Purpose of financial reporting Answer: Communicate financial results to the stakeholders
Financial reports help stakeholders & regulators: Answer: 1. Track the company's financial performance
2. Compare the company's performance
3. Make informed financial decisions
Accountin...
Purpose of financial reporting Answer: Communicate financial results to the stakeholders
Financial reports help stakeholders & regulators: Answer: 1. Track the company's financial
performance
2. Compare the company's performance
3. Make informed financial decisions
Accounting principles prescribed by the State Regulators Answer: Statutory Accounting Principles
(SAP)
Main reason that SAP rules are conservative Answer: Main focus of the regulators is to ensure that
the policyholders will be protected
Primary users of Generally Accepted Accounting Principles (GAAP): Answer: Investors
Main objective of GAAP: Answer: Present results that closely measure the financial performance
during a period (by matching revenues and expenses)
Certain accounting rules can impact many aspects of the actuary's work: Answer: 1. Issuing a SAO
2. Pricing/Designing insurance products
3. Determining capital requirements
4. Evaluating risk transfer of reinsurance contracts
5. Assessing the reserve adequacy of non-insurers
,6. Assisting in the calculation of taxable income
7. Valuing insurers in M&A transactions
Describe the Balance Sheet Answer: Shows the assets and liabilities as of a certain point in time
Role of the actuary in the preparation of the balance sheet Answer: Help value the reserves -
uncertainty associated with the reserves
Describe the Income Statement Answer: Shows the financial results (income) earned during a
period
Actuary's major role in income statement Answer: Estimate the amount and timing of payments
Describe the Capital & Surplus exhibit Answer: Lists those transactions that impact surplus, but
which are not included in the income statement
Describe the Cash Flow Statement Answer: Shows the cash flows into and out of the firm
Different net/gross basis for SAP & GAAP Answer: SAP: net basis
GAAP: gross basis
Describe Notes to the Financial Statements Answer: Quantitative & qualitative disclosures
elaborating on elements from the statements
List a party that would take a "liquidation" view of insurer & one that would take a "going concern"
view: Answer: Liquidation: Regulators
Going concern: Investors
,Compare Fair Value to Historical Cost: Answer: Fair value: value it can be traded at in the open
market
Historical cost: purchase price - depreciation
List an advantage of Fair Value & one for Historical Cost Answer: Fair value: more accurate
(consistent with actual market value)
Historical cost: more reliable (objectively verifiable)
Compare principles to rules, including their respective advantages: Answer: Principle: a general
accounting approach that the users need to interpret
Rule: specific guidance that users need to follow
The rules are easier to interpret, but the principles are more adaptable to changes
Why are nonadmitted assets not included in the surplus calculation Answer: Non admitted assets
are not easily convertible to cash to satisfy the insurers liabilities
Bond face value Answer: amount to be paid in the final single payment
Upon purchase of the bond, record: Answer: the bond at actual cost
Upon purchase of the common stocks, record: Answer: the bond at cost + brokerage fees
After purchase of the common stocks, record: Answer: the bond at fair value
Preferred stocks are valued: Answer: similar to bonds (i.e. NAIC 1-6)
, List some differences between preferred stocks and common stocks: Answer: 1. Preferred stocks do
not offer voting rights
2. Preferred stocks guarantee dividends
3. Owners of preferred stocks have priority to those of common stocks to receive a return of their
investment during a liquidation
Valuation rules of different type of real estate: Answer: 1. Properties occupied by the company
(>50%): Depreciation - Encumbrances
2. Properties held for the production of income: Depreciated cost - Encumbrances
3. Properties held for sale: min (Depreciated cost, Fair value) - Encumbrances
Portion of agents balances that is nonadmitted Answer: Premium that is over 90 days overdue is
nonadmitted
Uncollected premiums & agents' balances Answer: Balances due before the financial statement
date
Deferred premiums Answer: Balances due after the financial statement date
Amounts recoverable from reinsurers includes: Answer: Just the balances due for the losses that
have been paid (the ceding company recognizes recoverables on it unpaid losses by holding the loss
reserves net of recoveries)
Define deferred tax asset (DTA) Answer: Future tax benefits that arise due to temporary differences
in income recognition between tax and statutory accounting
Two common sources of DTAs: Answer: 1. Loss reserves are discounted in tax accounting
2. Carryforward net operating losses
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