Apr 2018 paper 1

[code9063]

hi,

in the part where I need to project future solvency ratios the model solution calculate 2018 excess asset as 2017 excess assets + 50% of 2017 expected profit. This results in $66m. Don't we need to allow for increase in the policyholder reserves? Motor and Property are supposed to increase by 6% and 3.5%, respectively so I thought excess assets should be $60.85 for 2018 after allowing for the fact that year end reserve should increase to 95.15 in 2018 from 90 in 2017. Thanks in advance.

 

[ntickner]

The model is simplified: Normally, profit would be Premiums + Investment Income - claims - expenses - increase in reserve, but to expect students to model all of those elements in the exam would be a bit much. Hence the Profit Margin as a proportion of premiums which covers all those elements. So increase in reserves is already taken into account when you calculate the Profit of $12m for 2017.

Does that make sense?

 

[code9063]

The model is simplified: Normally, profit would be Premiums + Investment Income - claims - expenses - increase in reserve, but to expect students to model all of those elements in the exam would be a bit much. Hence the Profit Margin as a proportion of premiums which covers all those elements. So increase in reserves is already taken into account when you calculate the Profit of $12m for 2017.

Does that make sense?

I'm not sure I'm convinced. We are given how much reserve increases each year so I think it's over simplification not to use the given information.