Feldblum Statutory Surplus Flashcards
Feldblum presents two definitions of surplus
Balance Sheet definition: surplus = assets – liabilities
Income Statement definition: surplus = prior years surplus + current year’s income
These two definitions would be equivalent if all balance sheet transactions also flow through the income statement.
in order to reconcile the income statement definition surplus with the balance sheet definition surplus
necessary to adjust the income statement definition surplus for transactions that do not flow through the income statement.
These are either:
Direct credits (increases) to surplus, or
Direct charges (reductions) to surplus
“Exhibit of Non-Admitted Assets”
in Annual Statement
This exhibit contains the following columns:
Non admitted assets at end of current year
Non admitted assets at end of prior year
Change for year (defined as “prior – current” in this exhibit)
two accounting methods for nonadmitted assets and pros
Method 1: write off the nonadmitted assets as an expense (in the income statement)
Method 2: classify the asset as nonadmitted & charge surplus directly.
Method 1 is more complicated, because the insurer needs to keep a separate set of books for GAAP & Statutory accounting. Under Method 2, the insurer only needs to keep GAAP books, and the statutory surplus can be identified by subtracting out the portion of the assets that are classified as nonadmitted.
Examples of Non Admitted Assets
Interest Due & Accrued over 90 days overdue is non admitted
A retrospectively rated policy is one where additional premium is charged or credited based on the profitability of the policy (if losses are higher than anticipated, additional premium may be charged). -> 10% of the unsecured Accrued Retrospective premium that is due to the insurer is non admitted.
The permanent excess of book over the market value is a nonadmitted asset
STATUTORY LIABILITIES
Provision for Reinsurance: This affects the balance sheet, but not the income statement, and therefore is a direct charge to surplus.
Premium Deficiency Reserve: PDR arises from premium which is insufficient to provide for losses and expenses.
Unrealized Capital Gains
These are direct credits (increases) to surplus, as there is no impact on the income statement. Note that the deferred tax liability arising out of these gains is a direct charge to surplus.
Estimates of the cost of holding capital can vary from
cost of Double Taxation to the difference between the cost of equity capital & after-tax investment yield
cost of double taxation
additional amount that investors need to pay by investing in securities via the insurer
Cost of Double Taxation can be thought of as
Cost of Holding Capital
formulas for taxes paid on direct investment, taxes paid on indirect, and cost of double taxation
To encourage investors to invest in the insurer
cost needs to be paid by policyholders -> paid through premiums as profit margin component since there are no direct transactions between the policyholders and the investors
Since it is paid through the profit margin in the premiums
(which is taxed as underwriting income), there is another layer of tax involved
margin needed on the premiums as a percentage of investment yield and margin as a percentage of premium
Atkinson & Dallas
Atkinson & Dallas reflect the additional cost that arises because of the investment constraints of insurer
