Ch1 & Ch2 Queries

Hi all,

Hoping that someone might be able to help me out with a couple of queries I've gathered while going through the first couple of chapters (just trying to get them resolved as early on as possible):

- Why is UPR the "usual basis for determing the reserves in respect of the unexpired exposure"?

I'd guess it's due to simplicity? On the face of it, this measure doesn't seem to explicitly consider the level of risk the insurer is exposed to ... unless the basis assumes that premiums are set equal to best estimate claims?​

- What is meant by 'original loss curves'? (Chapter 1, Section 5.3)

- Could someone explain "measures of exposure" to me please?

The notes say they "give an indication of how much risk there is within each policy" and "can be used as a rating factor". I thought I understood that until the next core reading question asked for a "possible exposure measure that would give a reasonable indiciation of the total level of risk on any portfolio of business" and answered with "premiums". Given the earlier definition of measures of exposure, it reads to me as though the questions asked for a indication of risk which could be used as a rating factor (to set premiums) and gave premiums - which seems very circular to me!​

 

UPRs
UK accounting rules have dictated the use of UPR for some time now. Under Solvency II, the situation will change to something closer to what you are saying would be sensible. Or maybe it's started changing already - honestly I lose track! The question could be posed like this: if you write a policy for £100 that you expect to run at an 80% loss ratio immediately before the accounting date, should you recognise £20 of profit immediately or should you recognise it evenly over the course of the policy, e.g. £5 after each quarter? The latter approach corresponds to using a UPR.

Original Loss Curves
Original loss curves come up in ST8. They are a method of deriving risk premiums (i.e. the expected loss cost without loadings for expenses, profit, tax, commission, etc.) under different policy limits and deductibles. They are normally referred to in the industry by other names, e.g. exposure curves, ILFs.

Exposure Measures
The definition of a measure of exposure, i.e. an "indication of how much risk there is within each policy" is pretty self-explanatory. They can be used for several purposes, e.g. setting premiums, setting reserves. When setting premiums, obviously you can't use premiums as the exposure measure but you can when setting reserves (as does the Bornhuetter-Ferguson method). Alternatively you could use another quantity (e.g. annual mileage for a car insurance policy) for both purposes.

All this stuff in covered later on in the notes. If you want to get to the detail quickly then I would suggest that pushing on through the course is likely to be much more efficient than consulting the forums.

 

Thank you for your help - I am of course trying to push on through the notes, but I do often find this can be a struggle when terminology which has previously confused me keeps popping up. I don't want to get to the end and find I've pushed through, but not understood anything because I didn't grasp (potential) basics very early on! And yes... I've found this to be the case in some previous topics, and it can be very difficult to get back on track late on when you've "ignore for now" a lot of sections :-(