Common Q: In Feldblum’s Notes paper, he gives an example of a retroactive reinsurance contact where the reinsurer can increase the premium if there is adverse development. According to SSAP62, this is forbidden (“Any provision for subsequent adjustment on the basis of actual experience in regard to policy obligations transferred, or on the basis of any other formula, is prohibited”).
I agree that Feldblum’s example is incorrect (as per SSAP62). Hopefully this means that it won’t come up in the exam, but I can not guarantee it. If it does, I would recommend assuming that Feldblum’s paper is correct, and answering accordingly. This is a safer approach IMO than simply saying that the contract does not qualify for retroactive reinsurance accounting (that will most probably receive full credit too, but I can not guarantee this)
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Q. Why are the current year adjustments for Special surplus equal to 3 instead of 2?
A. This was a tricky one… there are 2 pieces to this:
-Looking at the adverse development ONLY, we have special surplus change of 3 (4 – 1)
-HOWEVER, the reinsurer has paid out more (46) than it received in premium (44+1=45). Remember, when the reinsurer pays out more than it receives, the insurer can convert some surplus from special surplus to unassigned surplus. So it will convert the difference (46-45=1), changing the increase in special surplus to 2 (from 3)
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NOTE: THIS IS THE 2ND BLOG OF TODAY (10/19)
First, if you downloaded the 10/19 errata file before 22:30PST today, please redownload.
Q. Why isn’t the admitted valued of funds held at the reinsured company (1,200) limited to 100 (the reinsurance payable on paid losses)?
A. This is not the only form of “collateral”. There are other forms that are not mentioned in the question. Eg reinsurance payable on unpaid losses, unearned premium, commissions payable. Because we are not told the value of these items, we do not have enough info to cap the admitted value of the funds held.
A.
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Q. Why don’t we subtract the investment expenses or depreciation expense when calculating the investment gain?
A. The question gave us “NET investment income”, which means that these items have already been subtracted.
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2 topics that are raising a lot of questions:
1. When do we include Realized Capital Gains in Investment Income?
According to the AS Statement of Income,
Net investment GAIN = Net investment INCOME + realized cap gains.
Therefore, we can see that the GAIN includes realized gains, but INCOME excludes it.
2. 2007, Q26d; Why does the Provision for Reinsurance enter into the equation, but Treasury Stock is excluded… shouldn’t both be included because they are both direct changes to surplus?
The fact that these are both direct changes to surplus is irrelevant. In this question, we are just interested in the assets and liabilities:
-provision for reinsurance is a liability
-treasury stock is a component of surplus
Therefore only the provision is relevant
FYI. a change in assets/ liabilities OR surplus can result in a direct change to surplus — remember the definition is a transaction that causes an impact to the balance sheet but none to the income statement.
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Reminder: there may be older blog postings that do not appear in the “recent posts” section
Another question that is causing some confusion among students… people are curious what happened to the RBC of D, excluding E (22.5%*40=9). We assume that the insurer has an equity ownership of D, which means that the RBC of 9 would go to R2.
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Don’t forget to check the errata (posted to the Introduction section of the Study Manual).
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Reminder: there may be older blog postings that do not appear in the “recent posts” section
Another topic that is raising a lot of questions…why is the answer to part b 0?
This is a trick question. There are 2 ways to treat a recoverable in the deductible layer:
-if the recoverable is associated with an unpaid loss (by the insurer), we simply reduce the amount of the reserve
-if the recoverable is associated a paid loss, we need to create a recoverable asset.
In this case, the loss is unpaid, so we need to apply the former treatment (reduce the reserve, as opposed to creating an asset).
Since there is no asset, there can be no non-admitted asset. Therefore the non admitted asset is 0.
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I just want to clarify a few points about the treatment of money market funds in the RBC calculation:
-the money market funds receive the same RBC factor as cash (0.3%)
-that being said, the charge from the funds (0.3% * amount invested in fund) actually goes towards R2, not R0 (Feldblum stated this in his paper); even though the funds consist of “R0″ types of investments
This is not intuitive at all, and is therefore something that you are going to need to memorize.
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A practice exam is now available in the “Additional Questions” section of the website.
I am receiving a lot of emails about the treatment of unrealized capital gains when calculating the surplus change. You need to look carefully at how these gains are expressed in the question (the question should either state this or imply it):
-if the gains are (cumulative) values, you need to calculate the difference between the 2 statement values
-if the gain is the total gain during the year, in that case you can use just the latest value.
Bottom line, your objective is to calculate the increase in the unrealized capital gains during the year, as this is what directly increases surplus.
If you are unsure, as always state your assumption and answer acccordingly.
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