Hi All, Hoping I can get some help with this. For part (i), I'm struggling to understand how the UPR has been calculated for City Mall? The Q notes that the risk pattern doubles each policy year. Given it is a 3 year policy, I would assume then that Year 1 risk pattern is 25%, Year 2 is 50% and then Year 3 is 100%? The solutions note on UPR: As at 31/12/09: earned proportion is 1/7 times 1/4 = 1/28 UPR is then 27/28 x £30m = £28.929m As at 31/12/10: earned proportion is 1/7 + 2/7 times 1/4 = 3/14 UPR is then 11/14 x £30m = £23.571m Thanks in advance!
Hi Benoy, Perhaps, drawing a timeline might help you to see the risk profile of the project. We are told in the question that the risk doubles each policy year. Given we know the duration of the project is 3 years old, assuming that the proportion of the risk is x in year 1, this will mean in year 2 it will be 2x and similarly for year 3 it will be 4x. Hence, the risk is 1/7 for year 1, 2/7 for year 2 and 4/7 for year 3. We know the inception date is 30 September 2009 and at the Valuation date of 31 December 2009 which means that only 1/4 of the policy year has occurred. So, this means (1/7*1/4) has earned and 27/28 unearned. UPR = 27/28*30=28.93m. As at the next valuation date (i.e., 31 December 2010), the 1st policy would have ended on 30 September 2010 while only 1/4 of the second policy year has occurred. So, this means (1/7+2/7*1/4) has earned and 11/14 unearned. UPR = 11/14*30=23.57m. Hope this helps!
