Hi guys, I am just going through chapter 26 questions and couldn’t understand the answer to q26.3. In particular where it talks about ‘distortions’ and ‘deficit’ in the second paragraph of the solution. Where will this deficit be? Please let me know if something is not clear and I would be happy to elaborate. TP
What this is saying is that your underwriting result for 2017 may be affected (distorted) if there is a deterioration in your reserves during 2017 relating to events that happened prior to 2017. Recall one of the items that makes up the underwriting result is incurred claims, which is defined as paid claims + OCR c/f - OCR b/f. The OCR b/f will be in relation to events that happened prior to 2017. If during 2017, it is realised that those reserves were insufficient, this shortfall (deficit) would be recognised in the OCR c/f at the end of 2017.
