Hi, NET INTEREST SPREAD = interest earned - interest credited to policyholders WHAT ACTUALLY IS - interest credited to policyholders? Promised amount to policy holders for holding insurance or amount paid to reserve of the insurer?
interest income - interest expense…
So, credited rate is any interest expense? Any examples? (I mean only Life insurers)
If it’s accrual accounting, then they realize an interest expense based on the amortization of the liability.
If it’s a disintermediation, then it’s off the P/L.
For example.
Assets = 100, Liabilitiy = 98, Equity = 2
The asset is an 8% bond, the liability has a 7% actuarial (discount) rate
One year from now:
Interest income = 8
Interest expense = 7
Net interest income = 1
Operating expenses + taxes = 0
Net income = 1
Assets = 108, Liabilitiy = 105, Equity = 3
Very clear example. Thanks.
If it’s a disintermediation, then it’s off the P/L. - could you please shortly give an example?
I want to relate disintermediation…credited rates…and net interest income…at the end
If the client takes his money from the LI fund, then you would simply cancel out assets and liabilities on the balance sheet, and it would not be reflected on the P/L, only on the BS and CF statements.
For example, if one of the client’s has $10 of the L, and he wants them back, ignore accrued interest for now, or just assume it happens the next day after reporting period.
Then:
Assets = 108-10 = 98
Liability = 105-10 = 95
Equity = 3, unchanged because of the P/L neutral effect.
If however, the asset was a long term bond that was quite difficult to liquidate, given the urgency of the withdrawl, that would go into the P/L.
Let’s say $10 of that 8% long term bond was only sold on the spot market for $8, lower than it’s $10 market value. Then the P/L would reflect a loss on asset sale of $2.5, below the net interest income calculations, and you’re net interest margin would likely squeeze in the future, you would not be able to make a 1% NIM like you did in the first example.
The balance sheet would look like:
Assets = 108 - 10 (the market value of the bond before revaluation) - 2.5 (the additional sale at that 80 price to par to cover the cash outflow) = 95.5
Liabilitiy = 95
Equity = 0.5