At 02:50 PM 4/18/1998 -0700, you wrote:
>1. Butsic Interest p.79-81 Questions 9 and 12. (Question 18 on the 1995
exam and
>Question 3 on the 1997 exam); If the risk adjustment equals e(R-i) then
how is the risk
>adjustment independent of the risk free rate, i?
The paper assumes that R moves in parallel to i so that (R-i) is basically a
constant. Since e is also assumed to be a constant, the whole expression
remains constant.
>
>6. FASB, p.347 Question 1 (Question 7 on the 1994 exam) Should the answer
not be E (1,3)
>since transactions need to have both timing and underwriting risks?
On the 1994 exam that I received from the CAS, the answer is (A). This says
that "Transactions only involving underwriting risk" does not qualify but
options 2, retroactive reinsurance, and 3, Loss Portfolio Transfers (LPTs),
do qualify. This question puzzled me since the FASB paper does not appear
to address LPTs specifically. Paragraph 9 of the FASB comes close to
disqualifying LPTs but stops just short by referencing Paragraph 11.
Paragraph 11 says that "if ... not exposed to reasonable possibility of
significant loss, the ceding enterprise shall be considered indemnified ...
only if substantially all of the insurance risk relating to the reinsured
portions of the underlying insurance contracts has been assumed by the
reinsurer." Given that LPTs move the entire insurance risk of the
underlying contracts, this would appear to qualify.
As additional evidence, under "Reporting of Reinsurance Transactions" on
page 22-10 of the NAIC Accounting Practices article, it states that "Loss
Portfolio transactions are to be accounted for as retroactive reinsurance
which is discussed earlier in this chapter."
>
>Thanks!
>
>Cara and Andrea
>
Doesn't this stuff just want to make your head explode?
Wayne