Accounting – Methods and Interpretation

Question 1

• The reserves required for one-year accounts are

Answer 1

o Outstanding reported claims
o IBNR
o Reopened claims
o Expenses of handling these claims
o UPR (and possibly AURR)

Question 2

• Funded accounting

Answer 2

is used when the underwriting year is fundamentally important or when there are significant delays in premium and claim settlement

• Lloyd’s syndicates, marine and aviation business and non-proportional reinsurance still use funded accounts for internal purposes, and apply an adjustment to determine reserves on a one-year accounting basis

Question 3

• The main accounting concepts are: (5)

Answer 3

o Accruals – Revenue and costs are recognised as they are earned or incurred, not as money is received or paid
o Going concern – The enterprise will continue in operational existence for the foreseeable future
o Consistency – There is consistency of accounting treatment of like items within each accounting period and from one period to the next
o Prudence – Revenue and profits are not anticipated (that is, must be realised) and provision is made for all known liabilities, whether the amount of these is known with certainty or is a best estimate in the light of the information available
o Separate valuation of assets and liabilities – When determining the aggregate amount of any item the enterprise must determine separately the amount of each individual asset or liability that makes up that item

Question 4

The ratios you should calculate from the accounts are (11):

Answer 4

o Claim ratio (loss ratio) – Incurred claims/earned premium
o Expense ratio – expenses paid/written premiums
o Commission rate – commission paid/written premiums
o Combined ratio – claim ratio + expense ratio
o Proportion reinsured – net written premium/gross written premium
o Investment return – investment return/average asset value
o Profit margin – insurance profit/net earned premium
o Return on capital – post-tax profit/free reserves at start of year
o Solvency ratio – free reserves/net written premium
o Assets to liabilities – assets/liabilities
o Claims settlement pattern – OS claims reserve/claims paid