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2012 April Q4

J

Jun Wu

Member
Dear All

Hope you are well. :)

On this question on part ii)

the solution made the following assumptions:
  • Assume GWP = GEP (i.e. UPR b/f = UPR c/f)
  • Assume AURR as at 31/12/2010 = AURR as at 31/12/2011
  • Assume outstanding claims reserves include IBNR
  • Other reasonable assumptions are possible but then have to be carried through in the calculations
For the first point, GWP = GEP (i.e. UPR b/f = UPR c/f), this is quite unusual as this just means we don't account for UPR at all, while usually we assume half of the written premium to become UPR c/f? I guess if we do this then we must assume an UPR b/f for company A to work out the change?

So, if I made the following assumption would that be also ok?
  • Assume risk is uniform over the policy year and annual policy, inception uniform over the calendar year, so that half of written premium is UPR c/f.
  • No reinsurance
  • Assume a value for UPR b/f (for company A)
  • Then I use them throughout my calculation of net earned premium
Although, if I could assume GEP=GWP then I would as this save me time, but I just don't see this being done normally in other questions so I just want to check the safest way to score in the exam.

Much appreciated !
Thanks
Jun
 
Hi Jun
The safest and quickest option if you are not given the GWP for the previous year is to assume that the company is large and stable, such that GWP @ t-1 = GWP @ t, which means that the changes in UPR would be 0 (which is what the examiners did). If you look at April 2007Q6, this was the assumption that was made in order to calculate the ratios.

I think you can make an alternative assumption (here being the UPR b/f) and proceed as you mentioned as long you documented that so that the examiners can follow through with your workings (but might be at an expense of time!) The examiners noted, "A number of candidates took earned as half of written premium, even when assuming the same premium written in 2011 as in 2010 but were not sensitive to the fact that this gave very large loss ratios." So, if a candidate would have assumed a different GWP and correctly determined the changes in the UPR to arrive at the GEP, I'm sure he/she would have scored the marks.
 
Whilst I understand you could plug a number for the opening UPR and get full credit, I struggle with how you could choose a reasonable one. Also, I wonder if you may not have to end up plugging in numbers for other opening items when you calculate the return.
 
Busy_Bee4422 said:
Whilst I understand you could plug a number for the opening UPR and get full credit, I struggle with how you could choose a reasonable one. Also, I wonder if you may not have to end up plugging in numbers for other opening items when you calculate the return.
Click to expand...
thanks for this, that is good point, so yes assuming GWP the same between years should be good! :)
 
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