Fall 2017 #25 ROR

In the examiner's report solutions for part b, the ROR numerator does not subtract out the realized gains given in the question, $1000. Is there a reason for this?

Comments

  • edited April 2021

    Ok, this is tricky. I went back and looked at 4 old exam problems that asked you to calculate ROR:

    • 2017.Fall Q25b

      • you are given: investment operations: income
      • assumption: realized gains are already excluded, don't subtract for ROR
    • 2016.Fall Q22a.i

      • you are given: TOTAL investment income
      • assumption: realized gains are INCLUDED and must be subtracted
    • 2016.Spring Q23a.ii

      • you are given: net investment income
      • assumption: realized gains are already excluded, don't subtract for ROR
    • 2014.Fall Q23a.ii

      • you are given: TOTAL investment income
      • assumption: realized gains are INCLUDED and must be subtracted

    So, it appears that if the given information specifies total, that means that realized gains are included and must be subtracted for the ROR calculation.

    If the given information doesn't specify total then realized gains are already excluded and you don't have to subtract them.

    You can access these problems in the wiki article: https://www.battleactsmain.ca/wiki6c/MSA.Ratios

  • edited March 2019

    Hi Graham,

    Just to make it clear, the MSA text says "[...] investment income (excluding gains) [...]", so I guess it refers to Page 20.30 line 32 minus line 34, and not simply Page 20.30 line 32, right?

    Thanks!

  • That is correct, as can be seen in 2017.Fall Q25b

  • One thing noted for 2016.Spring Q23 a.ii is that the net investment income formula includes the realized gains/losses, which are given to be 0. As such we don't need to subtract for ROR

  • I would have to agree with @PsEm6C . The net Investment income in the 20.30 L39 DOES include the Realized gains, but the question specifically states they are set to 0.

  • In 2018 Fall #24, Net Investment Income also includes realized gains. This can be seen in Part a i) net income for fiscal year 2017 - realized gains are not added after NII, as well as Part b i) ROR - realized gains are subtracted after NII.

    It seems to me that these definitions change depending on who is writing the question (God bless us muggles). It may be safer to state our assumption.

  • @graham, I has been also confused by the 2018 Fall #24 that @DulcineaDelCA mentioned.

  • Hi @xuchaofan,
    Did you have a specific question about this?

  • Hi @graham, No, I don't have any specific question. But as DulcineaDelCA mentioned, the Net Investment Income in this question included realized gain which was not consistent with other exam questions. But I do agree that the safest way is to state well our assumption. Thank you.

  • Hi,

    On MSA wiki, we have this formula:
    Net.InvInc = InvInc + (Realized Gains/Losses) - (Inv.Expenses)

    But based on what's discussed here, it should be:
    Net.InvInc = InvInc - (Inv.Expenses), Net invest income should exclude realized gains right?

    Also the formulas below are correct?
    NI = uw income + net invest income + realized gains + other income - tax
    ROR = (uw income + net invest income + income from subsidiary)/gwp

    I read the forum posts but still want to confirm, and of course I will state my assumption on the exam, but in general are the formulas above correct?

    Thank you!

  • edited October 2022

    I think based strictly speaking on the source text, Net Investment Income does include realized gains (MSA text in the study kit, page 11). The wiki is correct.
    This discussion is more of trying to get a handle/ make sense of the CAS wordings.
    However, the CAS has not really known to be consistent with their verbiage so there's that.
    NI = UW income + Net investment income (As defined in the study kit) + other income - tax
    ROR = (UW income + Net investment income (As defined in the study kit) - realized gains + subsidiary income) / gwp

  • edited August 2022

    I am not sure if the previous ratio calculation still work for this exam. But how can I understand the realized gains (is that only realized gain within current year?) and why do we need to substract that with the ROR calculation?

  • Why would the previous ratio calculation not work for this exam?
    It is realized gain in the current year.
    ROR stands for return on revenue -> Capital gains are not logically part of revenue. That's my take on it

  • Thank you for your answer, but for the capital gains part I am still a little bit confusing. Why the unrealized gain would be part of revenue but the realized gain would not?

    Thank you!

  • Investment income does not include unrealized gains

  • edited September 2022

    But in CCIR.Instructions it says:
    NII
    = Total Realized Gains (Losses) on Sale + Total Fair Value Gains (Losses) + Dividends ← these are dividends received by the insurer, not dividends paid out + Gross Investment Income - Investment Expenses (other than Investment Taxes) - Investment Taxes

    I wondering if the total fair value gains means the unrealized gain in here? If not may you please advise me the difference between Fair Value Gains and unrealized gain?

    Thank you!

  • Maybe we are both confusing each other or I am not understanding you correctly ~ Investment income used in RoR excludes gains as mentioned in page 5 of the MSA report so naturally that would exclude unrealized gains
    Yes fair value gains are unrealized gains here

  • Hi Graham, it seems like FALL 2018 Q24 goes in the opposite direction as they are substracting realized gains from Net Investment Income. Could you provide more insight on explaining why is it happening in this situation? Thank you!

  • For RoR you do not include realized gains. Net investment income includes realized gains therefore you subtract it out. If you are referring to the inconsistency with 2016.Spring Q23a.ii, I would follow what is in the MSA paper which I alluded to in my first 2 sentences. The CAS are know to be inconsistent as questions are written by different actuaries and things fall through the crack. I prefer to follow the source strictly rather than past questions

  • "Just to make it clear, the MSA text says "[...] investment income (excluding gains) [...]", so I guess it refers to Page 20.30 line 32 minus line 34, and not simply Page 20.30 line 32, right?"

    I think I am blind. I cannot find 20.30 anywhere. In which Financial Statement is it? If it is not there anymore, where is it?

  • Yeap! I can't find 20.30 on the latest IFRS17 P&C returns, but you can find it in the older returns: https://www.osfi-bsif.gc.ca/Eng/fi-if/rtn-rlv/fr-rf/ic-sa/pc-sam/Pages/pc1.aspx

  • Hello @Staff-T1 and @graham,

    Thanks for the insightful conversation. I agree that ROR should exclude capital gain.

    Please let me clear summarize the whole conversation:

    1. Aug 2018, Graham Said that when we see Net Investment Income, capital gain is already excluded. Several students got confused as this was conflicting with the wiki

    1. In Oct 2022, Staff_T1 said "Net investment income includes realized gains therefore you subtract it out."

    I personally lean more forward towards @Staff-T1 Answer.
    Could you please clarify?

  • Graham was trying to explain the inconsistencies between the CAS past years. From a pure source material perspective, NII includes realized gains which is what I would use in the exam as this is consistent with the MSA paper

  • edited October 2023

    so that being said, for Fall 2017 Q25, ROR should be equal to (67,900 – 2000 -
    63,500 + 1,500 + 1,800) / 70,400 = 8.1%?

  • You are forgetting to subtract the investment expenses, but yes that is right

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