April 2011 Question 2viii

[Jerris]

The answer for this question is difficult to understand. I need help interpreting this. I have extracted selected sentences from the Examiners' Report and numbered them. Thanks a lot

1. Figures shown indicate the business is loss making
• Are we to the fact that expense + loss ratio is greater than net written premium as at 30 Sept? i.e. 300 + 85% * 1000 > 1000
• Are there other figures that suggest that the business is loss making?

2. However reserve figures seem inconsistent with LRs as UEP is 600 and claims reserve is 700.
• What is UEP?
• How is UEP calculated to be 600?

3. COR of 115% (85% LR plus 30% Expense Ratio)
• Is COR combined operating ratio?

4. The year-end position will reflect the development of premiums, expenses and claims [assume limited impact of investment income]
• What is this statement trying to say?

5. YE profit will be impacted by NEP for the year
• What is NEP?
• What is this sentence trying to say? In simple terms

6. Assumption needed for any further growth in premium in the last quarter
• What is this sentence trying to say? In simple terms

7. any increases anticipated to scheme charges may directly or indirectly captive premium income
• Is this trying to say that if the cyclists are (for example) charged higher premiums, then the growth in premium for the captive may slow?

8. sensitive to any negative press, infrastructure developments
• How are the amount of premiums collected by the capital sensitive to infrastructure development?

9. Or Set up costs biasing the expense ratio for the first 6 months?
• What does this mean?

10. Experience of first 6 months has been worse than planned: 85% COR cf 70%
• Compare this to point 3: COR should include expenses, therefore 85% in this point is referring to the Loss ratio? i.e. the use of the acronym COR is a typographical error

 

[Katherine Young]

My goodness what a lot of questions!

I think you'd find the ASET useful as it gives a much more detailed explanation than the Examiners' Report. (The current ASET won't include the 2011 exams, but I'm sure one or two older versions are available if you ring the switchboard and ask nicely . Just bear in mind that the older versions won't reflect the latest Core Reading, but that shoudn't be a problem for this question.)

It also sounds like you need to revise some key ideas relating to accounts. Again, ASET can help you there. Don't forget the Q&A bank either, I think you'd find it invaluable. There's also the ST7 Q&A bank if you're looking for extra practice at accounts questions.

In the meantime, I've given you some brief explanations below.

1. Figures shown indicate the business is loss making
• Are we to the fact that expense + loss ratio is greater than net written premium as at 30 Sept? i.e. 300 + 85% * 1000 > 1000

The combined ratio is 115% (ie 85% loss ratio + 30% expense ratio), so the business is loss making.

• Are there other figures that suggest that the business is loss making?

No.

• What is UEP?
• How is UEP calculated to be 600?

It looks like this is a typo in the Examiners' Report. UEP probably means "unearned premium", which is 400 not 600.

• Is COR combined operating ratio?

Yes.

4. The year-end position will reflect the development of premiums, expenses and claims [assume limited impact of investment income]
• What is this statement trying to say?

You are given the position as at 30th September. The year-end position will depend on how premiums, expenses and claims will develop in the next three months. (The examiners are assuming that investment income will not have a material impact on profitability.)

5. YE profit will be impacted by NEP for the year
• What is NEP?
• What is this sentence trying to say? In simple terms

NEP is net earned premium. Profit is a function of premiums, claims, expenses etc. So if NEP increases, so will the year end profit.

6. Assumption needed for any further growth in premium in the last quarter
• What is this sentence trying to say? In simple terms

Any assessment of profitability needs to take premium growth into account, because there are three months to go before the year-end.

7. any increases anticipated to scheme charges may directly or indirectly captive premium income
• Is this trying to say that if the cyclists are (for example) charged higher premiums, then the growth in premium for the captive may slow?

That's one example, yes.

8. sensitive to any negative press, infrastructure developments
• How are the amount of premiums collected by the capital sensitive to infrastructure development?

"Infrastructure" means road / rail networks. For example, if rail services improve, fewer people may travel by bike so premium may fall.

9. Or Set up costs biasing the expense ratio for the first 6 months?
• What does this mean?

High set up costs will impact the first 6 months but not the rest of the year. So the expense ratio will be higher if only the first 6 months are considered.

10. Experience of first 6 months has been worse than planned: 85% COR cf 70%
• Compare this to point 3: COR should include expenses, therefore 85% in this point is referring to the Loss ratio? i.e. the use of the acronym COR is a typographical error

Yes, this is an error in the Examiners' Report.

 

[Jerris]

Thanks a lot Katherine for going through this and giving me advice on seeking more practice, I am in the middle of working through the past exams and etc. I really appreciate this.

I will create another post to ask for the past ASETs once I am done going through the past papers to see which ASETs I need.