Practice Question 27.12ii

[Laura]

Under the nature of the business, it mentions that "from the change in the unearned premiums figure we can deduce that business volumes also fell from 2016 to 2017. "

I'm not sure why this is the case as provision for unearned premiums – gross has increased by 37.2 in 2017 and increased by 18.2.

Would you be able to explain?

Thanks in advance for your help!

 

[Ian Senator]

Those entries of 37.2 and 18.2 are labelled 'change in UPR'. When you follow the calculation of the earned premium (ie written premium minus the increase in UPR), you'll find they are reductions, not increases.

 

[Laura]

Hi Ian,
thanks for getting back!
Understand that:
net premiums written= gross written premiums - reinsurance premiums paid
Net premiums earned = net premiums written + UPR b/f (net of reinsurance) - UPR c/f (net of reinsurance)
taking 2018 as an example
net premiums written = 561.6-83.4=478.2
Net premiums earned=478.2+18.2-66.5=429.9
Wouldn't 18.2 in this case be an increase in UPR?

I'm also want to confirm if how we deduce business volumes fell from 2016 to 2017 from the change in the unearned premiums: In this case, this would be the increase of 37.2. As this is an increase, UPR b/f is more than UPR c/f. UPR b/f relates to business written in 2016 year while UPR c/f relates to business written in 2017. Is my understanding correct?

Thanks in advance for your help!

 

[Katherine Young]

Hi Laura,

Wouldn't 18.2 in this case be an increase in UPR?

The formula for earned premium is:

EP = written premium - the increase in UPR

Inserting the numbers in the question, and noting that 18.2 is displayed as a positive in the revenue account, the formula becomes:

EP = 478.2 - (-18.2)

So you can now see that we have a negative increase in UPR, ie a reduction.

I'm also want to confirm if how we deduce business volumes fell from 2016 to 2017

Using a similar logic to above, the change in UPR during 2017 is positive, so this in fact represents a reduction. Well if UPR has decreased during the year, then written premium is lower in 2017 than it was in 2016.

UPR b/f relates to business written in 2016 year while UPR c/f relates to business written in 2017. Is my understanding correct?

Yes, b/f is the entry at the start of the year, c/f is the entry at the end of the year. You can remember it as 'b comes before c, in alphabetical order'.