2018 Fall Q24 b.i)

yunal911111yunal911111
in CCIR.ARinstr

Hi,

Can you please explain why the formula for ROR in this question is:

= [Underwriting Income (Loss) + Net Investment Income -+ Realized Gains (Losses)] / [Net
Written Premium + Ceded Written Premium]

Instead of
= [Underwriting Income (Loss) + Net Investment Income -+ Realized Gains (Losses) + Other Revenue and Expenses] / [Net
Written Premium + Ceded Written Premium]

I always think the only difference between the numerator of ROE and ROR is realized gains/losses and income tax.

Please let me know.

Thanks!

Comments

  • grahamgraham

    I think this problem is a straightforward application of the ROR formula. The only term missing is "Income from Subsidiaries" and this isn't provided so you have to assume it is 0. The formula for ROR, according to the MSA ratio source text, does not have a term for "Other Revenue and Expenses" so you shouldn't include it.

    So ROE would include "Other Revenue and Expenses" but ROR would not. "Other Revenue and Expenses" is just a catch-all category that for some reason, MSA decided not to include in the ROR formula.

    Let me know if I didn't interpret your question correctly.

  • oxalisoxalis

    Hi,

    I might be overthinking on this, but in the formula uw income + investment income - cap gains + income from subsidiaries, cap gain would include realized and unrealized gain right? here we subtracted realized gain, but for the unrealized, isn't it the $2000 of AOCI in page 20.20? I would also subtract the 2000.

    Thanks,

  • grahamgraham

    Unfortunately, the MSA source text (only available in print form through the study kit) does not specify whether only realized gains should be subtracted or both realized and unrealized gains. All it says is "excluding gains".

    Note however that unrealized gains don't normally count when calculating taxable income so it's reasonable to assume they shouldn't be included in ROR either, especially since that particular exam problem did not subtract unrealized gains. That seems to be what the graders wanted.

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