UNSW

ACTL1122 Corporate Governance for Actuaries

Lecture Discussion Exercises
Week 5 Insurance Provisions and Reserves
1. Refer to the 2012 IAG Statement of Comprehensive Income and Notes
5 and 6. The items above Insurance Prot/(Loss) in the Statement
of Comprehensive Income form the Underwriting Statement for IAG
Group. Notes 5 and 6 expand on premiums and claims.
(a) What is the dierence between Gross Written Premium and Premium Revenue? Why do they need to be separately reported as
found in Note 5?
This practice is consistent with accrual accounting. Gross written premium relates to premium collected from policies sold over
the year, but not necessarily premium which IAG has earned because the policy has not expired yet. Premium revenue relates to
premium which IAG has earned over the year.
The two are separately reported in Note 5 to show how much written premium from the previous year is brought forward to be earned
over this year and how much written premium this year is carried
forward to be earned over the next year
(b) Would you expect Claims Expense for the year to be equal to the
amount of Claim Payments made? Explain your answer.
This is unlikely as the Claims Expense depends on how much we
expect claims made will be paid when it is settled. Some claims
may take time to settle in the future, and the amount may be
disputed or there are external eects such as legislative changes or
ination
(c) How do Underwriting Expenses dier from Fee based, Corporate
and Other Expenses? Why are they reported separately?
Underwriting expenses include Claims Expense, Acquisition Costs,
Commission, Fire Services Levies and other unspecied underwriting expenses. They are associated with the sale, management and
administration of insurance policies. They dier from Fee based,
Corporate and Other Expenses which are related to more general
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overheads and other expenses not necessarily specic to insurance

operations and activities
They are reported separately so to make it possible for us to evaluate the performance of IAG in its insurance and risk underwriting
activities, which is their core business
(d) Explain how Underwriting Prot and Insurance Prot are related,
and the benet of reporting them separately.
Underwriting Prot relates to the net revenue generated from insurance operations, whilst Insurance Prot is associated with the net
revenue generated from money used in insurance operations. Insurance premium is received and then invested and the returns are
combined with Underwriting Prot to determine Insurance Prot
Separating the two components show us how well IAG has managed its insurance and risk portfolio, and this can be independently
evaluated from how the external market has enhanced or reduced
their prot
(e) Explain how Insurance Prot and Statutory Prot are related.
The two prot gures dier by the Investment Prot From Equityholders Funds, Fees and Other Income (from non-insurance
activities), Share of Prot From Associates, Finance/Interest Expense and Other Expenses. The Statutory Prot gives the net
prot after deducting the expenses generated from other activities
of IAG, including overheads
(f) Calculate the Loss Ratio, Expenses Ratio and the Combined Ratio
for IAG over 2012. Comment on the performance.
This requires some discretionary judgment to be employed. There
are Reinsurance arrangements, and the eect should be netted o,
so we use Net Claims and Net Premiums in our calculations
Net Claims Expense
Net Premium Revenue
5791
=
7843
= 73.84%

Loss Ratio =

Underwriting Expenses
Gross Written Premium
2144
=
8992
= 23.84%

Expenses Ratio =

Combined Ratio = Loss Ratio + Expenses Ratio

= 73.84% + 23.84%
= 97.68%
The combined ratio is less than 100%, but the Underwriting Loss
is $92m. This is a disconnect. However, the reason is because the
Expenses Ratio is lower, given a higher GWP over the year, and
the eects of Reinsurance osetting the Loss Ratio.
2. Calculate the amount of earned premium for the following policies as
at 30 June 2012 :
(a) A home and contents insurance policy is sold for $720 and will
cover a home for one year. The policy inception date is :
(i) 1 July 2011
The cover is eective from 1 July 2011 to 30 June 2012, so
the full premium of $720 is earned for the nancial year
(ii) 30 November 2011
The cover is eective from 30 November 2011 to 30 November 2012 (close enough). Up till 30 June 2012, 7 months of
premium has been earned or $420
(iii) 30 September 2010
The cover is eective from 30 September 2010 to 30 September
2011. Up till 30 June 2012, 3 months of premium has been
earned, of $180
(iv) 1 May 2012
The cover is eective from 1 May 2012 to 30 April 2013. Up
till 30 June 2012, 2 months of premium has been earned, of
$120
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N.B. The key to answering these questions is to draw up a

timeline for the period over which the premiums are earned
and then do the same for the policy cover and see where the
two timelines coincide as this tells us how much is earned
(b) A public liability insurance policy is sold for $2 400 covering a
corporate event running over the periods :
(i) 4 January 2012 - 10 January 2012, written on 24 September
2011
The policy cover is entirely within the nancial year ending
30 June 2012, so the full premium of $2 400 is earned
(ii) 20 June 2012 - 20 July 2012, written on 10 September 2010
The policy cover is for 30 days and up till 30 June 2012, there
are 10 days. Hence, a third of the premium, or $800, is earned