SA3 tutorial 2 handout Q4

[LastHurdles]

When calculating insurance profit why do we allow for investment return rather than just the investment income (which is 5% of the assets held at the start of the year)?

If I wanted to calculate an investment return ratio what would the numerator and denominator be?

This is a general question- should earned premium be net of DAC or gross? The core readin seems to specify earned premium as gross of DAC. Sometimes questions say general expenses is eg 5% earned premium so it isn't clear to me whether this earned premium gross or net of DAC and I'm sure I've solutions not consistently using one or the other

Finally, in this question the loss ratios quoted are assumed to be gross of acquisition cost. Should I assume this is the case all the time unless specifically stated otherwise?

Thanks!

 

[Katherine Young]

When calculating insurance profit why do we allow for investment return rather than just the investment income (which is 5% of the assets held at the start of the year)?

That's the generally accepted account principle. Unrealised gains (and realised gains, and income) generally all make it into the accounts these days. See Chapter 3 page 7 and Chapter 9 page 2.

If I wanted to calculate an investment return ratio what would the numerator and denominator be?

investment return / assets held

Normally, as I say, the numerator would include gains. The denominator is normally calculated as the average of the assets at the start and end of the year - but if they tell you to do something else in the exam (as with this question), just do as you're told.

This is a general question- should earned premium be net of DAC or gross? The core reading seems to specify earned premium as gross of DAC.

You can show EP either gross or net of DAC. If you show it gross, you'll need a line for "increase in DAC" further down your Revenue Account. If you show it net, then you shouldn't have a separate line for DAC later on.

Sometimes questions say general expenses is eg 5% earned premium so it isn't clear to me whether this earned premium gross or net of DAC.

In this context, I'd use EP gross of DAC (because DAC is purely something that the accountants let us do, there's no reason that expenses would be affected by an accounting concept.

I'm sure I've solutions not consistently using one or the other

I can't think of a question where they've said expenses = x% of EP net of DAC. Difficult to comment unless you can give me an example?

Good luck! Hopefully this really is your "Last Hurdle"!

 

[LastHurdles]

Thank you for the response Katherine!