Past paper queries: September 2007

Hi, I have a few questions on the 2007 September paper:

Question 1 ii
It says the policy starts from 1 April 2016 to 31 March 2017
The date of sickness on the beginning of July. That means from July towards the end of 2016, there will be 6 months remaining, but the deferred period is 6 months too.
Shouldn't that mean there should be there will be no claim payable in the 2016 calendar year?
therefore loss ratio is 0 (ie: months with benefit payment = (end of year - sickness date) - deferred period= (12-6)-6 =0

However, in the examiner report, it did 8-6 instead, looks like it is considering Jan and Feb 2017 as a 2016 payment too. Is this correct?

Question 3a
This is more of trying to understand the exam technique.

In this question, it specifically wants us to highlight reinsurance for long and short term products.
The answer for part (a) however, seems to be pure bookwork describing risk premium reinsurance (reinsurance commission) and contingent loan.
I don’t see any reference to long and short term products until at the end of part (b). Even so, its only very small part with the reference.

Am I missing something here?
In an exam, I would have tried very hard to relate it with the question specifics. Furthermore, this is a discuss question, not a describe (bookwork).
I am worried that I’m wasting time trying to relate to the question specifics but don’t get any marks from it.

Question 4iii
I am struggling to understand bullet point 1 & 3 of the examiner report.
1: premium need to be earned
Does this mean we should consider only part of the premium that belongs to the current year?
Ie: single premium of 2000 over 2 years, then consider only 1000.
Are we trying to look at the profit of the current year only, without considering future profit of the contract?
If so, wouldn't this contradict with point 4 about capitalising future claim costs?

3: claims need to be incurred.
I'm trying to understand what this point means in isolation.
There are points about IBNR (5) and IBNS (7) already. So what is the relevance of this?

Question 7ii
This is a very lengthy calculation question. Can I know if this is still relevant to the 2021 SP2 syllabus?
Under an exam scenario, I wouldn't think of such calculation details:

• Compounding previous years claims by 1.01^n (ie: accumulating it to today's value)
• Compounding only 2002 & 2003 premiums by 10% each, so taking the "real value" (as of today) of premium for each year
• Last column "Weighted" I really don't understand this. How are these numbers derived?

Question 8 ii (Option C)
I am struggling to agree with the examiner report for this part.
For this option, it is making the underwriting conditions more strict: to exclude pre-existing conditions (did not exclude previously)
I interpret this as the exclusion clauses will be clearly disclosed and explained at the outset.
However, the solution seemed to be implying the other way - From excluding pre-existing condition to not.
Specifically:

• Point 3 & 4 mentions the risk of claim being denied and customer being uncertain about the eligibility to claim.
  Shouldn't an exclusion clause be clearly disclosed at the outset, so there is nothing to be uncertain about. And the claim shouldn't be "at risk" of being denied because it is already set out clearly at the outset it will not be covered
• Point 6 mentions attracting substandard risks to the insurer.
  Shouldn't an exclusion clause deter substandard lives away instead? In the sense that, they should realise at the outset there is no chance trying to claim for pre-existing conditions. So they (shouldn't) even try their luck
• Final point is about getting an agreement with the reinsurer
  Shouldn't the reinsurer be happy about this instead? Because there should be lesser claims

In essence, I think the solution for option C is implying exclusion clause being removed rather than introduced.
Did I understand the question/examiner report wrongly?


I am taking a very old past paper to practice on, as a way to root out areas of the course I didn't understand well.
I would really appreciate it if someone can explain these to me.

Thanks,
Trevor

 

Hi Mark,

Thank you for your explanation, however I have follow up questions:

Q1:

Sorry, I still don't understand this. I am actually referring to when the sickness starts: 1 July 2016. From 1 July 2016 to 1 Jan 2017, there would be 6 months. The solution implies there are 8 months of sickness, does that imply the sickness actually starts on policy inception itself? (1 April 2016)

Q4:

Based on the question mentioning premiums and claims paid in the calendar year, can I assume the profitability referred to is actually the current year profitability?
If so, am I right to interpret "future" in point 4 as the future within the current calendar year (ie: from date of assessment to 31 December of the current year)

Actually, I am trying to understand what does "incur" actually means and how is it different to "claims paid" referred to in the question.
Is it that "claims incurred" refers to:
+monetary amount of claims paid in the year
-claims paid relating to events happening in the previous year
+triggering events (insured perils) happening in the current year but not reported (IBNR)
+triggering events (insured perils) happening in the current year but not settled (IBNS)

Whereas "Claim paid" refers only to the monetary amount of claims paid in the year?

Q7:

How about the "Weighted Average loss ratio"? Is this the SUMPRODUCT of loss ratio and "weighted", and then divided by the total "weighted" (587.6)?

I don't recall studying this calculation from the CMP; eg: using past experience, accumulating it to present terms, and then working out a "Weighted" as Inflated loss * Loss ratio.
What I can recall is the syllabus does have a brief description that past experience could be used to estimate future experience, but no mention of compounding adjustments or any calculation involved.
Can you direct me to the relevant part of the course note to find this calculation mechanic?

Yes certainly if similar question is asked again. However, my real concern is what else they can ask that is not covered in the CMP.
If this is a higher order question where we are expected to work out a method ourselves. I am not sure how can I come up with this idea (especially under exam pressure) given that I have no practical work experience doing this calculation.


Q8:

Ah, I missed the line about replacing the existing underwriting requirements. So it is the fault of not reading carefully.

However if underwriting is removed and replaced by an exclusion clause, does that mean the insurer accepts all applicants automatically? Even if it is clear that they have pre-existing conditions the insurer will accept them anyway, and then reject them at claim underwriting.
I am thinking, if it is clear at the outset about the likelihood of claims relating to pre-existing conditions (known at outset), the insurer should have rejected their application at the outset. So chances of rejecting claims relating to pre-existing conditions will be very low.

I am trying to understand too how does "linked condition" works in practice.
For example, if an applicant is severely obese, but hasn't diagnose of heart diseases. In this case heart disease is not a pre-existing condition (although linked), therefore should be claimable.
With underwriting, this applicant would have been rejected (or at least charged a very high loading) at the outset.
With the new approach of not underwriting but adding an exclusion clause, does that mean the insurer will accept them anyway even if it is clear they are likely to be diagnosed for heart diseases?

 

Right, I think I understand this now. the key idea is that Jan and Feb 2017 claim payment actually relates to an incident happened in 2016, therefore it should be included as a loss ratio calculation for the year 2016.

Thanks for all the above responses, they are really helpful!