Sep 2008 Q5 (i)

Hi

The solution mentioned the 'tranche' method in order to accurately work out the EP for the year, allowing for various rate changes applied throughout the year

Can someone show me how it's done? My ActEd solutions only go as far as 2007 exams, I wonder if the proper way of doing this question was shown in the ActEd solutions?

Also, if I started using the tranche method, will it affect the way the rest of the questions is calculated? Or just part (i)?

 

Hi TJ,

The tranche approach takes account of the precise timing of each of the premium increases rather than just calculating an average premium for each year. So, each time there is a change in premium rates or numbers of policies, this defines a new tranche. For each tranche we would then calculate the UPR, so this method involves a lot more calculations than the more approximate approach.

So, for Contract A, the first tranche goes from 1st Jan to 30th April. Policies in this tranche are written, on average, on 1st March, so there are 2 months unexpired at the end of the year. Do this for each tranche in 2005 and then sum to get totals for the whole year, not forgetting to allow for DAC.

Then repeat for the other years.

Both methods are shown in the ST3 ASET.

Part (ii) takes some of the numbers from (i) so the numbers feeding through would depend on the method you used (although there wouldn't actually have been time to use the tranche method in the exam). The method for (ii) would be the same though.


Coralie

 

Hi Coralie

Gosh that sounds complicated

So, the tranche method isn't simply averaging the average monthly premium rates during the year?

eg for 2005 Contract A
2004 = £265
1 May 2005 = £267.5
1 November 2005 = £273

The monthly average premium for 2005 is 4/12*265 +6/12*267.5+2/12*273 = 267.66 - which you can then use this number to calcualate the written premium etc

This is NOT the tranche method?