses, not expected recoveries
i. This is because loss reserves are recorded net of expected recoveries

Question 12

Net Deferred Tax Assets

Answer 12

a. Deferred Tax Assets (DTA) and Deferred Tax Liabilities (DTL) arise from differences in
statutory accounting and tax accounting
i. Companies will record either a Net DTA or Net DTL based on which is higher, so
you will never see both on a financial statement
Common Sources:
i. Loss reserves are discounted in tax accounting (but not in SAP), and this
discounting generates an incurred loss and reduces tax due in the future
ii. The carryforward of net operating losses from prior years

Question 13

Non-Admitted Assets

Answer 13

furniture
agents balances over 90 days overdue
deferred tax asset
10% of Deductible Recoverable over Collateral
real estate
Investments that exceed state limitations
Funds held at reinsured company that exceed
remaining liabilities

Question 14

Other Expenses (Excluding Taxes, Licenses, and Fees)

Answer 14

Includes the following:
i. LAE
ii. Underwriting Expenses (Commission, Taxes, General, Investment expenses)

Question 15

Unearned Premiums

Answer 15

Daily Pro-Rata Method of booking

Monthly Pro-Rata Method of booking (assumes the following)
i. 1/24th is earned during the written month
ii. 1/12th is earned each month for the next 11 months
iii. 1/24th is earned the following month (month 13)

Question 16

Accounting Classification of Unearned Premiums

Answer 16

Accounting Classifications
i. Amount Unearned (< 1 year from policy effective date)
ii. Amount Unearned (> 1 year from policy effective date)
iii. Earned But Unbilled Premium (EBUP) arising from exposure audits
iv. Reserves for rate credits and retrospective adjustments based on experience
v. Premium Deficiency Reserve (reserve for when premiums are not adequate to
cover losses)

Question 17

Surplus components

Answer 17

1. Common Capital Stock
   a. Par value of insurer’s stock that is issued and outstanding
   i. Par value is the minimum amount set by the insurer at which the stock can trade
   at its initial offering
   b. Not material for most insurers since the par value is low
2. Gross Paid in & Contributed Surplus
   a. Equals the excess of sale price of stock issued over par value
3. Unassigned Funds
   a. Result of contribution of retained earnings (earnings not paid out as dividends) to surplus

Question 18

Current Year Surplus

Answer 18

Current Year’s Surplus = Prior Year’s Surplus
+ Current Year’s Net Income
+ Other Surplus Changes
+ Additional Capital Contributions
- Stockholder Dividends

Question 19

Other Changes in Surplus

Answer 19

Change in Unrealized Capital Gains
o Change in Net Unrealized Foreign Exchange Capital Gains
o Change in Net Deferred Income Tax
o Change in Non-admitted Assets
o Change in Provision for Reinsurance
o Cumulative Effect of Changes in Accounting Principles
o Capital Changes and Surplus Adjustments
▪ Changes in capital due to issuance of stock
▪ Changes due to return of capital
* Amount collected associated with par value is Paid-in Capital
* Amount collected in excess of par is Paid-in Surplus
▪ Transfers of surplus to capital when stock dividends are issued
o Dividends to Stockholders
▪ May be paid from unassigned surplus

Question 20

Changes in Surplus that don’t affect NI

Answer 20

o Change in Unrealized Capital Gains
o Change in Net Unrealized Foreign Exchange Capital Gains
o Change in Net Deferred Income Tax
o Change in Non-admitted Assets
o Change in Provision for Reinsurance
o Dividends to Stockholders

Question 21

UW Income

Answer 21

Underwriting
Income
=
Earned
Premium -
Loss & LAE
Incurred -
Underwriting
Expenses

Question 22

Derivatives

Answer 22

If an insurer can prove that a derivative is a “highly effective” hedge (i.e. it
significantly reduces the risk exposure from a different asset), then it can qualify
for hedge accounting, in which the derivative will receive the same accounting
treatment as the hedged asset (thus allowing it to offset the asset)
▪ If the derivative does not qualify for hedge accounting, it will be subject to mark-to-market accounting, in which any changes in fair value are recorded as unrealized gains

Question 23

Investment Guidelines

Answer 23

o NAIC allows for two types of investment guidelines
▪ Defined Limits: Follow established quantitative limits
▪ Prudent Person: A principle-based approach that allows the insurer to develop its
own guidelines
o Under a Prudent Person approach, the insurer should:
▪ Strive for the protection of the policyholder
▪ Consider available resources and investment expertise

Question 24

Components of Other Income

Answer 24

o Net Gains from Agents’ or Premium Balances Charged Off
o Finance & Service Charges not included in Premium
o Aggregate Write-Ins for Misc. Income (Examples Below)
▪ Gain on sale of equipment
▪ Retroactive Reinsurance
▪ Gain on Foreign Exchange
▪ Corporate Expenses
▪ Fines & Penalties from Regulators
* Elements that Impact Other Income
o Dividends paid to policyholders
▪ Includes paid dividends and declared changes in dividends that have yet to be
paid
o Federal & Foreign Income Taxes
▪ Excludes any portion deferred to future years

Question 25

Impairment

Answer 25

Impairment is when a firm believes it cannot collect the amounts due from an asset in the
future
▪ Treated as a realized capital loss

Question 26

5 Yr Historical Summary WP

Answer 26

• This exhibit shows gross and net written premium, categorized by the following:
  o Liability
  o Property
  o Property & Liability Combined
  o All Other
  o Non-Proportional Reinsurance

Question 27

5 Yr Historical Summary Income Statement

Answer 27

o Shows components of income over 5 years
▪ Net Underwriting Gain (Loss)
▪ Net Investment Gain (Loss)
▪ Other Income
▪ Dividends to Policyholders
▪ Federal & Foreign Taxes Incurred

Question 28

5 Yr Historical Summary Operating %s

Answer 28

Summarizes changes in ratios relative to earned premium, based on the following:
▪ Loss
▪ LAE
▪ Other underwriting expenses
▪ Profit