RE: D'arcy trr

Brian Fannin ( bfannin@IDRWC.com )
Fri, 2 Apr 1999 09:11:55 -0500

For the record, there's no such thing as investable liabilities. A
liability is a claim on a company's assets by someone other than the owners.
Very sloppy use of terminology by the examiners. Also, liabilities include
unearned premium reserves as well as loss reserves - see Robbin model 1.
The return is a return on surplus- that's why surplus is in the denominator
of the equation. Surplus and equity are just two different ways of
computing the same thing, namely owner's equity. Equity, or GAAP equity is
calculated using GAAP accounting, which does things like spreading expenses
over the policy period, and recognizing certain assets. Surplus, or
statutory surplus, uses statutory accounting, which is sometimes but not
always, a more conservative estimate of assets and liabilities. This gets
worked over pretty well on Part 7.

-----Original Message-----
From: bill g [mailto:billg5@yahoo.com]
Sent: Tuesday, March 30, 1999 10:11 PM
To: study group 6
Subject: D'arcy trr

D'arcy gives the formula trr=(ia/s)*irr +(p/s)*upm;

Is trr, total rate of return properly considered a rate of return based
on owner's equity? or a return on surplus?

Well this formula is easy, but consider 2 old questions

1986. an insurer writes business with a ratio of INVESTIBLE LIABILITIES
to annual earned premium of 1.3,.....etc

the trick to solving this was to use
INVESTIBLE ASSETS (IA as required for trr) = INVESTIBLE
LIABILITIES + SURPLUS, or IA= (1.3P +S).

My question, anyone familiar with investible liabilities? Is this
referred to in page 546 of Foundations?

Also from 1990 a problem was given which stated loss reserves are equal
to written premium. The trick on that one was INVESTIBLE ASSETS= surplus
+ loss reserves
so IA = S +P by substitution for loss reserves.
Can anyone comment on these calculations for investible assets required
in the formula, or think of other variations?
thanks for your help.

Bill.

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