2014.Spring 24
For part (a), the examiner report stated that % of net income is not a valid option for materiality standard. However, this option is listed on the study sheet. I would like to clarify whether % of net income is a valid option.
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For part (a), the examiner report stated that % of net income is not a valid option for materiality standard. However, this option is listed on the study sheet. I would like to clarify whether % of net income is a valid option.
Comments
I believe the examiners' report is incorrect. A percent of income could be a valid option for a materiality standard in the right circumstances.
Choosing a percentage of net income as a materiality threshold reflects an assessment based on the insurer's profitability. Investors, regulators, and rating agencies may view net income as an indicator for the insurer's financial health so it isn't accurate for the examiners' report to state that net income is not of interest to intended users of the SAO.
Having said that however, there are usually other valid options such as a percentage of surplus, or percentage of reserves, or amount that would trigger the next RBC action level. If you want to be safe, just use one of the others if you have the necessary information.