Question

An insurance company starts on 12/31/2017 with $600,000 in cash.  On 1/1/2018 it sells a one year policy (Policy A) for $250,000.  On 4/1/2018 it sells a one year policy (Policy B) for 200,000 (note: this means that three-quarters of Policy B will have “earned out” by the end of 2018.  On 1/1/2019 it sells Policy C for $200,000.  It stops writing policies after selling Policy C.

Investment Income

The company earns $30,000 of investment income in 2018.  It earns $40,000 of investment income in 2019.

Expenses

In 2018, $90,000 of underwriting expenses are incurred.  In 2019, $50,000 of underwriting expenses are incurred.

Losses

On 5/1/18, a $10,000 claim on Policy A is paid.

On 9/1/18, a $12,000 claim on Policy B is paid.

At 12/31/18, there case reserves of $25,000 for Policy A and $15,000 for Policy B.  There is IBNR of $100,000 for Policy A and $95,000 for Policy B.

On 3/1/19, a $22,000 claim is paid for Policy A.  

On 6/1/19, a $21,000 claim is paid for Policy B.

On 7/1/19 a $26,000 claim is paid for Policy C.

On 12/31/19, there case reserves and IBNR of $15,000 for Policy A, $40,000 for Policy B, and $90,000 for Policy C.

1. Calculate total incurred loss and net income or loss for the 2018 and 2019 calendar years.

Answer 1

Ans: An Insurance Company Start business on 12/31/2017 with cash $600,000

Income Statement
Particulars		Amount
		31.12.2018	31.12.2019
Sales Revenue
Policy
A		$250,000
B		$150,000	$50,000
C			$200,000
Investment income		$30,000	$40,000
Total	A	$430,000	$290,000
Expenses
underwriting expenses		$90,000	$50,000
Losses Paid
5/1/18,Policy A		$10,000
9/1/18,Policy B		$12,000
3/1/19,Policy A	Already Provision Is made in the year 2018
6/1/19, Policy B	Already Provision Is made in the year 2018
7/1/19, Policy C			$26,000
Provision
Case Reserve	(25,000+15,000)	$40,000
IBNR	(100,000+95,000)/(90,000)	$195,000	$90,000
Total	B	$347,000	$166,000
Profit or Loss	(A-B)	$83,000	$124,000

IBNR of Policy A and B Made in the year of 2018 Already include the case reserve for the year of 2019.

Estimated Ultimate Losses - (Losses Paid + Case Reserve) = IBNR