SP7 Mock Exam Q1

Dear All

Please can I confirm the following concept with you arising from this question Q1:

1. We are given DAC at start of 2017 and we are told commission as % of written premium, and solution did : DAC b/f _2017 / comm % = UPR at start of 2017.

• How does this formula make sense? UPR is the unearned part of written premium, DAC is the deferred part of the AC, are we saying
• So are we saying AC % of WP = commission % WP?? But I always thought commission and acquisition cost are two different items?

2. DAC b/f = UPR b/f * commission %

• I presume UPR b/f is gross of DAC here, and we are saying the comm % of it is the DAC?
• And when we work out technical reserves : we do UPR + OSC - DAC, because DAC is an expense although being deferred but it is not actually being invested anywhere?

3. The question sort of implied free reserves = shareholders funds, is that true?

Thank you so much!
Best regards
Jun

 

Just to follow up:
For part i)

• Ok, i see in the solution we made an assumption of DAC = 25% UPR which is same as commission rate.
• So commission and acquisition cost is indeed different items, and commission is to be included in the expense section. But why can't commission to be deferred too? This is also paid when we write policy or not?

Thanks!

 

Hi Jun,

I think you have answered part of your own question in the second post somewhat - top stuff!

With regards to commission, (second bullet point in your forum post above) I don't quite see a line for commission in the solution balance sheet - am I missing something here? Do let me know.

Also, I don't quite see where there are implied free reserves - is there a bit in the solution which is implying this? Again, I could be missing something!

Thanks
Aman
ActEd Tutor

 

Hi Aman! Thanks for response.
Yes sorry,

on second bullet, my question is now:

DAC b/f = UPR b/f * DAC rate (25%)

• I presume UPR b/f is gross of DAC here?
• And when we work out technical reserves : we do UPR + OSC - DAC, because DAC is an expense although being deferred but it is not actually being invested anywhere?

third bullet:
The solution seemed to imply free reserves = shareholders fund, because the solvency ratio = profit post tax/ initial free reserves, and solution take initial shareholder fund to be the dominator etc.
So going forward, do I take free reserves = shareholders fund for accounting question? They are different names for the same thing?

 

Hi Jun,

Yes, UPR is gross if DAC (in fact, the solutions are using DAC to work out the written premium)

When it comes to DAC, there is some useful theory in Chapter 26, section 2.1, about assets in a balance sheet. In a nutshell, expenses are paid on day 1 of the policy, but these are spread over the life of the policy. So, the DAC is an asset on a balance sheet.

When it comes to free reserves, you need to be careful with terminology, because there different terms that can be used to mean the same thing. I suggest you have a look at Chapter 1, section 4 (Free Reserves) - this details the term free reserves, and how other alternative expressions can mean the same thing (free assets, solvency margin, shareholders' funds, capital employed).

I hope that helps.

Aman
ActEd Tutor

 

Please can I check the below with you:
'statistical methods' in SP7, are these the BF, Chain ladder, IELR, Mark, Bootstrapping etc methods?

Thank you!
Jun

 

please can I confirm if dependency and correlation are used interchangeably in SP7?

I see them being used in the capital modelling chapters, like if they have the same meaning, but literally they are different?

I want to make sure if I see a question in exam asking dependency or correlation, I know what to answer.

Thanks!
Jun

 

Hi Jun

The word dependency goes into a bit more depth in SP7. I suggest you read Chapter 22, section 2.1, to help give a feel for the extent of a dependency in a capital model.

Thanks
Aman
ActEd Tutor