2014.Fall #15, wiki
Hi. I am reading the wiki, where the Liabilities are calculated for this problem (2014.Fall #15). It says that letters of credit would be considered a liability. I couldn't find this in Odomirok. Is that mentioned somewhere? I understand it's zero in the problem, but I'm nervous that it could show up as a non-zero value next time. Thanks!
Comments
We adjusted the wiki solution to the problem and sent a shout out to you - thank you! No liability for letter of credit, just placed in the footnotes.
Would this be because the letter of credit is a guaranteed payment by the bank? Whereas funds held by the company may have to be returned?
Letter of credit triggers a payment by the insurer's bank, upon meeting the conditions of a certain liability. But until those conditions are met, it cannot be considered a liability. Funds held by company under reinsurance treaty is the collateral that the reinsurer gives the insurer. If the reinsurer remits all its obligations to the insurer in a timely fashion, then this collateral will ultimately be returned to the reinsurer. That's why it's a liability.
I also just noticed the paid losses recoverable from reinsurance is not listed on the admitted assets, but is in this solution
Where do you find paid losses recoverable from reinsurance not listed under admitted assets?
I would have thought it would be in the list under, Calculating the Admitted Assets
The solution is basically straightforward but there are lot of little details you have to remember:
how to calculate bond values - depends on the rating of the bond
recalling that the amortization period for goodwill is at most 10 years
DAC doesn't exist in SAP because SAP recognizes acquisition costs immediately (GAAP sets up an asset and amortizes the amount over the life of the
asset)
DTA must be netted out by subtracting DTL
Calculating the Admitted Assets section does not provide a list of the admitted assets.
is there an admitted asset list that I'm missing in the wiki articles?
No, I don't think so. I don't think there's such a list in the source text either.
I see that SAP does not include unpaid losses underneath the deductible for high deductible policies as a liability (only amounts above the deductible). Does GAAP? Or are these never included on the balance sheet?
Yes, GAAP would have treated this the same way. As the wiki notes, this was a "trick" in the problem. The item itself is nonsensical: if the loss is below the deductible level, then by definition, it is not the insurer' liability.
Ok, that makes sense. So it presents credit risk but not a liability under both SAP and GAAP.
Correct.