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April 2019 Q2

Discussion in 'SA3' started by BenL, Apr 24, 2020.

  1. BenL

    BenL Member

    Hi Guys,

    The question is asking about the move from GN to GG. Per the question "Both premium bases are gross of reinsurance, but the GG basis includes acquisition costs whereas the GN basis excludes acquisition costs."

    Am I correct in thinking that a GG LR would be calculated as (claims/Premiums - acquisition costs), whereas the GN would be (claims/(Premiums))?

    I'm having trouble getting my head around the difference because if the acquisition costs are included they would be negative.

    There are also a few items in the marking schedule that are contributing to my confusion.

    The marking schedule states as a disadvantage that Gross net measure is more directly aligned to premium actually received by the insurers. . . so is likely to be a better indicator of the expected profitability of the insurer. Why would excluding the acquisition costs be a better reflection of profitability? I would think that profit should be determined after commissions have been paid?

    The marking schedule also states as a disadvantage that potential for business plan arbitrage to maximise profit potential within gross gross business plan limits. . . e.g. by pulling back in higher commission lines and using that capacity more efficiently in lower commission lines of business. Why would firms be disadvantaged by this?? I would imagine that offering lower commission products would generally be good (at least from a policyholders PoV), and as this is from the regulators perspective, it seems that this would be an advantage?

    Any help would be appreciated.

    Thanks!
     
    BenL, Apr 24, 2020
    #1
  2. Katherine Young

    Katherine Young ActEd Tutor Staff Member

    It’s the other way round. GN= claims/(premiums-acquisition cost). GG= claims/premiums.

    Treating it as a negative is just confusing matters. Think of it this way: The broker accepts the premium from the insured but doesn’t pass all of that amount on to the insurer. Instead it keeps some of it back, as commission. So the insurer only receives an amount of ‘premiums – acquisition cost’.

    An insurer’s profit is (very loosely speaking) ‘income less outgo’. The GN premium (ie excluding the part that the broker keeps hold of) mirrors this, because it’s the portion of premium that the insurer actually receives.

    Yes it’s hard to see what the examiners are getting at here isn’t it. It sounds like they're saying it may persuade insurers to stop selling high-commission products. This would be a disadvantage to consumers in general if it leads to less choice available in the market.
     
    Katherine Young, Apr 27, 2020
    #2

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