UPR Calculation CH1 pg13

[Pooja]

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.

Can someone explain how to solve this ?

solution given - £2,362.50 (75% of risk is outstanding at year-end, so the UPR is 75% of 90% of £3,500. Did not understand how 0.75 came ?

 

[Ian Senator]

Hi Pooja

This is also in the SP7 notes - see https://www.acted.co.uk/forums/index.php?threads/sp7-upr-question-on-page-13-of-notes.16390/

The risk is increasing constantly. If you draw a picture of the risk, you should find that you get a triangle and 75% of the area of the triangle is beyond the valuation date. Or use the 'monthly' method as per the above thread.

Ian

 

[Busy_Bee4422]

The book Pricing in General Insurance has an example spreadsheet with earned premium calculations if you want to see an alternative presentation.