2017 Fall 14a

passexam6cpassexam6c
in CCIR.ARinstr

Hi Graham,

For 2017 Fall 14a, is it okay for me to split the Gross cash flows into Net and Ceded first using the 25% cession rate, and then calculate the PV and pfads? I noticed I would get a different answer from the solution.

Comments

  • grahamgraham

    It shouldn't make any difference. Do you mean you split the unpaid into gross and ceded using the 25% ratio, and then calculated APV(net) as APV(gross) - APV(ceded)? I think that would be a messier calculation because it's easy to get "+" and "-" mixed up when you're dealing with PfAD(reinsurance) individually on the gross and ceded portions.

    (Note that only the claim liability cash flows are subject to the 25% cession. You would not apply the cession ratio to the investment income for example.)

  • passexam6cpassexam6c

    I splitted the unpaid into net and ceded, then I calculated the PV and APV of the net directly, using ceded for the reinsurance pfad calculation of course.

  • grahamgraham

    I think I'd need to see your calculations to be able to comment further.

  • danielle4nandanielle4nan

    Hi, I also have a concern regarding this question. I thought I knew the net income calculation, however it seems I've missed something important! Why is it that we can't imply use the APV of net discounted unpaid claims + LAE in the net income calculation? Why do we instead calculate net incurred losses as APV of unpaids + CY2016 claim payments - 2015 net claim liabilities?

    Thanks in advance!

  • chrisboersmachrisboersma

    The question is asking for UW Income

    Revenue = Earned Premiums
    Accounting Year Loss Cost = Paid + Delta(APV) + Investment Income (@0% so $0)
    UW Income = Revenue - Cost.

    What is an 'Income Statement'?

    An income statement is a financial statement that reports a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period.

  • grahamgraham

    Hello danielle4nan

    The calculation of net income can be confusing because exam questions provide the necessary information in different ways. For example:

    • 2015.Spring Q24: You can see my solution to this at the bottom of the CCIR.ARinstr wiki article in the PDF called Basic Accounting Practice. In that problem they also ask for net income but they give you the "final value" for net claims as part of Exhibit 60.20 in the annual statement. You then just use this value in a straightforward way as shown in my solution.

    But in 2017.Fall Q14, you have to calculate this "final value" using the paid loss, current year incurred loss, and prior year incurred loss. (It's a little but like the excess(definiciency) ratio problem where you use begining & ending UCAE and paid loss.) Your are given all the raw data: triangle of unpaid losses, payments pattern, MfADs, prior year APV, and you have to put it all together to get the value that would go into Exhibit 60.20.

    Does that answer your questions. Let me know if it doesn't.

  • danielle4nandanielle4nan

    Thanks everyone for your responses. I have a few more questions:

    1) Are the claims incurred and adj. expenses in 60.20 showing the APV of unpaid claims (disc. + PFAD), or are these amounts (which are shown in Q24 of Spring 2015) showing the accounting year loss cost, therefore CY paids + the change in APV of unpaids?
    2) For Fall 2017 Q14, the 2015 net claims liability figure was therefore also calculated to reflect CY2015 paids + change in APV of unpaid claims between 2015 and 2014?
    3) Does the pure APV of unpaid claims appear in the annual return in any section? This is really unclear to me.

    Thanks!

  • danielle4nandanielle4nan

    Another question that I have would be what is the difference between the Income Statement's Unpaid claims and adjustment expense and the Income Statement's net claims and adjustment expense? Thanks again!

  • chrisboersmachrisboersma

    Remember the accountants are responsible for the Accounting Statement....

    Also, you must make a distinction between LIABILITIES and INCOME. Claim Liabilities measure the amount of expected future expenditures on claims already occurred. Claims Incurred = payments and changes in estimates for claims already incurred. Once goes on the INCOME STATEMENT (claims incurred). The other goes on the BALANCE SHEET (ASSET/LIABILITY).

    1) Are the claims incurred and adj. expenses in 60.20 showing the APV of unpaid claims
    I really wish the CAS provided a completed Annual Return for reference (instead of blank). A lot of the information found in the Annual Returns is public for federally registered insurers.

    Page 60.20 is an INCOME based report on "Total Claims Incurred" the Total "Net Incurred" maps to "Net Claims and Adjustment Expenses" on 20.30 (10).

    The exact nature of the "Investment Income" portion is unclear, but my understanding is that this would be recorded in "INVESTMENT OPERATIONS" so the equation above would be somewhat incomplete.
    2) For Fall 2017 Q14, the 2015 net claims liability figure was therefore also calculated to reflect CY2015 paids + change in APV of unpaid claims between 2015 and 2014?
    No. It was calculated as APV Claim Liabilities.
    net claim liabilities == premium liabilities == APV == Discounted PV + PfAD.

    Liabilities ARE aggregates. Income is FLOW.

    3) Does the pure APV of unpaid claims appear in the annual return in any section?

    60.30 -- > 20.20 (13) - Unpaid Claims and Adjustment Expenses.
    although the management team could choose a HIGHER (or non-materially lower) value to report on the balance sheet.

  • danielle4nandanielle4nan

    Thank you Chris. Much clearer for me now. It would help if the CAS specified the 60.20 tab to be included in the Annual Return materials students are responsible for. Agreed that it be much easier to following the return had the CAS released a hypothetical example.

    I'm getting more comfortable with Fall 2017 Q 14. The net claims liabilities from the table represents the APV of unpaid claims (balance sheet statement item, from 60.30 exhibit), yet we are asked to calculate net income which requires the income statement net claims and adjustment expense (= CY paids + changes in balance sheet APV of unpaid claims, from 60.20 exhibit).
    Is that correct?

  • ckevin2202ckevin2202

    I have a question on the calculation of NEP with quota share reinsurance.
    My understanding is that:
    NEP = NWP + delta(UEP)
    NWP = Direct + Assumed - Ceded
    Why do we multiply the quota share at the NEP level and not the NWP?
    i..e
    NEP = (NWP + delta(UEP))*(1-quota share) NOT
    NEP = (NWP x (1-quota share)) + delta (UEP) ?

  • grahamgraham

    You have to be careful about gross and net. In your formulas above, you're trying to apply the cession% to net values, but that's not correct. The cession% is applied to gross values. According to the examiner's report solution.

    • NEP = (GWP + delta(GUEP))*(1-cession%)
    • (100 + 80 - 90) x 75%
    • = 67.5

    So maybe what you're asking is why the cession% needs to be applied to GUEP? (Instead of just applying it to GWP?) If so, the general rule is that whenever you're working with quota-share insurance, the cession% must be applied to any gross value (GWP, GEP, GUEP, gross loss) to get the corresponding net value.

    If I haven't interpreted your question correctly, please let me know.

Sign In or Register to comment.