IRR question - 2004 Exam #31a

[WadotNChew]

Quick question regarding All10's solution to this exam problem. The part in question:

Premium is $1000, collected on 1-1. Allocation basis for Surplus is WP, Ratio of WP to Surplus is .5-1 One loss occurs one year after inception for $1000, it is paid one year after that.

What is the required surplus at 12/31/X? A co-worker and I are thinking it is either 0, because the policy is expired and because WP is the allocation basis, surplus is then released. OR that because it's still in force at 12/31, required surplus should remain at 2000.

All10, however, in their solution to the problem, puts the required surplus at 1000.

Which one of three of us is right? And why?

Any help on this would be appreciated.

[Da Bears!]

Originally Posted by WadotNChew

Quick question regarding All10's solution to this exam problem. The part in question:

Premium is $1000, collected on 1-1. Allocation basis for Surplus is WP, Ratio of WP to Surplus is .5-1 One loss occurs one year after inception for $1000, it is paid one year after that.

What is the required surplus at 12/31/X? A co-worker and I are thinking it is either 0, because the policy is expired and because WP is the allocation basis, surplus is then released. OR that because it's still in force at 12/31, required surplus should remain at 2000.

All10, however, in their solution to the problem, puts the required surplus at 1000.

Which one of three of us is right? And why?

Any help on this would be appreciated.

I don't have All10 on me at the moment, so I can't verify what they say. But it is definitely wrong. If surplus requirement is based on WP, then once the policy expires, all surplus requirements go away. The loss reserve at that moment would be 1000, so you would need 1000 in assets on hand. But the surplus requirement would be 0.

[frank_exams]

Originally Posted by WadotNChew

Quick question regarding All10's solution to this exam problem. The part in question:

Premium is $1000, collected on 1-1. Allocation basis for Surplus is WP, Ratio of WP to Surplus is .5-1 One loss occurs one year after inception for $1000, it is paid one year after that.

What is the required surplus at 12/31/X? A co-worker and I are thinking it is either 0, because the policy is expired and because WP is the allocation basis, surplus is then released. OR that because it's still in force at 12/31, required surplus should remain at 2000.

All10, however, in their solution to the problem, puts the required surplus at 1000.

Which one of three of us is right? And why?

Any help on this would be appreciated.

Surplus on 12/31/XX should indeed be 0. You should have Assets of $1,000 and an oustanding Liability of $1,000 in Loss Reserves. $1,000 - $1,000 = 0. The equity flows are correct.

Frank

[tometom]

In this problem would you agree that a reserve of $1000 isn't required at time 0?

It says the loss occurs 1 year from policy inception, why would you setup a reserve at time 0 if the loss didn't occur until time 1?

[tometom]

nevermind, I'm an idiot. in part b, I left off the UEPR and the TIA just labeled it Reserves. I should have looked at it harder before I posted.