SA3 2024 M3 Q3

[Aneessa]

Can someone explain the answer to the third question in the 2024 additional mock pack please?
For part (i),
- how do we know that we need to assume policies are incepted halfway through every quarter for X? Why not assume that policies are incepted halfway through the year?
- Y seems to be incepted halfway through the year and 50% earned after each year though.

For part (ii),
- can you explain how the URR for Y is calculated, particular the part corresponding to the investment?
- why does the URR calculation not include the deferred acquisition cost since it is essentially an expense liability? or is the acquisition cost treated just with respect to premiums? So net URR = net AUR + net UPR

For part (iii),
- why is increase in free assets = retained profits and include dividend as well? I suppose because dividends have to be paid and will not be retained, contrary to the definition of free assets.
- why do we have investment income on both technical reserves and free assets?

 

[Katherine Young]

For part (i),
- how do we know that we need to assume policies are incepted halfway through every quarter for X? Why not assume that policies are incepted halfway through the year?
- Y seems to be incepted halfway through the year and 50% earned after each year though.

The first bullet point tells us that for Product X, claims in the last quarter are twice the level of claims in the other quarters. So it makes sense to work in quarters for product X. There’s no reason to do that for product Y though, so we’ll use a simpler method.

For part (ii),
- can you explain how the URR for Y is calculated, particular the part corresponding to the investment?

WP=200 and this is 50% earned by year end.

Applying the LR and CHE gives 200*0.5*95%*1.1.

Business written mid-year has another 6 months still to earn by the year end. Therefore the average claim event on the period of unexpired risk occurs 3 months after the year end. The average claim delay is 9 months. So we discount by a total of twelve months.

- why does the URR calculation not include the deferred acquisition cost since it is essentially an expense liability? or is the acquisition cost treated just with respect to premiums? So net URR = net AUR + net UPR

URR is an estimate of claims (plus associated expenses). It has nothing to do with acquisition costs.

AURR = URR - UPR net of DAC, (subject to a minimum of zero).

For part (iii),
- why is increase in free assets = retained profits and include dividend as well? I suppose because dividends have to be paid and will not be retained, contrary to the definition of free assets.

Your sentence doesn’t make sense, but it sounds like you’ve answered your own question.

- why do we have investment income on both technical reserves and free assets?

Both free assets and technical reserves are invested and will earn a return.

I think you would benefit from revisiting the accounting concepts discussed in SP7. There are many many Practice Questions in the SP7 CMP which will help you cement some of the fundamental questions you ask here.

 

[Aneessa]

Got it, thanks Katherine!