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September 2016 Q1

S

sarahr

Member
I am a bit confused by the second part of this question. It asks to describe how to use a cashflow approach to calculate the URR for PMI.
I thought the only way to really estimate reserves for PMI is by using case by case estimates, or using statistical analyses like the chain ladder approach.
I’ve looked at the answer and it is very generic, not really adapted to PMI at all.
So my questions are:
  • Does a cashflow approach like this get used to estimate reserves for PMI?
  • If so, surely it is close to impossible to ever estimate it correctly as PMI is an indemnity product? (The question also refers to doing the projection separately for cases with a high sum assured, but we don’t actually know what the sum assured is for PMI so that one point confused me too)
Any clarity on this would really help. Thanks.
 
Hi sarahr

You can use a cashflow approach to determine the URR. The URR is the estimated cost of future claims on the policy, so this could be done using a cashflow approach.

The answer does have some points that are tailored to PMI but it does have a standard structure (hopefully this gives you some comfort for the exam though!). As the solution does, I would add specific comments wherever I could (for example the point that discounting may not be used, and wouldn’t make much difference if it was, and allowing for future changes such as medical inflation or morbidity).

You’re right that it is very hard to estimate given PMI is indemnity, but the insurer will hope that by writing lots of policies it will achieve “average” experience overall.

Yes, I agree that “high sum assured” doesn’t seem appropriate for PMI. We removed this part before we put the solution in ASET!

Students found this question quite tough in the exam so don’t worry if you missed some of the less obvious points.

Sarah
 
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