(Papers) ACET Paper May 2010 "ST3 – General Insurance"

Q. 1) i) State the two main types of proportional reinsurance

ii) Explain by means of numerical examples, how the claim payment is divided between the direct writer and the reinsurer, in the event of a claim under each of the two types of proportional reinsurance.

Q. 3) A general insurance company writing only motor insurance business has assets comprising equities, cash and index-linked government securities. Discuss the appropriateness of the investment portfolio.

Q. 4) A general insurer uses a credibility formula to estimate the risk premium for a certain class of business.

i) Explain the loadings you would apply to the risk premium to arrive at the office premium Assume the office premium is determined by adding 30% to the risk premium to allow for insurer’s expenses and profit requirements. Two risks are coming up for renewal. For risk P, the total amount of claims in respect of the past 5 years is 80% of the amount the insurer would have expected whereas for risk Q it is 20% higher than expected. The insurer uses a credibility factor of 50% for risk P and 75% for risk Q.

ii) Express the office premium for risk P as a percentage of the office premium for risk Q

Q. 5) An insurance company accounts for all its business on a quarterly basis. The amounts of premium written for each quarter of the calendar year are:

Q1: 100 Crore
Q2: 120 Crore
Q3: 150 Crore
Q4: 120 Crore

In June, the company carried out a review of its expected claim experience for the year’s business, and concluded that for business written during the year at the current premium rate, the combined ratio (Loss ratio + expense ratio) for the year would be 114%. As a result of this review, the company increased its premium rates by 20%, the increases taking effect on 1st August. During the third quarter, Rs 100 Crore was written on the old premium rate and the rest was written on the new premium rate.

i) Explain briefly the terms UPR, URR and AURR.

ii) Stating the assumptions you make, calculate the UPR and estimate the AURR as at close of play at the end of year assuming that the accounting method used by the company does not use a provision for DAC for calculation of UPR.

iii) Explain briefly three reasons why a 20% increase in premium rates may result in a change in combined ratio which is significantly different from the decrease of 16.67% (=20/120).