Fall 2005 exam multiple choice question #2

[Act]

Does any one know why the answer is C (at least 62,500, but less than 70,000)? My answer is 75,000.

Here's the question:
Cal yr 2004 paid ulae = 25,000
Loss reserve at 12/31/2003 = 1,000,000
Cal yr 2004 loss payments = 250,000
Cal yr 2004 incurred losses = 500,000
IBNR % of loss reserve at 12/31/2004 = 20%
60% of a claim's ulae expense is paid when opened with the remaining expense paid at closing
Using the paid ulae to paid loss method, what is the ulae reserve as of 12/31/2004?

[.Godspeed.]

ULAE Reserve @ 12/31/2004
= (1 - % of ULAE paid to open claim)*Paid-to-Paid Ratio*Total Outstanding Loss Reserve @ 12/31/2004 + % of ULAE paid to open claim *Paid-to-Paid Ratio*IBNR Reserve @ 12/31/2004

= (1 -% of ULAE paid to open claim)*Paid-to-Paid Ratio*(Case Reserve + IBNR Reserve @ 12/31/2004) + % of ULAE paid to open claim *Paid-to-Paid Ratio*IBNR Reserve @ 12/31/2004

= (1 -% of ULAE paid to open claim)*Paid-to-Paid Ratio*Case Reserve @ 12/31/2004 + Paid-to-Paid Ratio*IBNR Reserve @ 12/31/2004

Also, CY Incurred = CY Paid + Change in Loss Reserves.

So, 500,000 = 250,000 + Change in Loss Reserves --> Change in Loss Reserves = 250,000.

Change in Loss Reserves = Loss Reserve @ 12/31/2004 - Loss Reserve @ 12/31/2003 = Loss Reserve @ 12/31/2004 - 1M = 250,000 --> Loss Reserve @ 12/31/2004 = 1.25M.

IBNR Reserve @ 12/31/2004 = .2 * 1.25M = 250,000.
Case Reserve @ 12/31/2004 = 1.25M - 250,000 = 1M.

ULAE Reserve @ 12/31/2004
= (1 -% of ULAE paid to open claim)*Paid-to-Paid Ratio*Case Reserve @ 12/31/2004 + Paid-to-Paid Ratio*IBNR Reserve @ 12/31/2004
= (1 - .6) * 25,000/250,000 * 1M + 25,000/250,000 * 250,000 = 65,000,

which agrees with the provided answer choice of C.

Hopefully that helps. I wish you the best on your test!

[Act]

Thanks .Godspeed.!

I thought IBNR was 20% of Case loss reserve not total loss reserve. The question is not clear enough.

[.Godspeed.]

I thought IBNR was 20% of Case loss reserve not total loss reserve. The question is not clear enough.

It is clear, though, from an exam point of view. Regardless of any standard conventions you may use on your job, on the exam, an accident year "loss reserve" = accident year "case reserve + IBNR reserve". However, if you feel that certain questions contain a degree of ambiguity, please state your assumptions.

[blueheaven]

journal entry

Hi, friends, I am a B. Com part-II student. The Principal give me a journal entry. Please help me to do this. On September 1, 2007, Chardon Corporation issued $300,000, 8%, 10-year bonds at face value. Interest is payable annually on September 1. Chardon’s year-end is December 31. Prepare the journal entries as follows; a) The accrual of interest on December 31, 2007, b) The payment of interest on September 1, 2008

[.Godspeed.]

Hi, friends, I am a B. Com part-II student. The Principal give me a journal entry. Please help me to do this. On September 1, 2007, Chardon Corporation issued $300,000, 8%, 10-year bonds at face value. Interest is payable annually on September 1. Chardon’s year-end is December 31. Prepare the journal entries as follows; a) The accrual of interest on December 31, 2007, b) The payment of interest on September 1, 2008

Your question is an accounting question, and does not have to do with the subject matter of this particular thread. However, maybe those who just took Exam 6, which covers some accounting, can still help.

IB or anyone else?

[Irish Blues]

The accounting on 6 is primarily related to reinsurance and premium accounting; it doesn't cover bonds and such - so this is probably an Exam 7 question.

[.Godspeed.]

The accounting on 6 is primarily related to reinsurance and premium accounting; it doesn't cover bonds and such - so this is probably an Exam 7 question.

Maybe, then, I'll be able to answer such a question in a few months! (Or if I dust off my old accounting binder and sift through that; we'll see.)