# SA1 Assign X4 (Sep17) - X4.2 (ii) + (iii)

Discussion in 'SA1' started by mossie, Sep 23, 2017.

1. ### mossieActive Member

Hi tutors,

Would be great if someone could provide some help!

X4.2(ii) The question asked for the method one would use to establish the capital required to set up a new insurance company to sell PMI (in a foreign country by a large UK PMI insurer).

The solution suggested you need to a) "project future premium income, expenses, claims and investment return." and b) "Use these to give projections of future revenue accounts and balance sheets, which could be used to estimate initial capital required".
1. Is this 'initial capital required' mentioned in the solution referring to the SCR only? or SCR + all the company start up costs?
2. What exact items in the "future projection revenue accounts and balance sheets" do you use to estimate this initial capital?
3. The projection items suggested didn't include change in DAC or change in reserve - why is that?
X4.2(iii) The question asked how to calculate the purchase price of an existing insurance company.

The solution suggested it consists of the Free Asset + Goodwill, and an adjustment would be made for "any capital that must be tied up to keep the company solvency". Does this 'adjustment' equal to the costs of holding this solvency capital, and the amount should be deducted from the FA+Goodwill?

Free Assets calculation
4. The solution suggested Free Assets is the MVA less realistic estimate of the liabilities. Does it mean liabilities = BEL + RM?
5. It mentioned the UPR as part of the Free Assets calculation, and that you need to allow for DAC in the UPR - why is that? and how?

Many thanks!

M.

2. ### Sarah ByrneActEd TutorStaff Member

1. Capital would be any regulator capital required (such as the SCR) but also capital for other start up costs such as product development, commission payments etc.
2. You would project all cashflows on the product and asset/liability statements to work out how much capital will be required. Suggestions of which cashflows will be projected are in the first point on the marking schedule.
3. A DAC asset isn't really appropriate (or necessary) for PMI as it is short-term and with a DAC asset we will spread the costs over several years. It could possibly be used to spreads costs over a couple of years. The cost of establishing the reserve would need to be allowed for and could have been mentioned.

4. The solution here builds up the liabilities as the sum of the outstanding claims reserve + UPR + IBNR. As this is not a calculation for statutory purposes it doesn't have to use Solvency II values. You could use the Solvency II balance sheet for comparison though.
5. Good question - I've asked a fellow tutor and whilst there may be some technical area that means a DAC would be allowed for in the UPR (if it is even used) but we're not aware of it. We'll remove this point in the solution for future years. Thanks for asking about it

Hope this helps.
Sarah

3. ### mossieActive Member

Thanks Sarah it helped a lot!

Re 3. - In cases where an insurer develops a range of PMI products from scratch, and hence expects huge development costs in IT systems etc, can they hold a DAC asset in that case? (Even though the PMI products itself are short term, presumably they would expect the business will run for at least medium term to make it worthwhile)

4. ### Sarah ByrneActEd TutorStaff Member

Possibly - although the Core Reading does mention that acquisition costs shouldn't be deferred to the extent that:
• the receipt of future premiums or future margins was insufficiently certain, based on prudent estimates of future expected discontinuance rates or other experience.
The receipt of premiums might not be sufficiently certain. However, if you could get agreement from your accountants/auditors it may be possible to have a short-term DAC.

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