Exhibit 80.10 - commissions

hope2pass

I'm struggling to understand this exhibit. My understanding is the net commissions (07) would attribute to all written premium for the period. Then any unearned commission would carry to (09) and I don't understand what (08) represents. I guess the confusion is why (10) has (07) + (09). In addition why (40) has (03)?

graham

If I understand your question correctly, you want to know why the formulas provided for column (10) of the net commissions exhibit make sense. (In other words, you aren't asking about a specific exam problem.)

Your explanation of net and unearned commissions from columns (07) and (09) makes sense. Let's look at this other category of commissions, Deferred Commissions from column (08). According to the CCIR instructions:

• Non-deferrable commissions are those that cannot be readily identified as exclusively relating to and varying with the acquisition of premiums and therefore are not recoverable.

By implication then, deferred commissions are those that do vary with the acquisition of premium. That's different from unearned commission which is commission related to the unearned portion of the policy. They also state that deferred and unearned must be reportedly separately. That's why they're separated into different columns in the net commissions exhibit.

Here is how I remember the formula for column (10):

• net commissions for the year just get added in directly (that part is easy)
• the contribution from deferred commissions is the (beginning - ending) value
• the contribution from unearned commissions is the (ending - beginning) value

Note that for deferred commissions we have (beginning - ending) = column (02) - column (08). So the deferred commissions item will increase your net commissions if value at the beginning of the year is greater than at the end of the year. That's because you recognized more of the prior year's deferred commissions than what you are deferring from the current year to the following year (and deferred commissions is an asset.)

And it's the opposite with the unearned commissions (which is a liability so intuitively +/- is reversed) where the column (10) formula is (ending - beginning) = column (09) - column (03). The unearned commissions item will increase your net commissions if value at the end of the year is greater than at the beginning of the year. Again, it's the opposite from deferred commissions because "deferred" refers to an asset and "unearned" refers to a liability.

hope2pass

EDITED. I found the definitions: deferred only refers to assumed and direct business whereas unearned refers to ceded business. The explanation above makes sense. I had trouble finding the definitions and understood commissions to mean something else. Thanks.

graham

Yes, I forgot to mention that. Thanks.

wilsonchan18

Hi, after looking at the explanation above, I am trying to explain myself why the Unearned Commission is different form Unearned Premium Reserve (UPR). UPR is a liability, but when we calculating the Earned Premium, we actually calculate the UPR Movement by Opening UPR - Ending UPR. Yet on this commission, its the opposite. I dont know why? But I do follow that the DAC and Unearned Comm are opposite sign cause one is asset and another one is liab.! I am struggling a bit on the understanding here

graham

It's very confusing to get the "-" and "+" signs in the correct places, but let me make sure I understand exactly what you're asking before I try to answer:

• In my prior post above, I said unearned commissions is a liability item on the balance sheet and the change is calculated as (ending - beginning).
• In your post, you said the change in UPR (which is a liability) is calculated as (beginning - ending)
• Your question is then: Why is the change in unearned commission the reverse of the change in UPR?

If this is indeed your question, then the answer is that the "change" formula depends on the context. In general, a change in any quantity is always (ending - beginning) but sometimes formulas subtract the change and sometimes they add the change. For example, EP (Earned Premium) is calculated as:

• EP = WP - change(UPR)
• = WP - (ending - beginning)
• = WP + (beginning - ending)

So it almost looks like we're calculating change(UPR) as (beginning - ending).

Now, in the net commissions exhibit, I was just trying to explain the reasoning behind the formula for column (10) which is given as:

• Column (10) = (02+07+09)-(03+08)
• = (deferred at beginning + net + unearned at end) - (unearned at beginning + deferred at end)

So when it's written like that, it looks like the change in deferred is (beginning - ending) and the change in unearned is (ending - beginning) but that's only because of how the formula is written.

So there really is no difference even though it might look different in the given context. I hope that makes it a little more clear. You really just have to think through the reasoning I provided in my earlier post and do a few problems for practice.

wilsonchan18

Hi Graham, thank you for your quick and detailed answer.

So if we ae talking in change perspective, we should rewrite the formula Column (10)=(02+07+09)-(03+08)=(deferred at beginning + net + unearned at end) - (unearned at beginning + deferred at end=Net+(deferred at opening-deferred at end)+(unearned at end-unearned at beginning)=Net-(deferred at End-deferred at Opening)+(unearned at end-unearned at beginning)=Net - Change in Deferred + Change in Unearned

Meaning the change in deferred portion is - sign, whereas the change in unearned portion is + sign. I think it probably really depend on how Regulator want to define it. Thank you Graham!

graham

You can rewrite it in any way that's algebraically equivalent if that aids your intuitive understanding, and it seems like you've thought through this exhibit very well.

One thing to be careful about however: It seems like you now have a good understanding of this so don't spend too much more time on it right now. Make sure you can do the old exam problems on commissions, then you can come back to review it later. Your understanding often improves when you put something aside for a little while before reviewing it at a later date.