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Flashcards in Odomirok 8-9 Deck (16):

Underwriting income formula

Earned premium - loss & LAE incurred - other underwriting expenses incurred


List some factors that can be used to allocate expenses

Premium, claim count or headcount


List some problems that may arise if expenses are not accurately allocated

-Distorted profitability measures
-Inefficient allocation of resources


The Exhibit of Net Investment Income divides the investment income from bonds into

-Interest received during the year
-Interest due & accrued
-Current year's amortization/accretion
-Interest paid for accrued interest on dividends


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


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


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 issuer at a specified maturity date, or after a specified period of notice, for a specified price


Define perpetual preferred stock

Preferred stock with no maturity date (ie can not be redeemed by the issuer)


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


Describe hedge accounting treatment

The derivative receives the same accounting treatment as the hedged asset


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)


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 enables the insurer to develop its own guidelines


List some components of Other Income

-Net gain from agents' or premium balances charged off
-Finance & service charges not included in premiums
-Aggregate write-ins for miscellaneous income (gain on sale of equipment, retroactive reinsurance gain, gain on foreign exchange, corporate expenses, fines & penalties)
-Dividends to policyholders
-Federal & foreign income taxes


Equation to derive current year's surplus from prior value

= Prior year's surplus + Current year's net income + Other surplus changes + additional capital contributions + stockholder dividends


Describe accounting treatment when stocks are issues

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