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Definition
| 1. The income for an accounting period determined by the application of a particular set of accounting rules to an organizaton's financial events |
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| 2. The change in a company's net worth during a particular period. |
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| 3. A model stating that a company's dividend policy has two parameters: the target payout ratio and the speed at which current dividends adjust to the target. |
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| 4. The proportion of a company's earnings or net income paid out as dividends to shareholders |
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| 1. Describe how insurers' income is measured. |
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Definition
| 1. An insurer's income is measured as the increase in net worth that a co generates during a specific period |
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| 2. Explain how a co's income measurement rules and allocation methods complicate the measurement of income. |
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Definition
| 2. A co's income measurment rules must address the issue of how to allocate changes in the value of goods or services to arbitrary periods. |
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Term
| 3. Describe how accounting income and economic income differ. |
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Definition
| 3. Accounting income is the income for an accounting period determined by the application of a particular set of accounting rules to an organization's financial events. Economic income differs from accounting income because it depends on the mkt effects of the firm's economic activities and not just on the accounting income measurement rules that are used. |
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Term
| 4. Contrast the focus of genererally accepted accounting principles (GAAP) and statutory accounting principles (SAP) |
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Definition
| 4. Treatment of income according to GAAP is based on measuring the co's as a going concern. Treatment of income according to (SAP) is used for solvency regulation and is based on rules that assume the co will be liquidated. |
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Term
| 5. Id difficulties that may occur in guaging the true value of a co. when using only accounting income. |
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Definition
5. The foolowing difficulties may occur when guaging the true value of a co using only accounting income:
(a) Accounting stmts cannon accurately measure value changes
(b) Accounting income measurment can result in an artifical inflation of income figures. |
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| 6. List the four basic measurement statndards emphasized by accounting |
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Definition
6. four basic measurement standards emphasized by accounting:
1. Relevance
2. Verification
3. Freedom from bias
4. Quantifiability |
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Term
| 7. Contrast the book value of a co with the mkt value of a co and describe how each is calculated. |
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Definition
7. The value of a co per its accounting records (its book value) is its value based on accounting income, calculated as the difference between revenues and costs (including taxes).
The value of a co from the perspective of shareholders (its market value) is based on economic income and equals teh dividends they receive plus changes in the market value of their shares. |
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| 8. Describe the five components of an insurer's income |
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Definition
8. The following are five components of an insurer's income:
(1) Underwriting gain (UG): Occurs if premiums earned in an accounting period exceed losses incurred (included LAE) and underwriting expenses incurred,. |
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| 9. List two main sources of investable income for insurers. |
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Definition
9. The following are two main sources of investable funds for insurers:
(a) Capital and policyholders' surplus
(b) Policyholder supplied funds |
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Term
| 10. Explain how it is possible for an insurer to maintain positive cash flows withiout earning a profit on underwriting |
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Definition
| 10. It is possible for an insurer to maintain positive cash flows without earning a profit on underwriting because of timing differences between cash receipts and disbursements and between revenue and expense recognition. |
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Term
| 11. Id factors that limit an insurer's ability to raise its insurance leverage ratio and continue to increase the new business it writes. |
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Definition
11. The following factors limit an insurer's ability to raise its insurance elverage ratio and continue to increase the new business it writes:
(a) The immediate recognition of underwriting expenses and deferral of revenues under statutory accounting reduces statutory net worth
(b) Expected decline in profit margin as new business is written
(c) Physical requirements involved in udnerwrting and otherwise servicing new business. |
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Term
| 12. Describe the effect of high inflation and interest rates on insurer portfolio mgmt |
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Definition
| 12. High inflation and interest rates adversely affect insurer portfolio mgmt by increasing underwriting cash needs and depressing the mkt values of existing bonds and mortgages. |
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Term
| 13. Describe the IRS definition of an insurer for federal tax purposes |
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Definition
| 13. The IRS definition of an insurer for federal tax purposes requires a co to issue insurance or annuity contracts, or reinsure risk underwritten by insurance co's as more than 50 percent of its business during the taxable year. Once a co meets the definition of an insurer, it must determine whether it is a life insurer or a nonlife insurer. |
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Term
| 14. List the activities that the Internal Revenue Code (IRC) acknowledges as insurance activities |
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Definition
14. The following activities are generally acknowleged as insurance activities:
(a) Those that shift a risk of loss from an insured to an insurer (transfer)
(b) Those that distribute risk among many insureds (sharing)
(c) Those that involve an insurance contract (distribution by contract) |
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| 15. List the genral tax-rule areas applied to property-casualty insurers and noninsurers |
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Definition
| 15.The general tax rule areas applied to property-casualty insurers and noninsurers include tax rates, depreciation, tax credits and carryovers, and employee benefits |
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Term
| 16. Id differences in the tax treatment of income for property-casualty insurers and noninsurers. |
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Definition
16. The following are differences in the tax treatment of income for property-casualty insurers and noninsurers:
(a) The ability of a property-casualty insurer to deduct the estimated amt of future liabilities regarding losses that have occurred.
(b) The amts of future obligations reported on the property-casualty insurer's Annual Stmt must be discounted to present value for income tax purposes. |
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Term
| 17. Id the event that triggers the deduction of estimates for unopaid losses for both reported and incurred but not reported losses. |
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Definition
| 17. The occurrence of the loss is the triggering event for the deduction of estimates for unpaid losses for both reported and incurred but not reported losses. |
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Term
| 18. List the two factors used as a basis for the industry discount rate published by the IRS |
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Definition
18. The following two factors are used as a basis for the industry discount rate:
(1) the interest rate that is determined annually by the IRS
(2) Loss and adjustment expense payment patterns. |
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Term
| 19. Id state taxes commonly levied on insurers |
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Definition
19. In addition to income taxes, the following are state taxes commonly levied on insurers:
(a) gross premium tax
(b) fire marshal tax
(c) Fire Department Tax
(d) Guaranty Fund
(e) Workers Compensation Funds |
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Term
| 20. Id how a co might use after-tax income |
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Definition
20. Teh after-tax income of a co may be used for the following purposes:
(1) to purchase assets to help it expand its operations
(2) TO pay down debt
(3) To invest in external investment opportunities
(4) To pay out to the owners in the form of dividends |
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Term
| 21. Constrast dividend policy decision making as a financing decision and as an investment decision. |
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Definition
| 21. Companie sthat can efficiently secure additional equity capital should view dividend policy as a financing decision; otherwise, they should view it as an investment decision. If dividend policy is a financing decision, co's are not forced to forgo investment projects to pay dividends. If it is an investment decision, paying a dividend signals that mgmt has not ID'd a sufficient number of opportunities on which the expected rate of return is at least equal to the co's own cost of capital to justify making external investments instead of paying dividends. |
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| 22. Id a popular reason for increasing cash dividend pmts to stockholders. |
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Definition
| 22. A popular reason for increasing cash dividend pmts to stockholders is mgmts belief that higher dividends will create higher mkt prices for the co's shares. |
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| 23. List two common alternatives to dividends as a way to distribute income to co owners. |
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Definition
23. two common alternatives to dividends as a way to distribute income to co owners are:
(1) Repurchasing corporate stock
(2) Acquiring other co's |
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Term
| 24. Explain how policyholder dividends exhibit elements of both pricing adjustments and earnings distributions |
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Definition
24. Policyholder dividends exhibit elements of both pricing adjustments and earnings distributions. For a stock insurer, a policyholder dividend should be regarded as an adjustment in the price of insurance, reflected in the practice of deducting policyholder dividends when determining the co's net underwriting gain, its taxable income, and its loss ratio and combined ratio.
Because a mtual insurer does not have shareholders, the policyholder dividends can represent both a price adjustment factor and a dividend (earnings distribution). However, insurance accoutning and tax accounting both treat dividends as an adjustment in the price of insurance. |
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