Reproduce financial statements for examples in paper

x367zhan

Hello, can battleact add more explanations for the examples in paper? I’m having difficulty to follow reproduce the statement with reinsurance contract scenario.
For example, can anyone help advise how the gross loss reserve is calculated for example 1 under reinsurance contract? Why not 1.4*original Gross loss reserve? Thanks

graham

First of all, the example provided in the source text is not a very good example for a few different reasons. You cannot reproduce their exhibit only with the information they give you.

A partial answer to your question about why the gross reserves are not just 1.4 times the original is in the 4th bullet under the "Altered Assumptions" heading. They say:

• The loss ratio remains 75% on both net and ceded business. However reserves increase relative to loss, because claims on more expensive properties take longer to develop.

They do not explain this any further however. The gross loss (paid + unpaid) is indeed given as 1.4 times the original:

• 1.4 x 750 = 1,050

Now the corresponding reserve is shown as 1,125 which is a little higher than 1,050 and this is consistent with their statement that reserves will be higher relative to the losses for more expensive properties. But they don't explain exactly how they got this value of 1,125. In other words, you cannot calculate it from the information provided.

So the reason I didn't include detailed explanations of the exhibits is that I couldn't. They do not provide enough information. (You can reproduce some of the given numbers but not all of them.)

My advice is to study this reading mainly by looking at the past questions. Future questions are likely to be at least somewhat similar and I think you could probably figure out most of the calculations just with general knowledge of accounting and how reinsurance works.

If you do have any other specific questions about these exhibits, please let me know, and I will do my best to answer them, if possible.