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2008 PART III EXAMINATIONS

Subject Title: Course 3A General Insurance


Date: Wednesday 30th April
Time: 9:15 am to 12:30 pm

Time allowed:

Three (3) hours plus fifteen (15) minutes of reading time

Instructions:

Each new question (but not each section of a question)


must be commenced in a new answer book.

Number of Questions:

Six (6)
Question
1
2
3
4
5
6
Total

Marks
19
17
13
17
18
16
100

Candidates are required to answer ALL questions.


This paper has 15 pages (excluding this page and the blank back page).

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 1

(19 marks)

a) Your friend is about to open a florist store. She knows you are studying to be an
actuary so asks what insurance she should obtain before opening her outlet. She
will have a shop, a van to visit the flower markets and also to make deliveries.
She shall rent premises and employs an assistant.
Advise your friend on the types of general insurance she should obtain, what is
covered by each type, and where she can obtain them from.
(5 marks)
b) You are an actuarial analyst at TigerTough Insurance. The marketing manager
has three-month-old twin daughters, as well as an older son. She has noticed the
extra expense associated with two babies compared to one baby and is proposing a
new product. Women would pay a premium, and then if they gave birth to more
than one baby from a single pregnancy, they would be entitled to a lump sum
payment for each additional child.
Draft a report to the marketing manager, including in your response:
(i)
(ii)
(iii)
(iv)
(v)
(vi)

an assessment of the product based on the insurability criteria,


any restrictions which you may impose,
the likely level of benefit and premium,
the sort of investments that should back the product,
the types of reinsurance you may use (if at all),
possible distribution channels.
(8 marks)

c) The CFO at TigerTough is concerned about the capital required to support the
new product. Explain to the CFO:
(i)
(ii)

Why capital is required to support the product?


How the capital will differ if the number of policies written is 100 vs 10,000
in the first year?
(3 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

d) TigerTough decides to commence writing the new product and you are assisting
the CFO with preparing the budget for the year to 30 June 2009. Gross written
premium for the year is forecast to be $200,000, which is expected to be written
uniformly over the year. The forecast profit margin is 15% of gross written
premium.
Ignoring reinsurance and expenses, provide estimates of:
(i)
(i)

The expected central estimate of outstanding claims liabilities at 30 June


2009; and
The expected central estimate of premium liabilities at 30 June 2009.
(3 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 2 of 15

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 2

(17 marks)

The following tables show analysis which forms part of the outstanding claims
valuation for Cajun Insurance Company as at 31 December 2007. The tables are
shown for the Industrial Special Risks portfolio. All accident years shown correspond
to calendar years.
Cumulative paid
Accident year
2003
2004
2005
2006
2007

Development year
0
38,500
45,000
40,000
38,000
42,000

1
98,200
96,200
88,000
89,000

2
104,000
102,500
94,000

3
104,000
106,800

106,400

Case estimates
Accident year
2003
2004
2005
2006
2007

Development year
0
46,200
44,600
40,000
51,400
48,100

Paid chain ladder


Development year
Accident year
0
2003
2004
2005
2006
2007
Total
Total excl last

CL ratios
Selected

3,500
2,100
2,800

3
3,500

6,000

98,200
96,200
88,000
89,000
96,587

104,000
102,500
94,000
94,704
102,778

104,000
106,800
95,957
96,676
104,918

106,400
108,402
97,397
98,127
106,492

203,500
161,500

371,400
282,400

300,500
206,500

210,800
104,000

106,400

Incurred chain ladder


Development year
Accident year
0

Total
Total excl last

8,200
7,400
6,800
5,900

38,500
45,000
40,000
38,000
42,000

CL ratios
Selected

2003
2004
2005
2006
2007

5
107,464
109,486
98,371
99,108
107,556

6
108,001
110,033
98,863
99,603
108,094

2.300
2.300

1.064
1.064

1.021
1.021

1.023
1.015

1.01

1.005

84,700
89,600
80,000
89,400
90,100

106,400
103,600
94,800
94,900
104,780

107,500
104,600
96,800
96,177
106,190

104,000
110,300
97,804
97,174
107,291

112,400
110,852
98,293
97,660
107,828

433,800
343,700

399,700
304,800

308,900
212,100

214,300
104,000

112,400

1.163
1.163

1.013
1.013

1.010
1.010

1.081
1.005

112,625
111,073
98,490
97,855
108,043

112,737
111,184
98,588
97,953
108,151

1.002

1.001

a) What data checks should be performed on the payment and case estimate data?
(2 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

b) The data amounts shown are in historical dollars. What does this imply for the
valuation results produced by:
(i) the paid chain ladder method?
(ii) the incurred chain ladder method?
(2 marks)
c) Using a discount rate of 7% per annum, calculate the discounted value of the
outstanding claims for the 2005 accident year using the paid chain ladder method.
State any assumptions that you make.
(3 marks)
d) Using the same discount rate of 7% per annum, calculate the discounted value of
outstanding claims for the 2005 accident year using the incurred chain ladder
method. State any assumptions that you make.
(4 marks)
e) The undiscounted estimate of outstanding claims using the paid chain ladder
method for the 2003 accident year is $1,601, which is significantly lower than the
case estimates of $6,000 at 31 December 2007.
What does this imply about the paid chain ladder method for older accident years?
Should the method be adopted for such accident periods?
(3 marks)
f) A manager at Cajun asks the following question
You cant use these methods for the latest accident year. There must be IBNR
claims at the valuation date, but the payments and case estimates only reflect
reported claims at that date
Prepare a response to the manager.
(3 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 4 of 15

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 3

(13 marks)

Bubble Insurance Company is a privately owned multi-line General Insurer. Bubble


has operated in Australia for many years, predominantly distributing its policies via
brokers. Bubble has written annual policies for a range of commercial and personal
products with both short and long tailed lines. The policies are written evenly through
the year.
Bubble has decided to leave the insurance business, and will no longer accept
premiums after 30 June 2007. Rather than transfer its liabilities to another insurer, it
shall continue to administer claims.
You are provided with the following information for Bubble as at 30 June 2007. It
comes from Bubbles financial statements and its APRA returns. For many years,
Bubble has adopted a claims provision in its balance sheet at an 80% Probability of
Adequacy.

Deferred Acquisition Costs

$m
0.167

Unearned Premium Liability

0.822

Central Estimate of Claims Liability


Risk margin to provide 75% PoA (14%)
Risk margin to provide 80% PoA (16%)

3.629
0.508
0.581

Central Estimate of Premium Liability


Risk Margin to provide 75% PoA (21%)
Risk Margin to provide 80% PoA (24%)

0.428
0.090
0.103

Note: Claims liabilities are calculated using a discount rate of 7% per annum
In the period from 1 July 2007 to 30 June 2008, Bubble has no policy cancellations. It
makes the following payments
for Accident years up to 30 June 2007
$1.387m
for Accident periods from 1 July 2007
$0.167m
The central estimate of claims liabilities at 30 June 2008 is $2.611m.
a) What do the Deferred Acquisition Costs represent, and how are they recognised
for accounting purposes?
(1 marks)
b) At 30 June 2008, provide your estimate of Deferred Acquisition Costs with
reasons.
(1 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

c) At 31 December 2007, Bubble is producing half-yearly accounts. An analyst


claims that no amount is required for Premium Liabilities, using the following
reasoning, At 30 June 2007, there was on average half a years premium
exposure remaining. Its now half a year later so the Premium Liabilities have
expired.
Explain the flaw in the reasoning of this comment, and provide an estimate of the
Central Estimate of Premium Liability at 31 December 2007 with reasons.
(2 marks)
d) The claims liabilities at 30 June 2007 used a risk margin of 14% (75% PoA) and
16% (80% PoA). In the year since then, payments were close to expected. At 30
June 2008, appropriate risk margins are 14.5% (75% PoA) and 17% (80% PoA).
Given that Bubble is in run-off, why would the percentage risk margins increase
over the year?
(1 marks)
e) Calculate the accounting claims incurred figure for the 07/08 financial year
assuming Bubble maintains reserves at an 80% PoA.
(2 marks)
f) Bubbles CFO wants to increase the probability of adequacy of the claims liability
estimate at 30 June 2008, and seeks advice. He argues that since Bubble is no
longer writing business, it does not have the support of inflows of premium. This
increases the uncertainty, so it is prudent to increase the probability of sufficiency
of the claims provision.
He also claims that increasing the claims provision will have the advantage of
suppressing profit, which in turn shall reduce the tax that Bubble shall pay for
2007/08.
Prepare a report for the CFO addressing his idea. Your report should consider the
effect of his proposal in both 2007/08, and future years.
(6 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 4

(17 marks)

Playdar is an insurer of Public Liability in the fictional state of Botanica. In Botanica


the government changed the policy for the settlement of Public Liability claims for all
incidents occurring after 1 July 2004. For incidents which occurred after that date,
claimants now use a different system of lodgement; this had produced significant
delays while plaintiff lawyers become used to the new system.
The following tables have been extracted from Playdars valuation analysis as at 30
June 2007. The tables show the reporting, payment (inflation-adjusted) and
finalisation pattern for Playdar. For the purposes of this question you may assume that
claims are never re-opened once they are finalised.
Accident year Cumulative claims reported
ending 30 June Development year
0
1
2
1999
382
488
516
2000
458
595
635
2001
477
616
661
2002
468
608
649
2003
490
641
689
2004
488
641
685
2005
509
673
726
2006
503
670
719
2007
516
685
735

3
527
653
682
671
708
702
747
740
756

4
533
662
691
681
719
712
758
751
767

5
537
667
698
687
725
719
764
758
774

Accident year
Payments ($'000 - current values @ 30 June 2007)
ending 30 June Development year
0
1
2
3
4
5
1999
1,238
2,411
3,424
3,330
1,139
3,680
2000
1,702
3,158
4,066
5,124
6,860
2,806
2001
1,734
3,659
4,927
7,477
10,237
11,658
2002
1,945
3,758
4,660
4,818
13,042
8,369
2003
2,026
4,370
5,982
8,120
4,230
2004
2,248
4,340
5,805
5,527
2005
843
2,380
4,359
2006
831
4,361
2007
1,740

Accident year
Claims finalised
ending 30 June Development year
0
1
1999
45
59
2000
47
92
2001
53
83
2002
52
88
2003
51
95
2004
55
92
2005
22
49
2006
19
81
2007
37

2
67
70
100
83
100
96
68

3
63
75
115
66
132
80

4
20
97
135
158
53

5
66
43
153
122

6
539
669
702
690
728
722
768
761
777

7
541
672
705
693
731
725
771
764
781

8
542
673
706
694
733
726
772
765
782

6
5,763
8,962
1,543

7
6,744
4,859

8
3,301

6
86
132
19

7
77
52

8
36

9
545
677
710
698
736
730
776
769
786

Playdar uses a Payments Per Claim Finalised (PPCF) model. The tables below show
extracts from the PPCF (ordinary time analysis) as at 30 June 2007

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 7 of 15

Ultimate
545
677
710
698
736
730
776
769
786

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

Accident year
Payments per claim finalised ($'000
ending 30 June Development year
0
1
2
41
51
1999
28
2000
36
34
58
44
49
2001
33
43
56
2002
37
2003
40
46
60
2004
41
47
60
2005
38
49
64
2006
44
54
2007
47

- current values @ 30 June 2007)


3
53
68
65
73
62
69

4
57
71
76
83
80

5
56
65
76
69

6
67
68
81

7
88
93

8
92

Average last 2
Average last 3
Average all

46
44
38

52
50
45

62
61
57

64
66
65

82
80
77

73
72
69

70
69
69

90
90

92

Selected

45

50

60

65

80

75

75

90

100

3
293
369
331
382
330
379

4
279
281
205
234
288

5
217
243
59
118

6
133
113
44

7
58
64

8
23

3
18.0%
17.2%
26.4%
15.1%
29.2%
17.8%

4
6.8%
26.0%
40.2%
40.8%
15.8%

5
23.5%
15.2%
73.4%
51.5%

6
39.4%
54.1%
31.1%

7
57.5%
45.4%

8
61.5%

51.9%

Accident year
Claims outstanding at end of year
ending 30 June Development year
0
1
2
1999
337
384
345
2000
411
456
426
2001
424
480
425
2002
416
468
426
2003
439
495
443
2004
433
494
442
2005
487
602
587
2006
484
570
2007
479
Accident year
Probability of Finalisation
ending 30 June Development year
0
1
2
1999
23.6%
15.1%
16.8%
2000
20.5%
19.2%
14.7%
2001
22.2%
16.8%
19.9%
2002
22.2%
18.1%
17.0%
2003
20.8%
18.5%
19.3%
2004
22.5%
18.1%
18.6%
2005
8.6%
8.6%
10.8%
2006
7.6%
14.3%
2007
14.3%
Average last 2
Average last 3
Average all
Selected

11.0%
10.2%
17.8%
22.5%

135

11.4%
13.5%
15.9%
18.5%

14.3%
15.9%
16.6%
18.5%

23.5%
20.7%
20.7%
21.0%

29.2%
32.7%
26.8%
27.0%

61.7%
43.6%
38.0%
40.0%

49.5%
45.3%
45.3%
45.0%

51.9%
50.0%

61.5%
55.0%

100.0%

Accident year
Claims finalised
ending 30 June Development year
0
1
1999
45
59
2000
47
92
2001
53
83
2002
52
88
2003
51
95
2004
55
92
2005
22
49
2006
19
81
2007
37
104

2
67
70
100
83
100
96
68
110
105

3
63
75
115
66
132
80
125
109
105

4
20
97
135
158
53
104
132
115
111

5
66
43
153
122
116
115
146
128
123

6
86
132
19
54
81
80
101
89
86

7
77
52
23
A
51
50
63
56
54

8
36
36
14
B
29
29
36
32
31

9
24
31
14
C
26
26
32
29
28

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 8 of 15

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

Accident year
Payments ($'000 - current values @ 30 June 2007)
ending 30 June Development year
0
1
2
3
4
1999
1,238
2,411
3,424
3,330
1,139
2000
1,702
3,158
4,066
5,124
6,860
2001
1,734
3,659
4,927
7,477
10,237
2002
1,945
3,758
4,660
4,818
13,042
2003
2,026
4,370
5,982
8,120
4,230
2004
2,248
4,340
5,805
5,527
8,297

5
3,680
2,806
11,658
8,369
8,735
8,660

6
5,763
8,962
1,543
4,031
6,055
6,003

7
6,744
4,859
2,045
D
4,577
4,537

8
3,301
3,554
1,366
E
2,917
2,892

a) In the claims finalised table, there are three missing amounts, marked A, B, and C.
Calculate these three values, showing your workings.
(3 marks)
b) In the payments table, there are three missing amounts, marked D, E, and F.
Calculate these three values, showing your workings.
(1.5 marks)
c) For the accident year ended 30 June 2005, calculate an inflated and discounted
outstanding claims cost. You may assume that the appropriate future inflation rate
is 4% per annum, and the appropriate discount rate is 7% per annum.
(2.5 marks)
In the table of finalised claims the slowdown of finalisations is apparent. The
Appointed Actuary of Playdar has decided to supplement the other models by using a
Payments per Claim Finalised model in Operational time. The following tables show
extracts of this analysis.
The first table shows PPCF values by accident year, and by quintile of finalisation.
The second table shows an assumed pattern of finalisations. For the three most recent
accident years, the pattern of finalisation has been adjusted to account for the delay
(and later catch-up) induced by the change to legislation.

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 9 of 15

9
3,288
4,237
1,835
F
3,561
3,530

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

Accident year
Payments per claim finalised ($'000 - current values @ 30 June 2007)
ending 30 June Band of finalisation
0-20% 21-40% 41-60% 61-80% 81-100%
1999
36
52
56
71
2000
35
63
68
74
2001
38
62
70
75
2002
40
64
76
75
2003
43
61
2004
43
63
2005
2006
2007
Average last 2
Average last 3
Average all

43
42
40

62
63
61

73
71
68

75
75
74

Selected

42

63

71

75

120

Accident year
Claims finalised
ending 30 June Development year
0
1
1999
45
59
2000
47
92
2001
53
83
2002
52
88
2003
51
95
2004
55
92
2005
22
49
2006
19
81
2007
37
91

2
67
70
100
83
100
96
68
92
99

3
63
75
115
66
132
80
94
103
137

4
20
97
135
158
53
104
114
147
108

5
66
43
153
122
116
115
138
125
120

6
86
132
19
54
81
80
125
89
83

7
77
52
23
A
51
50
79
56
52

d) In the table for claims finalised, the values G and H have been omitted. Calculate
these values, showing workings.
(2 marks)
e) Using the operational time method, calculate an inflated and discounted claims
cost for the accident year ended 30 June 2005. You should use the same inflation
and discount rates as in c) above.
(6 marks)
f) Which of the two results would you adopt and why?
(2 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 10 of 15

8
36
36
14
B
29
29
45
32
30

9
24
31
14
C
26
26
43
G
H

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 5

(18 marks)

You are the Appointed Actuary for CAZAJ Insurance Company, which is a multi-line
General Insurer. CAZAJ operates in all states and territories of Australia. As part of
the valuation of Claims and Premium Liabilities under GPS 310 at 31 December
2007, you are deciding on appropriate risk margins.
You are analysing the Household portfolio in an attempt to decide on a stand-alone
risk margin to provide 75% Probability of Adequacy for both Claims and Premium
Liabilities. CAZAJ has no reinsurance on its Household portfolio. Your analyst,
Archie Archerson, has produced the following tables.
Householders
Central estimate of outstanding claims
Central estimate of premium liabilities

$m (Inflated &Discounted,
incl expenses)
62.3
84.6

Method using data for accident years


2002-2007
Bootstrap method
Stochastic Chain Ladder
Mack Method

Accident year
2002
2003
2004
2005
2006
2007

Coefficient of variation
12%
14%
14%

Loss ratio
146%
68%
62%
71%
74%
76%

Average 2002-2007
St dev 2002-2007

83%
31%

Average 2003-2007
St dev 2003-2007

70%
5%

a) You have checked Archies work on the Bootstrap, Stochastic Chain Ladder, and
Mack Method, and concur with his results. Each method has relied on the use of a
chain ladder model. Archie is uncomfortable using the three methods as the
central estimate of outstanding claims did not rely on a chain ladder model (it used
the PPCI and Bornheutter Ferguson models).

2008 Institute of Actuaries of Australia 3A Sem1 08

Page 11 of 15

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

Explain to Archie the basic workings of the three methods, including an


explanation if his concern is valid.
(4 marks)
b) Following Archies analysis, you decide that an appropriate coefficient of
variation for outstanding claims for Household is 17%. Archie wants to know why
your choice is greater than the results of any of the individual methods.
Why would you choose a higher coefficient of variation than indicated by the
models?
(2 marks)
c) Having decided that 17% is an appropriate coefficient of variation for outstanding
claims for Household, describe how you would calculate a stand-alone risk margin
to provide a 75% probability of adequacy. You do not have to make actual
calculations.
(2 marks)
d) Archie notes that the adopted risk margin is significantly lower than the standalone risk margin calculated using the Tillinghast method.
Why would your choice be lower than the Tillinghast method? Does this
indicate your choice should be revised upwards?
(2 marks)
e) Archie is now assisting with an appropriate risk margin for CAZAJs Premium
Liabilities. In calculating the central estimate, a loss ratio method was adopted.

He argues that an appropriate stand-alone coefficient of variation is 7%,


representing the calculated CoV using the loss ratio experience from 2003 to
2007. He has excluded 2002 from the calculations as its a long time ago now,
and it was a poor year as we had a couple of natural catastrophes in that year.
What are the shortcomings of basing the coefficient of variation on the loss ratios?
Assess Archies reasoning, and provide with reasons an appropriate coefficient of
variation for the stand-alone risk margin for the premium liabilities.
(4 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

f) With your guidance, Archie has calculated stand-alone risk margins for premium
liabilities for all of CAZAJs different lines of insurance. He has also produced a
correlation matrix; an extract is shown below.
Householders
Householders
Domestic Motor
Commercial Motor
CTP

(i)

100%
30%
15%
3%

Domestic
Motor
30%
100%
70%
30%

Commercial
Motor
15%
70%
100%
20%

CTP
3%
30%
20%
100%

Briefly explain how Archie would have produced this matrix.


(1 mark)

(ii)

Give reasons explaining the correlation between


Domestic Motor and Commercial Motor
Householders and Compulsory Third Party
Householders and Domestic Motor
(3 marks)

2008 Institute of Actuaries of Australia 3A Sem1 08

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INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

MAY 2008 EXAMINATIONS

QUESTION 6

(16 marks)

You are the Appointed Actuary to Greyvan Insurance Company. Greyvan is a niche
insurer which provides travel and motor insurance to retirees who travel around
Australia by car with or without caravans. Greyvan has been very successful in
targeting this market it has mainly sold its business through motoring organisations
as well as advertising in publications aimed at such travellers.
Greyvan has always adopted a simple aggregate reinsurance policy. It has changed the
retention each year in line with inflation.
The following table represents output from the outstanding claims calculation at 30
June 2008. All the dollar figures have been adjusted for inflation, so are in equivalent
dollars of 30 June 2008.
Accident year
end 30 June

1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total 99-08

Gross
premium

Net
premium

Gross claim
payments

Net claim
payments

$'000
1,624
1,479
1,567
1,564
1,485
1,503
1,458
1,377
1,272
1,164
1,364

$'000
1,267
1,170
1,233
1,196
1,163
1,167
1,139
1,096
1,014
935
1,042

$'000
1,032
961
1,624
900
874
2,045
806
647
564
281

$'000
1,032
961
983
900
874
807
806
647
564
281

14,493

11,379

9,734

7,855

Gross
outstanding
claims
$'000
9
46
302
131
182
304
439

1,413

Net
outstanding
claims
$'000
9
46
90
131
182
304
439

Gross Loss
Ratio

64%
65%
104%
58%
62%
156%
64%
60%
68%
62%

82%
82%
80%
76%
79%
77%
82%
76%
86%
77%

77%

80%

1,201

The bold figures are estimates of the premium amounts which are estimated to attach
to the accident year ended 30 June 2009. They have been calculated with the help of
the marketing department with assistance from the manager responsible for placing
Greyvans reinsurance policies.
It may be observed from the table above that Greyvan has only triggered its
reinsurance policies in two years; these correspond to experience of weather related
catastrophes.
You are required to calculate a central estimate of Greyvans premium liabilities as at
30 June 2009. The methodology shall use an assumed loss ratio multiplied by an
appropriate measure of unexpired risk, together with adjustments. The estimate should
be in accordance with the requirements of GPS310.
The following information shall assist you in your calculations:
Greyvan writes six-month policies only
Due to weather and travel pattern variations, the percentage of policies sold in
each quarter follow this pattern

2008 Institute of Actuaries of Australia 3A Sem1 08

Net Loss
Ratio

Page 14 of 15

INSTITUTE OF ACTUARIES OF AUSTRALIA


GENERAL INSURANCE PART A

Date of commencement
of policy
Jul Sep
Oct Dec
Jan Mar
Apr Jun

MAY 2008 EXAMINATIONS

Proportion of policies
50%
15%
10%
25%

Approximately 7% of policies result in cancellation two weeks after


commencement, and for these policies a refund of 60% is given (provided no
claim is made). No refund is provided for other cancellations. (The figures in
the table above for the 2009 accident year dont allow for cancellations, but
previous accident years do allow for cancellations).
The table above includes all claims handling expenses, but does not include
other expenses of 8% of gross premium. Half of these other expenses relate to
acquisition and are incurred for all policies (including those cancelled).

a) Using the information above, calculate the unearned premium at 30 June 2009,
allowing for cancellations. Show all calculations, and state any assumptions you
make.
(5 marks)
b) What gross and net loss ratio would you adopt for use in the calculation of
Premium Liabilities? Give reasons, showing calculations (if any), and stating any
assumptions that you make.
(3 marks)
c) Calculate a central estimate of Net Premium Liabilities using your answers from
a) and b) above, as well as any other calculations or adjustments you require.
Show all calculations, and state any assumptions you make.
(6 marks)
d) Using the information provided, explain, with reasons, whether you would expect
Greyvans accounts at 30 June 2009 to require an Unexpired Risk Reserve.
(2 marks)

END OF PAPER

2008 Institute of Actuaries of Australia 3A Sem1 08

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