For this question, they provide "General expenses incurred" as an expense category. Shouldn't this type of expense be divided by earned premium? I'm thinking back to exam 5 where up-front expenses were related to WP but general expenses were related to EP.
Thanks!
Comments
There won't necessarily be a one-to-one correspondence between how quantities are treated between a rate indication and the annual statement since the purpose of each is different. The item "General expenses incurred" is taken directly from the IEE, Column 29.
If you're aware of the difference between cash and accrual accounting, GAAP accounting treats expenses on a cash basis. In other words, they are recognized when incurred. In contrast, statutory accounting treats premiums on an accrual basis, meaning premiums aren't recognized until they are earned. That means that under statutory accounting, revenues and expenses are not matched. Note that in a rate indication, however, we do try as much as possible to match premiums and losses.
The battlecard for this problem incorrectly states that it is an "Investment yield" problem rather than "2 year operating ratio" problem.
Thanks. It's corrected.
Hello,
I have a question on the exam report for this compared to Fall 2018 Q16. In Fall 2018 16, to get investment income gain we had to subtract the capital gains tax since the sum of investment income gain attributable to insurance transactions and Investment income attributable to capital and surplus supposedly already has realized capital gains included. This makes sense since in the IS section we learned investment income gain is investment income earned plus realized capital gains minus capital gains tax. So it is like (investment income gain attributable to insurance transactions) + (Investment income attributable to capital and surplus) = (investment income earned) + (realized capital gains). In IRIS ratio 5 we need investment income earned. Isn't it incorrect to just use (investment income gain attributable to insurance transactions) + (Investment income attributable to capital and surplus) to get investment income earned since this is including realized capital gains? I feel like this question needed to give us realized capital gains so that we can subtract it.
That's correct. The problem should have given you realized capital gains so you could subtract it. I've added a footnote to the BattleTable here: