Sep 08 Q5 (ii) Investment Income

[lwang]

This was a difficult question, but, put simply, we calculate the investment return by applying 4.5% of (net cashflow during the year/2 + claims reserve at the start of the year + UPR at the start of the year).

Hi I do understand the above formula given in examiner's report. However, can I assume the investment income is earned on the average of the technical reserve over the year? In this case, we just need to calculate (UPRc/f + UPRb/f + OCRc/f + OCRb/f)/2. UPR is net of DAC. I think this method is used in April 06 Q5 and a few other places.

An additional question about AURR - why it appears as an item in Balance Sheet but not in Profit and Loss Account?

Thanks a lot.

 

[Katherine Young]

can I assume the investment income is earned on the average of the technical reserve over the year? In this case, we just need to calculate ...

Yes, your method is equivalent to the one described in the Examiners' Report.

An additional question about AURR - why it appears as an item in Balance Sheet but not in Profit and Loss Account?

The Balance Sheet gives the position at a point in time. The Profit and Loss account tells you the movement between one Balance Sheet and the next Balance Sheet.

As you know, the Balance Sheet will state the UPR and the P&L will state the increase in UPR.

Similarly, the Balance Sheet will state the AURR (if there is one), and the P&L will state the increase in AURR.