Examination: Subject SA3 General Insurance Specialist Applications
Examination: Subject SA3 General Insurance Specialist Applications
Examination: Subject SA3 General Insurance Specialist Applications
EXAMINATION
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You have 15 minutes at the start of the examination in which to read the questions.
You are strongly encouraged to use this time for reading only, but notes may be made.
You then have three hours to complete the paper.
3. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
5. Attempt both questions, beginning your answer to each question on a separate sheet.
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
SA3 S2006 Institute of Actuaries
1 You are the newly appointed actuary for a small UK general insurance company that
writes liability insurance through regional UK brokers and Lloyd s. The company is
newly established having started writing risks on 1 July 2005. The professional
indemnity class of business currently accounts for most of the business written by the
company.
One of your first tasks as the company s actuary is to estimate outstanding claims and
IBNR requirements as at 31 December 2005 for the purposes of the company s year-
end accounts. The company accounts for its business on a one-year accounting basis.
In addition to the company s own detailed policy and claims information, you have
decided to obtain benchmark claims development and loss ratio information from
publicly available sources. You have collected paid, incurred and ultimate loss ratios
by year of account from the UK statutory returns submitted by 10 different insurance
companies. You have selected each of the 10 companies because they present a
professional indemnity classification within their returns.
Having collected these data, you realise that it may not be appropriate to include data
relating to all of the 10 companies within your benchmarks. Your company s
professional indemnity underwriter has agreed to assist you in identifying those
companies whose data should be used for benchmarking purposes.
(i) Suggest two main reasons why UK statutory returns are more useful than
Companies Act accounts for deriving reserving benchmarks for your
company. [2]
(ii) Explain the distinguishing aspects of each professional indemnity account that
you would wish to investigate when selecting the most appropriate loss ratio
benchmarks for reserving purposes. [18]
Following your discussions with the professional indemnity underwriter, you have
made your informed selection from the 10 benchmark accounts and you have
combined the information, weighted by volumes of business, to produce the following
summary table.
Notes to table:
1. PLR = paid loss ratio = paid claims at valuation date divided by earned
premium at valuation date
2. ILR = incurred loss ratio = incurred claims at valuation date divided by earned
premium at valuation date
SA3 S2006 2
The underwriter has additionally provided you with his estimates of market premium
rate changes over the past 3 years and these are shown in the table below.
(iii) Describe how you might use the information provided in the tables above to
estimate a benchmark ultimate loss ratio for the 2005 accident year, stating
additional information that you might require from the underwriter. [14]
(iv) (a) Estimate average paid and incurred claims cumulative development
percentages for an accident year at the end of the first, second, third
and fourth development years.
(v) Suggest, with reasons, the extent to which you would expect to use your
company s own claims data versus benchmark information for reserve reviews
as at 31 December 2005 and 31 December 2006. [14]
[Total 58]
A motor manufacturer has approached your company to underwrite a new scheme that
provides gap insurance cover to purchasers of new vehicles sold by its network of
dealers. Under the terms of this policy, the insurance company will pay out the
difference between the original purchase price and the amount paid out by the
insured s own private car insurance policy in all events of the vehicle being written
off. The insurance cover is for the first three years of vehicle ownership, provided the
vehicle remains under the ownership of the original vehicle purchaser. The
manufacturer has expressed a preference that all purchasers of vehicles in the UK pay
the same flat monthly premium for the cover. The premium will be payable for a
period of 12 months from vehicle purchase.
(i) Discuss the advantages and disadvantages to the new vehicle purchaser of this
policy. [6]
(ii) Describe risks that are likely to exist in this scheme for the insurer, suggesting
ways in which these risks can be mitigated. [16]
(iii) Discuss the data you will require to calculate the risk premium, including
possible sources for this information. [14]
(iv) State the other data or information you would consider in deciding whether or
not to underwrite the scheme. [6]
[Total 42]
END OF PAPER
SA3 S2006 3