ACCOUNTING FOR OTHER ASEETS

Floor : A type of interest rate swap where the buyer receives an amount times the difference
between specific interest rate and the indeks interest rate.

Policy loan (certificate loan) as admitted asset : A loan made to policyowner and secured by a policy
cash surrender value (net cash value) as collateral. Policy loan consist of :
- A conventional policy loan : Made to a policyowner when he/she uses the policy the policy
as security for the loan.
- Automatic premium loan (APL) : Nonforfeiture option that alloes the insurer to pay overdue
premium on a policy by establishing a loan against the policy cash value.

Policy loan interest is reported separately from policy loan as a part of investment income on S.O..

Short Term Investment : Money Market Investment, Commercial Paper, Banker Acceptance,
Treasury Bills.

Bank Reconciliation ensures the reported amount accurately reflects the insurer cash balance. The
major factors that contribute to the difference in account balance :
- Outstanding Checks
- Unrecorded deposits
- Service charges
- Interest Income
- Nonsufficient fund (NFS) checks, that is the payor didn’t have enough money in its checking
account to pay the amount of check
- Error

Due Income (Expected, but not received yet) vs Accrued Income (already earned, but not received
yet). Premiums Due (General Insurance) vs Defereed and Uncollected Premium (Life Insurance) only
for modally (non annual payment).

Prepaid expenses are those expenditures that the insurer expect will provide a future value or
benefit (e.g. rents, subsciptions, service contract, and ony other fees/charge).

Reinsurance ceded :
- Amount recoverable from Reinsurers
- Commissions and Expenses Allowance Due (reinsurer share the expense)
- Experience Rating and Other Refunds Due, many reinsurer provide a partial premium refund
if the actual claims experience is better than the projected claims experience)

Deferred POlicy Acquisition Cost (DPAC/DAC), is an asset account allowed under US-GAAP to enable
an insurer to capitalize certain cost associated with a block of new products or new business and
amortize them over the premium paying period of traditional insurance product. Canadian showa in
reserve instead of aset.

Example of DAC (policy issue costs, product development cost, agent commissions)

Electronic Data Processing Equipment (EDP).

 ACCOUNTING FOR RESERVE

Most common type of reserve :

- Policy reserve (UPR and additional reserve [PV of future cost])
- Claim reserve

A released reserve is a policy reserve that was established in connection with an inforce policy but is
no longer required. Valuation method can be net level premium approach (NPV, GPV) or full
preliminary term method (US) or policy premium method (Canada).

Surplus strain (issue strain / NB strain) is the decrease in an insurer’s surplus caused by the high
first-year costs and the reserving requirements associated with new product. We can use
reinsurance to minimize this strain (by quota share).

On the other hand, surplus strain can be limited in statutory reserve using modified reserve
method, such as Commissioners Reserve Valuation Method (The first year reserve is assumed to be
0) .

NET GAAP RESERVE = GAAP POLICY RESERVE – DPAC

Policy reserve calculated for tax purposes is a ceiling on the insurer income tax deduction for
increases in reserves (but with interest rate assumption higher meaning that the tax is smaller than
asuumed).

Other type of reserve (All statutory exclude claim fluctuation reserve) :

- Claim fluctuation reserve (under both staututory and GAAP)
- Premium deficiency reserve
- Contingency reserve (Group contingency reserve, group annuity congtingerncy reserve,
participation in seperate account, mortality fluctuation reserve, contingency reserve for
large risk, special contingency reserve [caused by unforseen events])
- Aset fluctuation reserve (IMR, AVR [ consist of equity component and default component])
 ACCOUNTING FOR CAPITAL AND SURPLUS

Capital account (:
- Common stock
- Preferred stock
- Additional Paid-In Capital

Capital account does not include on mutual and fraternal because they do not issue stock, they raise
their funds through net gains from operation and by issuiing surplus note. So, their accounting
equation is :
A = L + Surplus

U.S. Statutory Accounting US GAAP

Gross Paid-In and Contributed Surplus Additional Paid-In Capital
Special surplus Retained Earning
Unassigned Surplus Ifrom N.I.) Retained Earning

Source of surplus :
- Internal source of capital and surplus (net gains from operation [policy benefits, commission,
operating expense, taxes, license, and fees] and gains from sale of invested aset, decrease
on non admitted aset , and decrease on reserve)
- External source of capital and surplus [ceding insurance risk to reinsurer, selling a line of
business or subsidiary, issuing stock, issuing surplus notes, changing corporate form,
receiving surplus from parent company, issuing bonds.

Unauthorized company : Reinsurer that may be licensed in other states, but unlicensed in the
reinsurer state of domicile. So, insurer establishes a specific account called liability for reinsurance in
unauthorized companies.

Type of reinsurance :
- YRT (Yearly renewable term) reinsurance
- Coinsurance
- Modified coinsurance
- Assumption reinsurance (selling line of business)

Insurance can issue :

- Stock
- Surplus notes (a long term, unsecured debt just like bond with non fixed interest)
- Bonds

Changing corporate form :

- Sell non strategic or unprofitable lines of business
- Merge with another insurer
- Form an alliance or joint venture with a strategic partner
- Demutualize (if a mutual insurer)

Special surplus has aside to (1) meet unforseen contingencies or (2) pay for certain extra ordinary
expenses. In Canada, to determine total regulatory capital,
Aset – Liabilities + deferred realized gain – deferred realized loss
 Accounting for Revenues

External factor that affecting premium income :

- Regulatory requirements
- Accounting standard
- Market
- Competitors
- Taxes
- Interest rates

Internal factor that affecting premium income :

- Product features
- Sales distribution system
- Investment policies
- Management vision