Investment Income from Insurance Operations
in CCIR.ARinstr
I understand that it's the investment income from "the 'money' the company has lying around" before it has to be paid to the claimant, but why do we have to subtract assets? I'm struggling to see how receivables would negatively impact the investment income made.
Comments
I see what you're saying: If you have $100 in reserves that's "lying around" and $20 in assets, why can't we just invest the $100? Why does the $20 in assets need to be subtracted.
Well, the first rule is that accounting formulas don't always make intuitive sense. But in this case, I think there is a somewhat reasonable explanation. There are 3 items (at least in this particular problem) that are subtracted:
Recall that the DPAE asset (see the CIA.PrLiabs wiki article) is a prepaid expense that comes out of the UPR (Unearned Premium Reserve). That means you can't invest the whole UPR amount that's on the books because the DPAE already came out of it. In other words, you only have UPR-DPAE "lying around" to invest.
For the receivables, this is money that's owed to you by others so you don't have it yet. It's an asset but you aren't actually holding it (and there's a chance you might not get it) so you can't invest it.
Thanks Graham!