AIAF 1: Intro to Insurance Accounting Exam Questions And Answers Already Graded A+

5 basic assertions of accounting - Answer--complete, valuation, existence, ownership, classification, described and disclosed Required accounting criteria from a set of rules or requirements: - Answer--understandability, relevance, reliability, comparability/consistency, lack of bias, and cost-benefit effectiveness Understandability Criteria - Answer--Must be transparent, intelligible, and clearly disclosed Relevance Criteria - Answer--Must be timely, have predictive value, provide useful feedback about previously made decisions Reliability Criteria includes: - Answer--Representational faithfulness -Verifiability: another person should be able to recreate the value -Completeness -Neutrality Comparability and Consistency - Answer-Info should be able to be compared between time periods and among entities Lack of Bias Criteria - Answer--If info is biased, it's useful ONLY if the user understands the bias, it is consistently applied, and the users can adjust the info to reflect their own desired bias -ASOP 21 requires that the actuary be aware that a discounted reserve is an inadequate estimate unless appropriate risk margins are included -CIA (Canada) requires reporting of policy liabilities that include both present value discounting and provisions for adverse deviation (risk margin) Cost-benefit effectiveness criteria - Answer--Can be reflected through materiality thresholds -Less strict/complete rules may be permitted for immaterial items if **full** compliance would result in crazy high costsWhich actg criteria have relationships with each other? - Answer--Relevance and reliability -Neutrality and reliability Example of the trade-off between relevance and reliability - Answer--Value of infrequently traded asset could be relevant if owner is selling it to meet a liability. -The asset valuation could be impossible to determine, with the only reliable value being its original cost. -Original cost may not be relevant to the info user -owner may have to choose between relevant but unreliable value or a reliable but irrelevant value T or F: the relationship between relevance and reliability affects the valuation of difficult-to-estimate insurance liabilities - Answer-true Comparing lack of bias and reliability - Answer--Conflict arises b/t the two when there is uncertainty -This often results in required conservatism , which can lead to **delayed recognition** until the value is more dependably known -Conservatism could result in reporting a high liability value -Ex: A high estimate of ultimate losses would be conservative when used to estimate claim liabs, but optimistic when used to estimate agent contingent commissions Categories of users of actg information - Answer--Investors, creditors, owners (GAAP) -regulators and supervisors (Reg/supervisory actg) -Tax authorities (Tax actg) T or F: GAAP is intended for a narrow range of users - Answer-False; a broad range of users like creditors, investors, owners The focus of GAAP accounting is on: - Answer--Value or performance of an organization as a going concern; it is assumed that the company will continue to run indefinitely -GAAP usually focuses on the replacement/depreciated cost of assets b/c of thisAn entity in runoff would value its assets using: - Answer--liquidation market value Regulatory/Supervisory Accounting - Answer--Statutory Actg Principles produced by the NAIC -Places emphasis on realizable value for asset sale and liab settlement -Can include conservatism or bias T or F: In the US, tax accounting rules for insurers are based on statutory accounting - Answer-true Example of management actg rules for large claims in individual business units - Answer--Mgmt may have a reinsurance pool among its busn units (Q/S) in its internal accounting results; often called internal reinsurance Example of management accounting with liab discounting - Answer--GAAP may not allow discounting of liabs for future investment income due to reliability, but mgmt may believe that present value discounting of liabs is necessary to eval the finc results of the busn units