Fall 2017 Q14

Tony88passTony88pass
in CCIR.ARinstr

When calculating the net income for 2016, I'm confused why we need to include the EP from 2015? My understanding is, the net income in Calendar Year 2016 would be the CY16 EP minus the CY16 Incurred loss. Is the 2015 EP in this question actually refers to the EP in 2016 from business written in 2015? Sorry this made me very confused.

Comments

  • grahamgraham

    I'm assuming you are referring to the NEP calculation right at the beginning of sample answer 1:

    • Net Earned Premium
    • = (100,000 + 80,000 - 90,000) x 75%
    • = 67,500

    The quantity in parentheses is the gross EP for 2016 and the 75% is the percentage the primary insurer keeps under the reinsurance agreement. But getting back to your question: In general, the formula for EP in a CY is:

    • EP = WP – change(UEP)

    To calculate change(UEP), you need UEP from the prior CY, in this case 2015. You can find this and other useful accounting formulas in the wiki here:

    So in this exam problem, we have:

    • WP(2016) = 100,000
    • UEP(2016) = 90,000
    • UEP(2015) = 80,000

    Then just substitute these values into the formula. If you need further clarification on why the EP formula is true, let me know.

  • Tony88passTony88pass

    Thank you Graham, sorry I forgot to minus change of UEP

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