Chapter 4: Accounting: methods and interpretation

Question 1

Reserves needed for annual (one-year) accounts

Answer 1

• Outstanding reported claims
• IBNR
• Reopened claims
• Claims handling expenses
• UPR and perhaps AURR

Question 2

Main accounting concepts:

Answer 2

• Accruals
• Going concern
• Consistency
• Prudence
• Separate valuation of assets and liabilities

Question 3

Accounting ratios

Answer 3

• Claims ratio (loss ratio)
• Expense ratio
• Commission ratio
• Combined ratio
• Proportion reinsured
• Investment return
• Profit margin
• Return on capital
• Solvency ratio
• Assets to liabilities
• Claims settlement pattern

Question 4

Converting underwriting year records into annual accounts:

Answer 4

• Underwriting year claims outstanding includes both amounts from incidents already reported and amounts in respect of claims on events that will occur in future accounting periods
  o To convert underwriting year to accident year one needs to reduce the estimated claims outstanding so that they cover only events occurring up to the end of the accounting period
• Under accounting year, one needs to set up an unearned premium reserve (UPR) in respect of claims that are yet to occur on policies that have been written but not yet fully earned.
  o This is usually done by assuming that the premium is earned evenly over the policy year, but might have to be adjusted if this isn’t the case
  o An additional unexpired risk reserve may also be established for future claims experience expected to exceed allowances in the unearned premium reserve
• Accident year claims outstanding must also include an allowance for claims arising from incidents occurring in the year in question but in respect of policies written in earlier years (i.e. earlier underwriting years)
• Deferred acquisition cost asset needs to be set up under accident year in respect of acquisition costs paid for premiums received but not yet fully earned.