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Sept 2011: Q5 ii

J

jensen

Member
Hi

When calculating the Outstanding claims reserves for large claims, how did we come to use 25% of earned premium? I don't see this mentioned in the question.

Also, when we estimate the total assets as at 31/12/09, why is it we excluded DAC? I would have included DAC since DAC is an asset, and the accounting standard in the question appear to allow DAC.

Thanks a bunch!
 
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Outstanding claims reserve = incurred to date - paid to date

For large claims, this is:

65% x earned premium - 40% x earned premium = 25% x earned premium

With regards to your DAC question, the total assets held by the company will be its technical provisions (ie the value of its liabilities) + shareholders' funds.

Hence, the total assets = oustanding claims reserve + UPR (net of DAC) + shareholders' funds.

The UPR is lower because of the allowance for DAC, and since a reduction in the liabilities has the same effect as an increase in assets, the total assets do indeed allow for DAC.

I see that you are using the examiners' reports to practice past questions. Some students find that these don't quite provide enough explanation, particularly for calculations. Why not buy the ASET? This would have given you the answers to all of your recent questions, and would also give you tips for learning and exam technique, so it would make your study much more efficient.

Kind regards,

Katherine.
 
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