Flashcards in A3. Odomirok 8&9 Deck (16):
List some factors that can be used to allocate expenses
Premium, claim count or headcount
Underwriting income formula
EP-LLAE Incurred - Other UW Expenses incurred
The exhibits of Net investment income divide the investment income from bonds into
-interest received during the year
-interest due and accrued
-current year's amortization/accretion
-interest paid for accrued interest on dividends
List some problems that may arise if expenses are not accurately allocated
-distorted profitability measures
-inefficient allocation of resources
Why is Amortization or accretion of bonds required?
The coupon rate is different to the market interest rate at the time the bond is purchased. The amortization produces an amortized cost equal to the face value at maturity.
Describe interest paid for accrued interest on dividends
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.
Formula to derive realized gain when bond is sold
Amount received - adjusted carrying value
Define redeemable preferred stock
Preferred stock that is redeemable at the option of the insurer at a specified maturity date, or after a specified period of notice, for a specified price
How can a derivative qualify to be a "highly effective" hedge?
If the insurer can demonstrate that a derivative has significantly reduced a particular risk exposure.
Define perpetual preferred stock
Preferred stock with no maturity date (i.e, can not be redeemed by the issuer)
How are derivatives that do not qualify for hedge accounting treated?
Mark-to-market accounting (any changes in fair value are recorded as unrealized gains)
Describe hedge accounting treatment
The derivative receives the same accounting treatment as the hedged asset.
List some components of other income
-Net Gain from Agents' or Premium Balances Charged Off
-Finance and service charges not included in premiums
-Aggregate Write-ins for Miscellaneous Income (Gain on sale of equipment, Retroactive Reinsurance gain, Gain on Foreign Exchange, Corp Expenses, Fines and penalties)
-Dividends to policyholders
-Federal and Foreign Income Taxes
2 types of investment guidelines that are permitted by the NAIC Model Investment Law
-Defined limits: quantitative limits
-Prudent Person: a principles based approach which enable the insurer to develop its own guidelines
Describe accounting treatment when stocks are issued
-The amount collected associated with the par value is recorded as paid in capital
-The excess is paid-in surplus