Sep16 Exam Q1(i) / Exam technique

Discussion in 'SA1' started by mossie, Sep 7, 2017.

  1. mossie

    mossie Active Member

    Hi all,

    Would be great if someone could help! I have a few questions relating to the solution of this question, which asked for a description of how BEL is determined for PMI.

    In the solution, it saids the two main elements of BEL are (a) claims provision relating to past exposure (i.e. o/s claims, IBNR, IBNER, claims in transit, claims expense etc), and (b) premium provision relating to future exposure.

    What exactly is included in (b)? Is this the expected future premium income from in force policies, or expected future claim outgo from unearned premium (or unexpired risks) of in force policies, or both combined!?

    Under SII, due to contract boundary, PMI premiums after the next policy renewal date may not be allowed for in the BEL. Is this because those policyholders due for renewal could refuse to renew the contract, or is it because the insurer can in theory refuse to renew? One bullet point in the solution says premiums for 'policies that are due for renewal where the renewal letter has already been sent to the policyholders' should be included in the BEL, doesn't that contradict the contract boundary rule?

    The solution also mentioned Bound But not Incepted (BBNI) business - where is this covered in the course notes?

    The solution mentioned illiquidity premium - how is that relevant to the calculation of BEL for PMI?

    Exam technique query
    The last few bullet points of the solution mentioned illiquidity premium, matching adjustment (MA), and that the use of MA is unlikely to be approved by the regulator for PMI business. In the exam, are we likely to get marks for pointing out things that are not relevant for the product/situation in question, like the example mentioned here?

    Many thanks!

  2. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Hi Mossie

    The premium provision element is the expected cashflows (all of them!) on the future exposures. This part covers future experience. The solution describes the cashflow projection calculation or this. The first part (a) relates to amounts held to cover the past period of cover.

    The contract boundary is the point at which the insurer can terminate cover, refuse to accept a premium or change the benefits/premiums. This is generally the end of the 1 year term for PMI insurance. If the insurer has sent out a renewal letter they have already signalled their intent to provide cover for a further period of insurance and it is reasonable to therefore include this policy within the determination of the capital requirements.

    BBNI business is not covered in the Subject SA1 Course Notes. The examiners included this point as it does relate to the BEL for short-term insurance, but only students with experience would have mentioned it. So, if you knew it you got credit. But you could still have scored highly without knowledge of this specific point.

    I agree that point on the illiquidity premiums seems odd in the solution - perhaps it was included by error?

    Here, you needed 11 marks. If you could generate enough ideas for 11 marks without mentioning matching adjustments etc then there was no need to mention it. But, if you were struggling, I would absolutely say to mention it. It is included within the section in the notes on best-estimate liabilities and so as this solution was part bookwork there is no harm explaining it but acknowledging it is of less relevant here than for long-term insurance. This solution shows these types of ideas can score marks in the exam!

  3. mossie

    mossie Active Member

    Many thanks Sarah!
  4. arnie_d12

    arnie_d12 Member

    Hi Sarah,

    The way I understand it is:

    Claims provisions relating to past exposure - won't include any premiums, it's just the money we need to pay in respect of claims

    Premium provision relating to future exposure - this will include everything going forward i.e. + expenses + future claims -investment income - premium income

    Is this right?


  5. Sarah Byrne

    Sarah Byrne ActEd Tutor Staff Member

    Hi Arnab

    Yes, that's correct. Obviously for PMI investment income will be small but still worth mentioning :)


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