spring 2015 #13

stas

why in this question when they calculate pre-tax profit,
they don't subtract change in Reserves, or change in Agents' balances?

does pre-tax profit = uw income?

graham

Let's ignore investment income since your question is about Step 1 of my solution.

The way I would think about this is:

• pre-tax profit = money in MINUS money out
• for an insurance company, that means earned premiums MINUS losses & expenses

Now, the losses and expenses for that calendar year already include incurred losses, which would include any changes in reserves for prior accident years. That's why changes in reserves are not explicitly included. (Their inclusion is implicit.)

For Agents' Balances, it's the same idea. This amount is already included in earned premium. (This particular amount is just telling you how much premium the agent owes to the insurer.) They were trying to trick you. When you're given so much information in an exam question, it's hard to know what should be included and what shouldn't. The only way to learn it is to practice, practice, practice, like you are doing!

peteabbate

The examiner's report for this question lists the following argument against:

Short-tail lines may require more surplus

At the risk of sounding dumb, isn't it the long-tail lines that require more surplus?

graham

I believe you are asking about 2015.Fall Q13. A short-tail line like homeowners may be exposed to catastrophe and may need to quickly draw on surplus to supplement its reserves.

In contrast a long-tail line, while possibly requiring higher reserves on a per claim basis, would have a longer time frame to absorb any adverse claim development and might not need to rely on its surplus position to as great an extent.

Note that 2015.Spring Q13 asked essentially the same question and one of the "against" answers was similar but they didn't specify whether it was short-tail or long-tail that should be given a greater allocation. All the examiner's report said was:

• same treatment despite differences between short-tailed and long-tailed lines

mec06e

to calculate pre-tax profit/loss why do we subtract out taxes, licenses & fees

isn't that making the profit/loss post-tax?

Staff - AC

The tax in TLF is the premium tax, which is a kind of expense. The calculated profit is still pre-income-tax.

mec06e

thanks that makes sense

Staff - AC

Sure, good luck.

lovehuayu

For agent balance here, why it is not added in Other Income? Since other income = agent's balance charged off + service fee + aggregate write-in. For pre-tax profit will not have agent balance part??

Staff - AC

It is only the agents' balances charged off or recovered that is added to Other Income. The given was agents' balances (not charged off or recovered).

mec06e

I was just reviewing the excel problems you have put together for IEE and there is one modeled off of this question:
for the general expenses why aren't you using 50% of them (with the assumption 50% are in pre-paid expenses)

like we did in Fall 2012 #2 for Total Profit
I'm not seeing what the difference is in the questions here

Staff - AC

2012.F.17 gave prepaid expenses, and it's an assumption that 50% of general expenses are prepaid. The excel problem itemized the expenses (instead of rolling them up as "prepaid"), so there is no longer a reason to consider the allocation of general expense to prepaid.

corysmithm

What exactly makes up finance charges not included in premium? Charges makes me think another expense.

Thanks

Staff - AC

These include charges (to the policyholder) for payment of premium in installments. They are a part of "Other Income".