ST3 April 2006 Q5 and Sept 2007 Q6

[Actu09]

Hello everyone and happy 2016!
Regarding the calculations, how were the figures for the outstanding claims reserve(c/f) and the investment return generated?
Kind Regards,

 

[Actu09]

In addition to that, i would appreciate it if someone explained to me how the relevant ratios (Incremental % paid for 2004 acc yr.reserve as stated in the examiners'report for September 2007 Q6) were calculated.

Thank you in advance

 

[Katherine Young]

how were the figures for the outstanding claims reserve(c/f) and the investment return generated?

The outstanding claims c/f = the amount at the end of the year. This is the same as the amount at the start of the following year (ie the b/f amount for the following year.) So the 2002 outstanding c/f = 2003 b/f. There are no calculations, you're given this information in the question.

We're told to ignore investment return on free reserves, so we take 5% of the average technical reserves at the start and end of the year, where technical reserves = outstanding claims + UPR. For example, for 2002, technical reserve b/f = 100+200=300 and c/f=250+465= 715. So investment return =5%*(300+715)/2=25.4.

how the relevant ratios (Incremental % paid for 2004 acc yr.reserve as stated in the examiners'report for September 2007 Q6) were calculated

I've knocked up an explanation in a spreadsheet. See the attached doc.

 

[Terran85]

How did they calculate the DAC and Techical Res start and end of year for Q5?

Thanks

 

[Darren Michaels]

Please see https://www.acted.co.uk/forums/index.php?threads/accounts-exam-question.14447/#post-53935
for the calculation of the DAC.

The technical reserves are the sum of Outstanding Claims Reserves (given in the question) and the UPR net of DAC.

 

[Terran85]

Thank you very much, for completeness anyone looking for Tech Res number

- For 2002: 100 (O/S Claim b/f) + 200 (UPR b/f) - 16 (DAC b/f) = 284.

Thanks agaiun

 

[sma09gc]

Hi, sorry if I'm being really silly but in September 2006 Q6 part I've I can't see where the 86.8% is coming from? I understand all other parts of the solution. I have also looked at your solution Katherine but can't see details of the calculation as it is PDF. Can someone help? Thanks

 

[Darren Michaels]

The 0.868 is the sum of the rest of the row, ie 0.396+0.217+0.111+0.084+0.061

You are taking a weighted average of the relevant discount factor, eg 1.09^-0.5 by the weights shown in the row labelled "as a percentage of outstanding development, this is".

So the complete formula is (0.413*(1.09^-0.5)+0.246*(1.09^-1.5)+0.137*(1.09^-2.5)+0.114*(1.09^-3.5)+0.089*(1.09^-4.5))/(0.413+0.246+0.137+0.114+0.089)=0.868