SAO Practice Answers 2019-Fall

Questions Similar to 2019-Fall

1. Describe the impact of under-reserving on a company's financial statements.
2. How does reinsurance affect a company's risk profile?
3. Explain the significance of using discounted versus nominal values in reserve calculations.
4. Discuss the implications of changes in actuarial assumptions on reserve estimates.
5. What are the potential consequences of a material error in the actuarial report for a company?

Answers

1. Under-reserving leads to an understatement of liabilities, resulting in an inflated profit in the short term. In the long term, it can lead to unexpected losses when the reserves prove insufficient to cover claims, impacting the company's financial stability.
2. Reinsurance transfers a portion of risk to another entity, reducing the potential loss the company might face from claims. It also impacts the company's capital requirements and can lead to improved solvency margins.
3. Discounted reserves reflect the present value of future obligations, accounting for the time value of money, leading to potentially lower reserve figures. Nominal values do not consider the time value of money, potentially resulting in a more conservative estimate of reserves.
4. Changing actuarial assumptions can significantly alter reserve estimates. More conservative assumptions might increase reserve levels, impacting profitability. Less conservative assumptions might decrease reserves, improving current profitability but potentially leading to underestimation of future liabilities.
5. A material error can lead to misstated financial statements, affecting decisions made by stakeholders. It might also require restatements of financials and can damage the company's reputation and credibility in the market.