This problem was not presented very well. They don't provide enough information for you to know how to deal with the non-admitted assets. See the excerpt below from the examiners' report:
Part (b) actually asked for total assets but to calculate surplus you must use only non-admitted assets. They don't tell you whether the assets listed are net or gross of admitted assets but the solution seems to imply they are net.
This is an example where it's good to include a short explanation of your assumptions regarding non-admitted assets so the grader knows you have thought about the relevant assumptions and understand there is an ambiguity in the question.
From (a) i understand the item "reserve for rate credits and retrospective adjustments based on experience" is not under UEP. Then, where should be it placed?
If it is a kind of liability, why it is not considered in part(b) calculation?
Would it have been acceptable for this problem to state the assumption that the Deferred Premiums, Agent's Balance were a non admitted asset. I thought I read somewhere else that the Deferred premium were non admitted.
skreitzer - Deferred Premiums, Agent's Balance is Asset item 15.1. There may be some rules about portions of it being non-admitted, but it is not non-admitted altogether.
Chapter 18 of the Odomirok text (Insurance Expense Exhibit) doesn't specifically address the item "reserve for rate credits..."
Chapter18 focuses on the allocation of expenses and profits rather than the classification and reporting of reserves. It seems reasonable however that the Reserve for Rate Credits and Retrospective Adjustments is likely treated as a separate item in the liabilities section of the balance sheet, rather than being rolled into other reserves like the Unearned Premium Reserve or Loss and Loss Adjustment Expense Reserves.
This separate treatment is consistent with the nature of the reserve, which is specifically related to retrospective adjustments and rate credits based on experience, separate from other reserves that cover unearned premiums or anticipated claims and claim adjustment expenses.
The issue is that the exam problem specifically states that you are given "All Assets & Liabilitities" so presumably the reserve for rate credits is embedded somewhere in these numbers but it isn't clear where. This exam problem may have errors or inconsistencies but this cannot be verified given that it isn't addressed in the source text.
Comments
This problem was not presented very well. They don't provide enough information for you to know how to deal with the non-admitted assets. See the excerpt below from the examiners' report:
Part (b) actually asked for total assets but to calculate surplus you must use only non-admitted assets. They don't tell you whether the assets listed are net or gross of admitted assets but the solution seems to imply they are net.
This is an example where it's good to include a short explanation of your assumptions regarding non-admitted assets so the grader knows you have thought about the relevant assumptions and understand there is an ambiguity in the question.
For part a, how is the UEPR calculated? I think there could be a calculation error in the solution.
UEPR is the sum of UEP <= 1 year and > 1 year, the two categories given in the problem. The solution is correct.
From (a) i understand the item "reserve for rate credits and retrospective adjustments based on experience" is not under UEP. Then, where should be it placed?
If it is a kind of liability, why it is not considered in part(b) calculation?
Would it have been acceptable for this problem to state the assumption that the Deferred Premiums, Agent's Balance were a non admitted asset. I thought I read somewhere else that the Deferred premium were non admitted.
skreitzer - Deferred Premiums, Agent's Balance is Asset item 15.1. There may be some rules about portions of it being non-admitted, but it is not non-admitted altogether.
jasonchw - I will get back to you on this.
Chapter 18 of the Odomirok text (Insurance Expense Exhibit) doesn't specifically address the item "reserve for rate credits..."
Chapter18 focuses on the allocation of expenses and profits rather than the classification and reporting of reserves. It seems reasonable however that the Reserve for Rate Credits and Retrospective Adjustments is likely treated as a separate item in the liabilities section of the balance sheet, rather than being rolled into other reserves like the Unearned Premium Reserve or Loss and Loss Adjustment Expense Reserves.
This separate treatment is consistent with the nature of the reserve, which is specifically related to retrospective adjustments and rate credits based on experience, separate from other reserves that cover unearned premiums or anticipated claims and claim adjustment expenses.
The issue is that the exam problem specifically states that you are given "All Assets & Liabilitities" so presumably the reserve for rate credits is embedded somewhere in these numbers but it isn't clear where. This exam problem may have errors or inconsistencies but this cannot be verified given that it isn't addressed in the source text.