blanchard reins note

[JasonScandopolous]

Quick question about the Income Statement in the 4th scenario ("Provide Surplus Relief") - why are they showing the "ceding commission" as an expense on the income statement? Was this a mistake, and they meant "commission" as they did in the 1st scenario?

[MountainBeach]

This paper drives me nuts. It has a bunch of info, but not enough documentation to pull it all together. There should be a column with the calculations to show where the values are coming from.

I think what he did was start with the original commission, and then reduce that expense for the benefit gained from the ceding commission.
Original commission (expenses) = WP of 1000 * 0.20 = 200
After reinsurance purchase: WP of 1000 * 0.20 minus 0.2 X ceded premium = 1000 * 0.2 - 0.2 * (1/2 * 1000) = 200 - 100 = 100.
It's just coincidence that the result is the same as the value of the ceding commission.

I have some other questions about this paper, though, if anyone has some insight:

1a. Where on my NAIC/SAP Balance Sheet blank do I find Ceded Agents Balances (listed as a liability in Blanchard's examples)? Anyone got a line number on that? Is it rolled into something else? Maybe it's just late and I'm going blind from studying too much, but I cannot find it.

1b. Where in the syllabus do we learn how to account for them (written rules, not just their mysterious appearance in this paper)?
He never tells us how that Ceded Agents Balances entry should be calculated, but it appears to be Agent Balances * (ceded WP / Gross WP) in exhibit 1.


2. Is it customary for a reinsurance treaty to cede not only some amount of WP, but also some Agent Balances? On the old exam 6 I don't remember calculating anythng other than a % of WP as the purchase cost of the reinsurance, for example, in a Quota Share treaty. We would reduce the cash asset by an amount equal to QS% * Gross WP. In this paper it looks like we not only hand over some combo of cash and cash extracted from the value of the bonds, but also promise to hand over a % of Agent Balance when they are finally paid. Feels like giving a "tip" to the reinsurer. The Agent Balances are part of WP; we got part in cash, and we are still waiting for some to show up, but it's all already WP, or am I missing something here? It seems like double-dipping.


2. He never tells us whether this whole paper is GAAP or SAP. I've come to the conclusion that it's SAP because he's using offsetting of the reserve accounts; that's not allowed in GAAP. Really, anytime we are handed accounting rules it should be stated at the top whether it's SAP, GAAP, International, Tax, etc. basis.


3. If anyone has a few minutes: Take a look at Problem #29 from the Fall 2010 old Exam 6. It's straight off this paper, and similar to Exhibit 4 (provide surplus relief). If this whole paper is SAP, and the outline of Balance Sheet and Income Statement given in the problem are SAP (just like this reading), why did both of the model answers use GAAP? Why can't we see a model answer with SAP for this type of problem, since "The purpose of this study note is to educate actuaries on certain basic reinsurance accounting topics that may be omitted in other syllabus readings." Is it quicker to do this problem via GAAP and pretend that we don't recognize that it's from the Blanchard paper?


4. I cannot figure out how the investment income was calculated in Exhibit 1 on page 2. It's supposed to be 5% of (cash + bonds) according to the details on page 1. The amount shown is 113; I get 132.5. The "with" reinsurace column comes out OK; 139 = 0.5(2662 + 113). So I cannot figure out how to calc the "with" asset value of the bonds. grrrrrrr. Same problem in Exhibit 4; the change in the assets doesn't match what I think would be the result after reflecting the ceding commission and the purchase price of the treaty.


Thank you in advance for any insight on the above items!

[gitmichaels]

Originally Posted by MountainBeach

2. He never tells us whether this whole paper is GAAP or SAP. I've come to the conclusion that it's SAP because he's using offsetting of the reserve accounts; that's not allowed in GAAP. Really, anytime we are handed accounting rules it should be stated at the top whether it's SAP, GAAP, International, Tax, etc. basis.

I have a question about this too. In his section 5. Facilitate withdrawal from a market segment, he has a bullet saying "a deferred acquisition cost asset exists under the current accounting paradigm." That means we should be looking at GAAP here. When you say he's using "offsetting of reserves," it's not all that clear, because although he does show a net value, he also shows the gross and ceded values separately, which could mean the ceded values are technically a contra-liability.

Overall, I mainly just agree that this is confusing and he could definitely be more clear about what type of accounting he's using.

[Hiu]

Just see the post. I've just tried to follow the 4 cases in the Excel. The same feeling as you.
http://www.actuarialoutpost.com/actu...d.php?t=226675

[Daniel]

Originally Posted by MountainBeach

This paper drives me nuts. It has a bunch of info, but not enough documentation to pull it all together. There should be a column with the calculations to show where the values are coming from.

I think what he did was start with the original commission, and then reduce that expense for the benefit gained from the ceding commission.
Original commission (expenses) = WP of 1000 * 0.20 = 200
After reinsurance purchase: WP of 1000 * 0.20 minus 0.2 X ceded premium = 1000 * 0.2 - 0.2 * (1/2 * 1000) = 200 - 100 = 100.
It's just coincidence that the result is the same as the value of the ceding commission.

I have some other questions about this paper, though, if anyone has some insight:

1a. Where on my NAIC/SAP Balance Sheet blank do I find Ceded Agents Balances (listed as a liability in Blanchard's examples)? Anyone got a line number on that? Is it rolled into something else? Maybe it's just late and I'm going blind from studying too much, but I cannot find it.

1b. Where in the syllabus do we learn how to account for them (written rules, not just their mysterious appearance in this paper)?
He never tells us how that Ceded Agents Balances entry should be calculated, but it appears to be Agent Balances * (ceded WP / Gross WP) in exhibit 1.


2. Is it customary for a reinsurance treaty to cede not only some amount of WP, but also some Agent Balances? On the old exam 6 I don't remember calculating anythng other than a % of WP as the purchase cost of the reinsurance, for example, in a Quota Share treaty. We would reduce the cash asset by an amount equal to QS% * Gross WP. In this paper it looks like we not only hand over some combo of cash and cash extracted from the value of the bonds, but also promise to hand over a % of Agent Balance when they are finally paid. Feels like giving a "tip" to the reinsurer. The Agent Balances are part of WP; we got part in cash, and we are still waiting for some to show up, but it's all already WP, or am I missing something here? It seems like double-dipping.


2. He never tells us whether this whole paper is GAAP or SAP. I've come to the conclusion that it's SAP because he's using offsetting of the reserve accounts; that's not allowed in GAAP. Really, anytime we are handed accounting rules it should be stated at the top whether it's SAP, GAAP, International, Tax, etc. basis.


3. If anyone has a few minutes: Take a look at Problem #29 from the Fall 2010 old Exam 6. It's straight off this paper, and similar to Exhibit 4 (provide surplus relief). If this whole paper is SAP, and the outline of Balance Sheet and Income Statement given in the problem are SAP (just like this reading), why did both of the model answers use GAAP? Why can't we see a model answer with SAP for this type of problem, since "The purpose of this study note is to educate actuaries on certain basic reinsurance accounting topics that may be omitted in other syllabus readings." Is it quicker to do this problem via GAAP and pretend that we don't recognize that it's from the Blanchard paper?


4. I cannot figure out how the investment income was calculated in Exhibit 1 on page 2. It's supposed to be 5% of (cash + bonds) according to the details on page 1. The amount shown is 113; I get 132.5. The "with" reinsurace column comes out OK; 139 = 0.5(2662 + 113). So I cannot figure out how to calc the "with" asset value of the bonds. grrrrrrr. Same problem in Exhibit 4; the change in the assets doesn't match what I think would be the result after reflecting the ceding commission and the purchase price of the treaty.


Thank you in advance for any insight on the above items!

5.75 points (2011 exam) came out from this confusing paper. Over half of the candicates lost at least half points here. Concepts tested were easy. We are supposed to figure out 'basic concepts' from confusing facts.

Both paper and problem did not give the reinsurer's attachment point, which was required to calculate the net retend Cat loss for the ceding.

[Treat.E.Wording]

Originally Posted by MountainBeach

This paper drives me nuts. It has a bunch of info, but not enough documentation to pull it all together. There should be a column with the calculations to show where the values are coming from.

I think what he did was start with the original commission, and then reduce that expense for the benefit gained from the ceding commission.
Original commission (expenses) = WP of 1000 * 0.20 = 200
After reinsurance purchase: WP of 1000 * 0.20 minus 0.2 X ceded premium = 1000 * 0.2 - 0.2 * (1/2 * 1000) = 200 - 100 = 100.
It's just coincidence that the result is the same as the value of the ceding commission.

I have some other questions about this paper, though, if anyone has some insight:

1a. Where on my NAIC/SAP Balance Sheet blank do I find Ceded Agents Balances (listed as a liability in Blanchard's examples)? Anyone got a line number on that? Is it rolled into something else? Maybe it's just late and I'm going blind from studying too much, but I cannot find it.

1b. Where in the syllabus do we learn how to account for them (written rules, not just their mysterious appearance in this paper)?
He never tells us how that Ceded Agents Balances entry should be calculated, but it appears to be Agent Balances * (ceded WP / Gross WP) in exhibit 1.


2. Is it customary for a reinsurance treaty to cede not only some amount of WP, but also some Agent Balances? On the old exam 6 I don't remember calculating anythng other than a % of WP as the purchase cost of the reinsurance, for example, in a Quota Share treaty. We would reduce the cash asset by an amount equal to QS% * Gross WP. In this paper it looks like we not only hand over some combo of cash and cash extracted from the value of the bonds, but also promise to hand over a % of Agent Balance when they are finally paid. Feels like giving a "tip" to the reinsurer. The Agent Balances are part of WP; we got part in cash, and we are still waiting for some to show up, but it's all already WP, or am I missing something here? It seems like double-dipping.


2. He never tells us whether this whole paper is GAAP or SAP. I've come to the conclusion that it's SAP because he's using offsetting of the reserve accounts; that's not allowed in GAAP. Really, anytime we are handed accounting rules it should be stated at the top whether it's SAP, GAAP, International, Tax, etc. basis.


3. If anyone has a few minutes: Take a look at Problem #29 from the Fall 2010 old Exam 6. It's straight off this paper, and similar to Exhibit 4 (provide surplus relief). If this whole paper is SAP, and the outline of Balance Sheet and Income Statement given in the problem are SAP (just like this reading), why did both of the model answers use GAAP? Why can't we see a model answer with SAP for this type of problem, since "The purpose of this study note is to educate actuaries on certain basic reinsurance accounting topics that may be omitted in other syllabus readings." Is it quicker to do this problem via GAAP and pretend that we don't recognize that it's from the Blanchard paper?


4. I cannot figure out how the investment income was calculated in Exhibit 1 on page 2. It's supposed to be 5% of (cash + bonds) according to the details on page 1. The amount shown is 113; I get 132.5. The "with" reinsurace column comes out OK; 139 = 0.5(2662 + 113). So I cannot figure out how to calc the "with" asset value of the bonds. grrrrrrr. Same problem in Exhibit 4; the change in the assets doesn't match what I think would be the result after reflecting the ceding commission and the purchase price of the treaty.


Thank you in advance for any insight on the above items!

For #4, the $113 invinc is an error/typo. It s/b $133, as you thought. Not that in the invinc analysis for exhibit 1 the author states that the net invinc was "little changed. And the same assets in exhibit 2 earn invinc of $133. So I figure it was just a typo that didn't get caught during the proof reading.