Spring 2016 Q23

bkmlocks

Hey Graham,

Was just wondering if there was a mistake for the taxes for this question.
I find it a bit odd that the Taxes are in brackets suggesting that it is negative taxes (receiving) and hence suggesting that 5000 should be added to get the Net Income after Tax.

Thank you !

graham

In the Statement of Income, a negative value means a loss, so negative taxes here is just the normal situation where the company has a tax balance that it must pay to CRA.

CalendarYr

I'm confused for Part a) (iii) Net loss reserves to equity - what is "Net Loss Reserve". In this question the solution used "Unpaid Claims and Adjustment" (Liabilities 400K- Assets 150K). However, in 2018 Fall Q 24, exactly same wording, it only used 143K from Liability without deducting 8K from Asset. Why? @graham

graham

There is a slight difference between the 2016 problem and 2018 problem in what you're given and how you calculate the Net Loss Reserves. (The terms "loss reserves" means the same thing as "unpaid claims".) The $8,000 does not have to be explicitly subtracted because it is already included in the $143,000. This is explained below.

2016 problem:

• This is the easier problem because you're given all the current year values that you need.
• You're given the (gross) unpaid claims for the current year of 400,000 and the ceded unpaid claims for the current year of 150,000. All you have to do is subtract to get the net unpaid claims of 250,000. (Same thing as Net Loss Reserves.)

2018 problem

• This is harder because you are not given the current year gross and ceded unpaid claims. You have to start with the net unpaid claims as of the prior year-end (2016). This is calculated as gross - ceded = 132,000 - 7,000 = 125,000. This is the net unpaid for all years evaluated at the end of 2016.
• Then you have consider activity from the current year (2017) and add (or subtract) to the 2016 year-end net unpaid of 125,000.
• So in 2017 you're told net claims incurred was 60,000. (Since it's net, that means ceded amounts have already been taken out.) And this 60,000 represents total claims which is paid + unpaid.
• You are also told net paid during 2017 is 42,000. Subtract this from the 60,000 to get 18,000. This is the net unpaid for 2017 only.
• Now take the 2016 year-end net unpaid (125,000) and add in the net activity for the current year which is (18,000) for a total of 143,000. This is the net unpaid (or net loss reserve) for all years as of the end of 2017. This is what you need for numerator for the MSA ratio.
• Again, because we did the calculations on a net basis to start with, the 8,000 in ceded unpaid is already included in the 143,000 and so does not have to be subtracted. (That would be double-counting.)

ibsy

Hi Graham,

I have a question on how to understand the "Net Inv Inc" component in this problem, with regards to their comment "the company has no investment income gains".

Considering the Net Inv Inc formula = InvInc-InvExp+Real Gains/Losses, I understand "investment income gains" to be the "InvInc-InvExp" component in the formula.

Therefore if the cie has no inv inc gains, I would understand the Net Inv Inc in this problem to be composed only of Realized Gains/Losses. Implying that for the RoR calculation, I would not use the same approach as in the examiner report, and consider only UWInc in the numerator (and omit Net Inv Inc).

Does that make sense?
Thanks.

graham

From the answer in the examiner's report, I think when they said "no investment income gains", they meant there were no realized gains. The formula for ROR is:

• ( U/W.Inc - CapGains + InvInc + IncFrmSubs ) / GWP

So CapGains = 0 and also IncFrmSubs = 0. The exam question would have been clearer if they had said "no realized gains" but you know that investment income is non-zero because the table explicitly says that net investment income for the current year is 105,000.

(I do understand your line of reasoning but you're probably overthinking it.)

ibsy

Thanks! Now I wonder if I understood well the RoR formula you just mentioned:
( U/W.Inc - CapGains + **InvInc **+ IncFrmSubs ) / GWP

Can you confirm that InvInc in this formula actually refers to NetInvInc=InvInc+RealGains-InvExp? i.e. line 39 of page 20.30 of the Statement of Income? Or is it something else?
I thinks this was discussed in another thread, but it wasn t totally clear to me what the final conclusion was.

Thanks.

graham

Yes, that's my interpretation. (They are referring to line 39 on page 20.30.) There is another term labelled "Gains (Losses) from FVO or FVTPL" but it seems we can assume this is equal to 0 also. Maybe when the problem said "no gains" they meant both that and "Realized Gains (Losses)"

ibsy

great, thanks!

thesuperactuary

I am still not sure why here the sample solution didn't incorporate the tax amount into NI calculation. Could someone please shares more details? Thanks!

Staff-T1

Isn't net income provided in the question? Why would you need to calculate it?

bicbic

the net income provided didn't specify it's after tax or before tax. is it because the income tax is listed above net income, so we can assume it's net income after tax?

also, U/W income is -120, net investment income is +105, income tax is -5.
if follow the formula, net income after tax = U/W income + investment income - income tax = -120 +105 - (-5) = -10
rather than -20 which is given in the question

Staff-T1

Yeah I would interpret it as after tax if the line for tax is before net income.
Seems off. I agree it should be -10

AndrewL

As a follow up to @graham 's post above to @ibsy, assume the question actually meant cap gain=0.

How do we have that Inv Inc = Net Inv Inc?

Net Inv Inc = InvInc - InvExp + Real Gains/Losses.

1. I believe that Real Gain does not equal capital gain. Can you please confirm?
2. We would need to assume that investment expenses = 0

Staff-T1

You cant really do the question without assuming that investment income = net investment income here
1. Yes capital gains = unrealized gains + realized gains
2. Yes