2014 Fall - Question 12b

mary_mmary_m
edited September 2021 in NAIC.IRIS

For IRIS 2 part of the problem, it looks like they are using prior year surplus (80,400) in the denominator instead of the current one we got from part a) (60,160) but I believe for IRIS 2, we are supposed to use current surplus and not prior one. Could you please explain why we are using 80,400 for IRIS 2?
Thanks!

Comments

  • grahamgraham

    Sure! The reason is that the scenario they describe in part (b) is different from the scenario in part (a):

    • In part (a) they are asking you to calculate the surplus as of Dec 31, 2013 assuming no reinsurance.
    • In part (b), they are introducing reinsurance that's purchased on Jan 1, 2013. That means the surplus you calculated in part (a) for Dec 31, 2013 is no longer relevant.

    In particular, they tell you the surplus at Dec 31, 2013 under this new scenario is the Dec 31, 2012 surplus of 80,400 plus the amount of ceding commission. If the quota-share % is "x" then the $-value of the ceding commission is:

    • (ceding commission %) * DWP * (quota-share %)
    • = 32% * 300,000 * x

    So the surplus for Dec 31, 2013, assuming the reinsurance scenario is:

    • 80,400 + (32% * 300,000 * x)

    Then you solve for x and proceed to calculate IRIS 4 as shown in the solution. (Since x works out to be 10%, the new surplus under the reinsurance scenario comes out to 90,000, although the question doesn't specifically ask you for this value.)

  • ulyssesulysses

    There are already two threads on this problem, so I don't want to add a third one even though my question is on part a.

    Why is the net realized capital gain not part of the total gross investment income earned? Just by the naming of it, doesn't 'total gross II earned' include all of your investment income, and that includes net realized capital gain? It's also really frustrating because I've seen another exam problem (I can't remember which one) where the realized capital gain WAS part of the II earned, and we had to figure that out! (it wasn't an assumption stated in the problem)

  • Staff - ACStaff - AC

    You'll find the answer to this in the linked table in Odomirok.8-9-IS:

    https://battleacts6us.ca/wiki6us/Odomirok.8-9-IS#:~:text=out%20to%20JH!)-,item,(dividends%20to%20policyholders)%20%E2%80%93%20(fed/foreign%20taxes%20incurred)%20%C2%A03,-1%20SAP%20uses-,item,(dividends%20to%20policyholders)%20%E2%80%93%20(fed/foreign%20taxes%20incurred)%20%C2%A03,-1%20SAP%20uses "https://battleacts6us.ca/wiki6us/Odomirok.8-9-IS#:~:text=out to JH!)-,item,(dividends%20to%20policyholders)%20%E2%80%93%20(fed/foreign%20taxes%20incurred)%20%C2%A03,-1%20SAP%20uses")

    It highlights the distinction between investment income and investment gain. This is really a terminology issue.

  • charles7276charles7276

    why is the ceded UEPR used to calculate the surplus aid 186k? isn't some of that from the prior year which the reinsurance wouldn't apply to? i would've thought to take the difference between 186k and 31.2k.

  • grahamgraham

    The ceded UEPR (Unearned Premium Reserve) is used in calculating surplus aid because the quota share reinsurance agreement applies to all covered risks during its term, regardless of when the premiums were originally earned.

    So separating current and prior year's UEPR doesn't impact the calculation of surplus aid for assessing the insurer's reliance on reinsurance and its financial stability.

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