I wanted to ask if it is possible that a firm which has calculated AURR as the sum of projected claims plus expenses compared to UPR net deferred acquisition costs found that the this was sufficient and reflected an expected underwriting profit on unexpired risk but has a history of the combined ratio which is increasing and is now above 100%. My thinking when I saw the combined ratio I thought that definitely an AURR should be set up but it was not the case. An explanation would be helpful in this regard because I am not fully understanding the concepts.
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Calculation of the AURR
- Thread starter nyaman
- Start date
Generally speaking, you're right, an underwriting loss would normally accompany a high combined ratio.
However, there are so many assumptions to make in the calculations of each, that you could invent a scenario that doesn't quite look so clear cut. For example, you could play around with AURR calculations (eg discounting, prudence etc), or UPR assumptions (earnings patterns, DAC assumptions etc). The assumptions would largely depend on the purpose of the calculation (eg tax or internal). Note also that a high historical combined ratio doesn't necessarily imply a high future one - for example, maybe the company is planning to implement rate increases, which could be reflected in the AURR calculation.
However, there are so many assumptions to make in the calculations of each, that you could invent a scenario that doesn't quite look so clear cut. For example, you could play around with AURR calculations (eg discounting, prudence etc), or UPR assumptions (earnings patterns, DAC assumptions etc). The assumptions would largely depend on the purpose of the calculation (eg tax or internal). Note also that a high historical combined ratio doesn't necessarily imply a high future one - for example, maybe the company is planning to implement rate increases, which could be reflected in the AURR calculation.
Thank you for the explanation. I guess if the company is anticipating rate increases it makes sense given that the economic environment its operating is very unstable in terms of inflationary pressures which are particularly affecting expenses.