Hi Enrico,
Fellow student here. These are my thoughts.
- Between Oct and Dec, you had three months - consider premium as paid and one major claim of 500k. Let us assume that this is paid in Dec of next year. This relates to the claims provision.
- The following 9 months have £100 being paid per month in premiums and £50 being paid out in expected claims per month. Let's assume these are paid at end of month (So last payment at end of Sept of following year). This relates to the premium provision. Let us also assume we add an ENID of £1 a month at end of each month.
I think this is answered above. Both claims and premium provision are prospective calculations of the expected cashflows - it depends on whether it is on the earned or unearned part.
Yes. The claims provision is the discounted value of 500k.
The premium provision is a series of cashflows: £100 at t=0, £100 (premium in) - £50 best estimate claim- £1 ENID = £49 at t=1 to 8 and, -£51 at t=9 where t is time in months.
In this case the premium provision is actually allowing for profit so is negative.
Just a note that it is very unlikely for insurers to use a monthly discount rate for their SII technical provisions. However given the current close to zero interest rate environment, it doesn't really matter - it will be about £441 and an asset.
Last edited by a moderator: Mar 28, 2020