Chapter 34

Question 1

1. What should be paid close attention to when interpreting or analysing accounts?

Answer 1

• Accounting rules and practices in the country concerned
• Any changes in the accounting rules and practices (note: when comparing, previous year figures will need to be changed to the new accounting rules)
• If the accounts have been prepared on a going concern basis
• Compare current year figures with previous year figures
• Insurance companies and banks are subject to cyclical effects (cyclical claims experience, underwriting cycle and economic cyclical effects – interest rates) so compare results considering these effects
• Insurance companies: The strength of provisioning as this affects the reporting results

Question 2

2. What do reports accompanying accounts usually include?

Answer 2

• Risk appetite
• Riks profile (risk company is exposed to)
• Risk management and mitigation
• Performance against key objectives
• Investment strategy and performance
• Progress against short- and long-term goals
• Governance arrangements, including independence of the board

Question 3

3. What are the different types of ratios that insurance companies accounts can be analysed using?

Answer 3

• Expense ratio = incurred expenses : premium income
• Commission ratio = commission : premium income
• Operating ratio = total incurred claims and expenses : premium income (used for more short term business – general insurance)
• Reinsurance premium : premium income

Question 4

4. What to consider when analysing bank accounts?

Answer 4

• Economic cyclical effects
• Probability of default and loss given default – assesses quality of bank’s loan portfolio

Question 5

5. What to consider when analysing benefit schemes?

Answer 5

• No statement of profit or loss
• Statement of net assets

Question 6

6. Why do benefit schemes use actuarial valuation?

Answer 6

• Demonstrate solvency
• To determine contribution rates

Question 7

7. What are the benefits of disclosure?

Answer 7

• More transparency
• Allows beneficiaries to leave scheme if not satisfied
• Alerts the trustees and members to potential problems
• Well designed information may bring new business
• Poor disclosure may give rise to the beneficiaries gaining false expectations for their future benefits
• Leads to benefit providers presenting the benefits in different ways which may be well understood by the members (avoids mis selling)
• Helps the owners of the benefit providers to be aware of the financial obligations and for it to appear in the company accounts

Question 8

8. What disclosures need to be made for beneficiaries?

Answer 8

• Benefit entitlements
• Contribution obligations
• Expense charges
• Investment strategy
• Risks involved
• Treatment of entitlements in the event of insolvency

Question 9

• Legislation controls when these disclosures are released

Answer 9

• On entry
• Regular intervals
• Once payments commence
• On request
• Combination of all these

Question 10

10. What are the possible disclosures needed?

Answer 10

• Assumptions used
• Actuarial method used
• Value of liabilities accruing over the year
• Increase in the past service liabilities over the year
• Investment return achieved on the assets over the year
• Surplus or deficit and change in this figure over the year
• Benefit cost over the year
• Membership movements