Contract boundaries - renewing?

[phos2]

In the notes it says:

"Within the boundary period, both contractual recurring premiums and premiums arising from policyholder options to renew or extend their policies should be considered on a best estimate basis "

I want to know how this works in practice.

If we have a valuation date of 31/12/2020 and an annual policy incepting in 1/7/2020 with premium £1000. Then:

1) Will the full annual exposure period of this policy be counted as it is within the boundary period?

2) If this policy has an 50% chance to renew in 1/7/2021 with a premium of £1200, how will that get counted under solvency II? Would we have to count it under the URR somehow?

Any help please

 

[zuglubuglu]

Hi Phos2,

The term URR does not exist in an SII balance sheet and this would fall under a Premium Provision (possibly even allowing for profit). It would be counted using the probability of take up.

Let me change the question as an insurer is likely to look at a group of policies. Say we have a motor insurer and as at end of 31/12/2020, the insurer had sent renewal letters amounting to a total premium of £1million. Let's assume these are yearly lump-sum premiums and the take-up is 50%. Let us also assume that the loss ratio (includ. acquisition costs, and claims handling costs) is 90%. To make it simple let's assume the payment of losses are mid yearly. Let us also assume also that the insurer now cannot change the pricing and has to take on clients for which a renewal letter was sent.

Then we would expect to write £500k or premium from this business, this is a cashflow inwards as at mid-January. £400k is paid out as at mid-July. They are then discounted accordingly. In essence the premium provision would include a profit of around £100k as we are in an almost-zero interest rate scenario.

Hope this helps,
Dom