Question

Assume the following information  

1. Pinnacle Insurance Company is formed on 6/30/15 with $10MM of capital (surplus). (MM stands for “million”)
2. Pinnacle sells one commercial insurance policy on 9/1/15 that provides 12 months of coverage, with premium of $12MM.
3. A $4MM claim occurs in October and is paid on 11/30/15.
4. Pinnacle learns of another claim that occurred in late December 2015, which it estimates will amount to $3MM, and is subsequently paid in January 2016.
5. Expenses for the period 6/30 to 12/31/15 are $1.5MM
6. Pinnacle sells no more business in 2016.
7. $5 MM of new claims arise in 2016 of which $2.7 are paid in 2016 and the balance expected to be paid in 2017.
8. Expenses in 2016 are $2MM.i
9. Investment income in year 2015 is $1.0MM and in 2016 is $1.5MM

Answer the following questions

1. Earnings for 2015
2. Surplus at the end of 2015
3. Unearned Premium Reserve at the end of 2016
4. Claim Reserve at the end of 2016

Answer 1

Total Capital (Surplus ) is 10$ mm

Insurance Company issued a Policy with a Cover of 12 Month with a premium of 12$ mm on 1st Sep 2015 to 31st Aug 2016 as policy was issued on 1st Sep 2015 the premium has been Invoice on 2015 on accrual income basis.

Total Insurance claim in Year 2015 is 7$mm which is not totally paid but expenses has been incurred on 2015 and an Expenses of 1.5 $mm, which generated an investment income of 1$ mm.Therefore total Income for Year 2015 is 12$ mm - 8.5$mm which is 3.5$mm Plus 1$ mm, ie 4.5$mm Earning in 2015

a) Total Earning in 2015 is 4.5$ mm

b) Surplus at the end of 2015 is 10$ mm + 4.5$mm ie 14.5 $mm

c) unearned Premium Reserve at end 2015 is 12$ mm -7$mm ie 5$mm ( Reserve at the end of 2015 is that not 2016).

d) Claim Reserve at the end of 2016 is 2.3$ mm which is arise in 2016 but not paid in 2016 and kept as reserves for paying in 2017.

Total income on investment for both years are 2.5$mm therefore total capital (surplus ) for Year 2016 are gone negative because there was an expenses 3.5$mm so Capital surplus was 9$ mm.

Thanks ...