2015 Spring #17

From pg. 329 of Odomirok, TBIL is given as:

Tax Basis Incurred Losses = Paid Losses + Change in Discounted Reserves
= Statutory Incurred Losses – Change in Reserve Discount

In the solution to Spring 2015 #17, the "change in reserve discount" is given as 550 x .05-500 x.08.

Should we consider the "change in reserve discount" Odomirok is referring to to be chg((1-DiscountFactor) x Reserves)? And the "change in discounted reserves" to be chg(DiscountFactor x Reserves)?

In this case, should the formula in the Wiki for TBIL = PL + chg(L^D) = IL – chg(L^D) be amended to clarify that these are different changes?

Comments

  • I figured out how these are equivalent! Thanks!
  • Awesome!

  • edited April 2021

    Is it just me or is the examiner report formula and solution wrong? They list that:

    • RTI = UW profit + 20% UEPR + Change in loss reserve discount + taxable investment income + realized gains

    but my understanding would be that:

    • RTI = UW profit + 20% UEPR - Stat Incurred Losses + Change in loss reserve discount + taxable investment income + realized gains

    i.e.,

    • -TBIL = -(Stat Incurred Losses - Change in loss reserve discount) = -((550-500) - (0.05 × 550 - 0.08 × 500)) = -62.5
      which calculated the other way would be,

    • -TBIL = -(Paid Loss + Change in discounted reserves) = -(0 + (550 x 0.95 - 500 x 0.92)) = -62.5

  • I believe the examiner's report is correct here. Take a look at my explanation for this problem in the wiki. Here's the direct link:

    Then let me know if you still want to discuss.

  • :D my bad, thx graham!

  • The examiner's report states that the dividends received from controlled companies shouldn't be included in investment income "per the paper." This seems reasonable enough, but I don't see it in Odomirok...can you confirm that this is still true?

    And while I was looking for that I noted that the proration applied to tax-exempt bonds (then 15%, now 25%) also applies to "dividends received from other corporate taxpayers." Is it correct to say that we'd treat dividends from non-controlled companies the same way we do the income from tax-exempt municipal bonds?

  • The "dividends received" part of this problem is outdated so you don't have to know how to do it. It was completely removed in the updated version of Odomirok. (2021.Spring is the first sitting with the updated version.) Note that this problem, as well as 2 others, are highlighted in orange in the BattleTable and in the BattleCards to indicate they are outdated.

    If you want to glance at how "dividends received" was treated in the past, here's a link to an old version of the Chapter 26 wiki article:

  • OK, thanks. (The wiki explicitly mentions that the AMTI part is outdated but doesn't mention the dividends, so I wasn't sure.)

  • Actually, now that I go back and look, I don't think it's listed/colored as outdated in the BattleCards? It shows up in Quiz 5. (It is marked as outdated due to AMT in the BattleTable.)

  • Thx, I've clarified this in the BattleTable footnote and in the wiki article, and marked the problem as (partially) outdated in the BattleCards.

  • Could you please let me know why we multiply 15% proration provision why calculating taxable investment income for tax-exempt bonds

  • The 15% proration provision is indeed old, and is now revised up to 25%. We updated the wiki footnote to this problem to reflect this. Thank you.

  • edited March 2023

    I have a question on this problem and how it relates to the IS section. The UW profit for that section is not just EP - incurred loss, it also subtracts LAE and other expenses. Is the IL notation in the tax section actually incurred loss, lae and other expenses? Also, this question did not give earned premium. Is interest on EP assumed to be included in the U/W profit that is provided?

  • edited March 2023

    UW income does include deductions for uw expenses, as stated in the IS section. The IL notation in the tax section includes loss and LAE. The fact that uw expense (and policyholder dividends) are not found in the TBI formula is an omission. Note that some old exam problems expected you to calculate tax without giving you uw expenses or policyholder dividends. That formula was made with those problems in mind.

    There is a brief note in the relevant section of the wiki about this:

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