ST7 query

Discussion in 'SP7' started by Suzuki, Dec 15, 2018.

  1. Suzuki

    Suzuki Member

    Hello All,

    There is a question on page 43 of ST7 notes (Chap 1). I couldn't work out the answer for option b. I have included it below for your reference.

    An insurance company calculates its UPR using an individual, policy by policy approach. Calculate the UPR as at 31 December 2018 for the following annual policies:

    (b) Premium £3,500. Commission 10%. Started 1 July 2018.Risk starts at zero, and increases daily by a constant linear amount over the policy year.

    Sol: £2,362.50 (75% of risk is outstanding at year-end, so the UPR is 75% of 90% of £3,500)


    My query is how do they arrive at 75% for risk remaining at end of the year?

    Any help will be greatly appreciated. Please let me know if any of the above is not clear.
     
  2. Ian Senator

    Ian Senator ActEd Tutor Staff Member

    Hi Suzuki

    Policy starts 1 July, with increasing risk until the year-end, so 'average risk' is as at 1 October. So 25% of the risk gone by the end of year.

    Alternatively: 1 unit of risk in July, 2 units in August, 3 in Sept, etc. Count up the risk units before year-end, and divide by the total. Won't give you exactly 25% due to a slight 'continuity correction', but it's near enough.

    Ian
     
    Last edited: Dec 16, 2018

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