• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

ST7 Sept 2011 q1 iii

M

Michael_JM86

Member
Hi ActEd,

When calculating the URR why do we inflate/depreciate for 2.5 years? This seems to be from the average inception of the policy (halfway through the first year) to the end of the URR period (the end of the third year).

Why do we not inflate/deflate to the mid point of the URR period? I.e the middle of the third year, so the adjustment is for 2 years.

Many thanks,
Michael
 
I think I can see where I was going wrong.

To calculate the premium, we take the value of the car A, multiply this by the probably of writing the car off and adjust for inflation/depreciation. If a car crashes during the first year, the accident will happen on average half way through the year, so 0.5 years adjustment. Similarly for crashing in years 2 and 3, 1.5 and 2.5 years adjustment.

Therefore, the URR adjustment is 2.5 years as we inflate/depreciate from the start of the first year rather than the middle of the first year.

Is my understanding now correct? I think I was getting confused with applying an adjustment to a policy that incepted half way through the first year, rather than an accident that occurred half way through.

This question is hard!

Many thanks,
Michael
 
Yes that's right - we are just looking at one policy and we are told in the question to assume that the car is written off mid year in each case.

Therefore 2 years after inception (for a 3 year contract) there is only one more time that the car can be written off, ie in the middle of the third policy year, in other words 2.5 years after the original policy inception.
 
Thanks Darren.

For the depreciation calculation I found myself wanting to calculate it as a compounding factor instead of subtracting the depreciation. For example, A * p * (1 + inflation %) * (1 - depreciation %). Is this a valid approach?
 
You must log in or register to reply here.
Back
Top