U/W ratios - 2010 Specimen Q1

Discussion in 'SP7' started by maz1987, Mar 26, 2015.

  1. maz1987

    maz1987 Member

    The incurred loss ratio here is calculated for each company as:

    incurred claims / earned premium

    With the calculation of incurred claims appears to be:

    paid claims + change in o/s claim reserve

    1) How do we know the claims paid during the year for each is in respect of claims that occurred during the last year? What's to say that it isn't payment on prior years' claims?

    2) Why is the change in o/s claim reserve included?

    3) Is the change in AURR also included in the calculation of incurred claims (although the assumptions suggest this would have 0 change anyway)? If so, why would it be included? The prior year's AURR should reduce to zero, as that business will be fully earned at the point of calculation of the balance sheet, while the current AURR is in respect of unearned premium for future years. Including either of those seems inconsistent with the denominator of GEP.

    Thanks
     
    Last edited by a moderator: Mar 26, 2015
    maz1987, Mar 26, 2015
    #1
  2. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    As mentioned in the Glossary, incurred claims is also used to refer to the estimate of ultimate claims in annual accounting, which is defined as the total amount paid in the year plus the total claims reserve at the end of the year less the total claims reserve at the start of the year.

    Hence all claims paid in the year are included irrespective of which underwriting, accident or reporting year they relate to.

    Similarly we need to look at the difference between the outstanding claims reserve (full OCR not just reserve for outstanding reported claims) at the end of the year and the OCR at the start of the year.

    I would not include any increase in the AURR in the calculation of Incurred Claims for annual accounting ratios. This is because as you say it is not consistent with the denominator of Earned Premiums.
     
    Darren Michaels, Mar 30, 2015
    #2
  3. maz1987

    maz1987 Member

    Thanks for the reply Darren. It makes a bit more sense to me now.
     
    maz1987, Apr 4, 2015
    #3
  4. maz1987

    maz1987 Member

    I'm now much more comfortable with the calculations here, although I have an observation that the form of the calculation allows for negative loss ratios if OCR b/f > Claims Paid + OCR c/f.

    I assume it's fine to have negative LRs, right?

    Thanks
     
    maz1987, Apr 9, 2015
    #4
  5. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    Hi yes as you say if you are deriving loss ratios based on a set of accounts and the OCR b/f is greater than the paid claims plus the OCR c/f then the incurred claims during the year will be negative, which may give a negative loss ratio provided that the earned premiums are positive.

    The earned premiums could also be negative if the written premiums are less than the increase in UPR. Hence even if the incurred claims are negative you could still get a positive loss ratio if the earned premiums are also negative.
     
    Darren Michaels, Apr 13, 2015
    #5
  6. maz1987

    maz1987 Member

    Right, so on an accident year accounting basis negative (or double negative = positive!) loss ratios are certainly possible.

    Thanks!
     
    maz1987, Apr 17, 2015
    #6
  7. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    yes that's correct.
     
    Darren Michaels, Apr 20, 2015
    #7

Share This Page