HELP: April 2013 - Q2 part (ii)

[ac0914]

Hi all,

Could someone explain to me on how the total profit in year 2014 was derived, without calculate the uw profit and investment income on tech. res ?

Many thanks

 

[Darren Michaels]

You need to assume that the written premium grows at some rate over the next year, say g%. Then further assume that the growth in premium income results in a similar growth in claims and expenses.

Hence you can estimate the total profit at the end of 2014 in terms of g.

You then set the solvency margin at the end of 2014 to be the same as that at the end of 2013 (ie 25%) and solve for g.

To do this you don't need to calculate every entry in the profit and loss account (like u/w profit and investment income on technical reserves), you just assume that the insurance profit grows by g% too.

 

[ac0914]

Thanks Derren. But I still don't get it where does the 1,000 x 2.5% (1+g/2) comes from?

 

[Darren Michaels]

You are estimating the investment return on the free assets.

We know that the company earns 2.5% pa on the average of the free reserves at the start and end of the year.

So if we assume that everything grows by g% over the year, roughly speaking we would expect the free reserves to grow by this, so the average of the start and end year value will be an increase of g/2% over the value at the start of the year.

You could actually do this part of the calculation more precisely if you wanted to, but it is unlikely to result in a materially different answer.