Spring 2019, #24, A Change in Tax vs. Tax Paid
Based on the solution, what is stated as the formula in the wiki for Change in Tax is used to calculate Reinsurer Tax and Primary Insurer Tax. Isn't setting the change in tax for the reinsurer/primary equal technically different than achieving equal tax paid for the two parties as asked for in the question?
Comments
The trick is that they said "tax dollars due to the commutation" and this is just a different way of saying "change in taxable income". So for this problem, it's basically the same thing because were are only concerned with the effects of the commutation.
Note that in this problem, you also had to calculate the tax whereas in my wiki example, you only had to calculate the taxable income. So this exam problem had one extra step where you had to multiply the taxable income for each company by their respective tax rates.
The examiner's report had the formulas for tax due to commutation backwards from the wiki article. The examiner's report formula for primary insurer's tax is tax rate * (commutation price - ceded discounted reserves), but the wiki says it is tax rate * (ceded discounted reserves - commutation price). Is this just the difference of the exam question phrasing it as "taxes paid" and the wiki phrasing it as "tax benefit" - since negative taxes paid would be a tax benefit?
Yes, that is correct.
Thank you!
Sure, good luck.