Which Surplus formula to use (Fall 2017 #10)

Is there a good way to know when we should not use the assets - liabilities formula to calculate the surplus? I tried to use it for Fall 2017 #10 but the solution says I didn't have enough info to calculate the liabilities, but doesn't specify what was missing. How do I know whether they have omitted something intentionally vs omitting it because it can be assumed 0?

Comments

  • edited January 31

    That is actually a very good question because it looks like you're given several liability components. The examiner's report gave a very, VERY detailed explanation so I'm guessing the scores on this question were low. And like you said, they specifically said that some people tried the assets-liabilities approach.

    The biggest tip-off that they wanted you to use this formula:

    • (surplus) CY = (surplus) CY-1 + (NI) CY + (direct charges to surplus) CY

    is that they gave you surplus for 2015 and the only blank entry in their table was surplus for 2016. That means surplus from 2015 is likely your best starting point.

    The other tip-off is that they provided 2 years worth of information for everything: 2016 and 2015. If they had wanted you to calculate assets-liabilities, you really only need 2016 information. Here, there were items where you need to change from 2015 to 2016, like the change in DTA.

    Note they also provided information you wouldn't need if you were trying to calculate liabilities, for example earned premium. That's an income statement line item, which is part of what you need to calculate (NI). It's true they might give you information you don't need to test whether you know you don't need it, so that's not always a foolproof way of knowing what to do.

    Also, the investment information on lines G, H, I in the statement of the problem are exactly what you need to calculate investment income as part of NI.

    In any case, I think this was a hard problem so it's good for learning. If you can get the web-based version of this problem consistently correct then you're doing well. See BattleQuiz 4 in the Odomirok.8-9-IS wiki article. Here's the link to that section that has a few further details on how to solve this problem:

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