Firstly, just to confirm, to calculate the URR, you multiply the adjusted loss ratio by the UPR? (which will be the premium yet to be earned in the unexpired period?) And just a hint to try spot if when doing out the technical account of balance sheet: If the Loss ratio is greater than 100%, you’ll know you have an AURR in the balance sheet (or increase in it in the technical account) as the premiums wont be big enough to cover the URR? Thanks
Yup that is pretty much it. But what do you mean by adjusted loss ratio, what is it adjusted for? Some companies might not hold an aurr though and just pay for increased reserves with new premiums. It is possible to smooth over accident years. But as long as you make your assumptions clear then you are fine I guess. But of course if you want to include one and state your assumptions then it is fine.
For adjusted loss ratio, i mean that its the expected loss ratio next year(the year that the UPR related to) so the Loss ratio would be the current one adjusted for inflation and premium rate changes. Ah, is it actually possible in the exam like that to not include in increase in the AURR in the technical account or BS and just say, i assume they'll pay out these from current premiums?
I guess the best strategy in the exam is the simplest approach. I couldn't see this come up but if it did then you could make a simple assumption and hold an aurr if you wanted at the same lr or an adjusted one. Or, if there is an aurr in there currently then it would be wise to see what to do with it and carry it forward if need be. As a side note you are also right about needing to adjust the loss ratio if you are projecting on an accident year basis. This is because inflation in the next accident year would be higher. Also since the current accident year is potentially made up of more than one year's written premium then a rate change may also apply. But if the rate change includes an allowance for inflation then you might not need to include both. In practice I wonder what happens? If you are projecting on an underwriting year basis then moving to earned underwriting year then you don't need to bother with the adjusted loss ratio. But this is only really done for Lloyd's accounts, but then again for opinions you can't take credit for the difference between the upr and urr, if it is positive. Ignore most of this if you want it is just blabber.
