Difference Between VOBA and DAC Assets

Insurance companies used to report couple of labels in their financial reports i.e. VOBA and DAC. Let's see what these terms are and what is the basic difference in it as under:

VOBA stands for Value Of Business Acquired which is an intangible asset. It is the amount of in-force business purchased in an acquisition activity. It is calculated at the time of acquisition as the present value of future profits which is linked with the acquired insurance policies.

DAC stands for Deferred Acquisition Cost and is also an intangible asset by nature. It is calculated at the time of acquisition based on the capitalisation percentages of in-force business. It is accomplished through reinsurance assumption where the insurance portfolio is separated into the specified insurance contracts. It is the acquisition cost of agents' and brokers' commissions, marketing and agency costs etc which is capitalised over the specified period of time.

Hope it will help.

What is What in C-ROSS ? The New Solvency Method

China launched a new Solvency methodology known as China Risk Oriented Solvency System (C-ROSS) which is adopted by almost all the Chinese insurance companies from the beginning of 2016. Everyone knows what are the definitions and details of the new pillars describe by this regime. I'm writing in here to clarify the main confusion that I've heard from lot of analysts that what would be the Solvency Ratio (%) and its main components based on this new regime.

So, this blog will show the reporting style of the new Basel Reports that provides the Solvency details and will answer the following questions:

1. What is Core Solvency Margin Ratio?
2. What is Core Capital - Tier 1 ?
3. What is Comprehensive Margin Ratio?
4. What is Actual and Required Capital under C-ROSS?

So the answers to all these questions are that the "Comprehensive Solvency Margin Ratio(%)" is actually based on this new methodology i.e. C-ROSS. Please it as under:

 As you all know that:

Solvency Ratio = (Actual Capital / Required Capital) * 100

Now try to apply the above formula by picking up the values encircled in the below image and you'll get the above Ratio:

So in the above image, if you pick up the green highlighted values then you will get the Comprehensive Solvency Margin Ratio:

Comprehensive Solvency Margin Ratio = (27,873,248 / 9,9573,969)*100
                                                                = 291.12%
                                                                = 291%

Core tier-1 Capital and Core Solvency Margin is actually the components or indicators of the old Solvency method provided by CIRC.

Hope it will help. Please write in your feedback if there is any. Thanks

Difference between Reinsurance Ceded Reserves versus Reinsurance Receivables

I felt the need to write something over "Reinsurance Ceded Reserves" and "Reinsurance Receivables" both are reported on Assets' side of the Balance Sheet in the financial reports of insurance companies. Analysts while doing their analysis, they get confused and consider that both type of labels have the same concept, which is wrong. Please find below some explanation for both of these concepts with the help of an example:

1. Reinsurance Ceded Reserves is reported on Assets side because it is actually the ceded recoverable estimated for a particular period of time, against the Gross Policy Reserves, which will be recovered from the reinsurer.

Possible Components:
The possible components that we could find sometimes on the face of the balance sheet on asset side while sometimes under the bifurcation of the total amount of reinsurance ceded reserve somewhere in the notes of the financial statement, may be as under:

• Ceded/Reinsurance unearned premiums reserves/liabilities
• Ceded/Reinsurance liability reserves/liabilities
• Ceded/Reinsurance outstanding reserves/liabilities

Note: The main thing that we need to note that companies define it as "Estimated" or "Actuarial" amount of the reserve that is estimated to be recovered from the reinsurer. 

2. Reinsurance Receivables is an asset which sometimes reported on the face of the balance sheet on the asset side or sometimes reported within the breakout of Insurance Receivables. All those receivables or recoverable, that are settled amount of losses, insurance companies submit to the reinsurers are called reinsurance receivables. 

Main difference between these two concept is that the first one is the Estimated/Actuarial amount that company estimates to receive from reinsurer while the second one is the settle amount of receivable which company already have settled with its policyholder and then submitted further to its reinsurer to recover. 

Please have a look at the below table encircling these two different concepts:

Hope it will help. Thanks

Calculating Gross Change in Unearned Premium Reserve

Gross Premium Earned = GWP +- Gross Change in Unearned Premium Reserve

As you know that the gross change in unearned premium reserve is required to calculate gross premuim earned while ceded change in unearned premium reserve makes ceded premium earned amount.  But it happens most of the times that companies directly report the net change in unearned premium reserve without disclosing it's bifurcation or breakout.  Therefore in order to calculate gross and ceded change, you need to follow the below steps:
1. Go to the Consolidated Balance Sheet of the company.
2. Go to Liabilities side and try to find out the unearned premium reserve amount of the current period.
3. If it's reported then see next the point no. 6 below.
4. But if you don't find directly reported unearned premium reserve amount on the face of the liabilities side of the balance sheet then look for the policy reserves amount sometimes with the label as insurance contract reserves, or insurance policy reserves, or insurance liabilities etc.
5. Copy the current period's amount given for the insurance reserves and search it in the same report. You will be able to find the breakout of this amount where you could see that unearned premium reserve would be it's one of the components of insurance reserves amount.
6. Take the difference of current unearned premium reserve amount from its opening amount which would also be given in the same table or below this table.
7. If the difference between the current Ans comparative is positive then subtract the amount from gross written premium but if the change is negative then add this change to the gross premium written amount.
7. The amount would be now Gross Premium Earned amount.