2019F - Q23

ZJiangZJiang
in MSA.Ratios

Hello,

Is there an error in the 2019 F Q23 part b)? Is the acceptable range for the overall net leverage ratio 500%, or 400% as stated in the solution?

Thank you!

Comments

  • grahamgraham

    Yes, that's an error in the examiner's report. I double-checked in the MSA ratios source text from the study kit and the threshold for "Overall Net Leverage" is 500%. (The conclusion is still valid because the calculated ratio was 513%, which is outside the acceptable range.)

    Part (a) of that same problem also has errors in the examiner's report. You might have already seen that but for reference, see the notes below the summary table at this link:

  • ZJiangZJiang

    Thank you Graham !

  • oxalisoxalis

    Hi,

    How do we know here the invested assets is the unpaid claims and adj? I thought the definition for invested assets = Cash + (Bonds & Debentures) + (Common Shares) + (Real Estate)

    thank you

  • grahamgraham

    You're given the values for Total Investments in the top box (20.10 Assets). It just happens to be the same as the unpaid amount because in this scenario, there are no other invested assets. You do earn investment income on cash, bonds, common shares, and real estate, but cash = 0 in this problem and you're not given any of those other values here.

    Note that unpaid amounts are always used to generate investment income. That's the whole idea behind discounting the losses. You can use your current unpaid amounts to generate investment income so the amount you have to set aside for unpaid is lower than the amount you expect to pay out at a later date.

    Also take a look again at the excess/deficiency ratio problems from the CCIR.ARinstr reading. In these problems you explicitly calculate investment income based on unpaid amounts.

  • oxalisoxalis

    Hi Graham,

    I'm still a bit confused, it makes sense to invest the unpaid claims, but why don't we also invest the unearned premium? since annual premium is usually received before or on the policy effective date, we can use this money to generate income too?

    Thanks,

  • grahamgraham

    The unearned premium is invested also, but it isn't part of the excess/deficiency calculation. Since the excess/deficiency ratio is for assessing the adequacy of reserves, we only count investment from unpaid claims for that.

  • wxysimonwxysimon

    Hi Graham,

    To clarify, if the UCAE here was 360,000 and Total Investments was provided as 350,000. (ie. I don't know when would this happen, maybe there are other invested assets other than cash, bonds, common shares, and real estate?) Do we use 'Unpaid Claims and Adjustments' or 'Total Investments' in this question?

    My first instinct for this question would be to use 'Total Investments' since we were not provided with the detailed numbers of cash, bonds, common shares, and real estate.

    thank you

  • grahamgraham

    Yes, the formula for investment yield uses Total Investments.

Sign In or Register to comment.