Could you clear up the figure to show in the balance sheet for the outstanding claims reserve. For the solution of this question they show the outstanding claims reserve figure carried forward. I thought you calculate the outstanding reserve figure as incurred - paid ? Where incurred would be 111- 61+94 And paid 111. So the reserve figure for the balance sheet(excluding upr and aurr) would be 33, whereas in the solution the figure is the carried forward amount. From the solution, is it correct to say the we work off carried forward figures only? (With regards to the reserve calculations for the balance sheet)? And is the calculation of outstanding claims reserves = incurred - paid incorrect?
Yes, this is correct. The balance sheet is a snap-shop of the company's financial position as at the year end. Be careful, you're getting confused between what goes into the P&L and what goes into the balance sheet. The P&L tells you what has happened over the past 12 months. The incurred figure is "incurred during the year", so this belongs in the P&L, and is calculated as "paid + increase in outstanding". ie, incurred = paid + OS c/f - OS b/f.
Part ii One of the assumptions in the model solution for part 2 is that AURR at start of year is also 47. Why is this an acceptable assumption? Given that another assumption is that premiums are written annually, if the company knew it was writing loss-making business at end of 2010, why would it willfully continue doing so with the same pace in 2011? Yes there could be market forces, contracts with promises stable premiums and other reasons; but wouldn't it have been more justified to assume that AURR was non existent at start of year?
As it says in the solution "Other reasonable assumptions are possible but then have to be carried through in the calculations", so if you clearly stated that you were assuming the AURR was zero at start of year and worked this through correctly, you should still get full credit.
