Fall 2019 Q18
Hi Graham or anyone who knows the answer,
Do you why the first bullet point given in this question is relevant?
* 'Assume that the net investment incomem.... method'
I am not sure how this changes the solution.
Thank you for the help!
Comments
For this bullet point:
I think they are just dotting their i's and the crossing their t's here. I looked through the annual statement instructions but I couldn't find any reference to how this assumption makes any difference to the calculation. I think the part about the equity method is completely irrelevant because you have to use the equity method (The equity method is not explained in the instructions.) Rather, they seem to be implying something about the income or loss from pooled funds. Note that,
Let
As a simple example:
Then the condition wouldn't hold because:
Are they trying to say that the value of NIFO used in the excess (deficiency) ratio cannot be greater than NII + PF. Maybe you would have to use the value of 70 instead of 80 for NIFO? Maybe losing money on pooled funds lowers the amount of investment income that can be used when calculating the excess (deficiency) amount?
In the exam problem, NIFO = 5200 but if NII + PF had been less than 5200, maybe you then had to cap NIFO at whatever NII + PF was? If this is what they were getting at, I don't think anyone would have even thought of that.
This is all just a guess on my part. I couldn't find where any of this is explained.
(Pooled funds are deducted from from aggregate holdings on page 40.07 to obtain total investments so pooled funds do seem to be treated slightly differently from other investments, but this is all seems way too detailed to be expected to know for the exam.)
Hi Graham, I have a follow up question this problem.
It was my understanding that we need APV(UCAE & IBNR) to calculate the total investment income from insurance operations.
However in the solution, it seems that we are just using UCAE and not APV(UCAE).
When I first attempted the question, I used:
APV(UCAE & IBNR) as of 12/31/2017 = 163000+112000 = 275000
APV(UCAE & IBNR) as of 12/31/2018 = 168000+130000+100000 = 281000
APV(UCAE & IBNR) = 278000
Can you please comment on why we are not using the APV(UCAE & IBNR)?
Although you usually don't have a choice because of how the information is given, acccording to the CCIR Annual Statement Instructions, there is no single answer as to whether to use APV or non-APV here. You're supposed to use the value from Page 20.20, Line 13 in the annual statement but from the instructions:
Unpaid claims and adjustment expenses must be reported at gross value, but where
discounting is required by the insurer’s primary regulator, on a discounted basis. Please refer
to “Section V - Jurisdictional Requirements” for further guidance.
So this value could be either UCAE or APV(UCAE). Note that these problems definitely use APV:
but these don't specify:
Here's the real answer to your question
I see what you were trying to do but you implicitly assumed the company started operations in 2016. If the company had AY losses prior to 2016, these would count towards generating investment income for CYs, but you would be missing these in your APV values.
The best way to know which numbers to use is to pay attention to the format of the given information. The boxes at the top gave you the assets and liabilities from the balance sheet and these are the values to use, even if you could calculate them from the triangles (which in this case you probably can't.)
That makes a lot of sense, thank you!