ST7 Pu 14 PDF

ST7: CMP Upgrade 2013/14 Page 1
Subject ST7
CMP Upgrade 2013/14
CMP Upgrade
This CMP Upgrade lists all significant changes to the Core Reading and the ActEd
material since last year so that you can manually amend your 2013 study material to
make it suitable for study for the 2014 exams. It includes replacement pages and
additional pages where appropriate. Alternatively, you can buy a full replacement set of
up-to-date Course Notes at a significantly reduced price if you have previously bought
the full price Course Notes in this subject. Please see our 2014 Student Brochure for
more details.
This CMP Upgrade contains:
All changes to the Syllabus objectives and Core Reading.
Changes to the ActEd Course Notes, Series X Assignments and Question and
Answer Bank that will make them suitable for study for the 2014 exams.
The Actuarial Education Company IFE: 2014 Examinations

Page 2 ST7: CMP Upgrade 2013/14
1 Changes to the Syllabus objectives and Core Reading
1.1 Syllabus objectives
Syllabus objective (k)(iv) has been changed to:
(iv) Describe the Mack and bootstrapping approaches to reserving.
1.2 Core Reading
Chapter 3
Page 37
A new paragraph of Core Reading has been added, which discusses the use of
telematics in motor business.
We recommend that you remove pages 3738 from your Course Notes and use
replacement pages 37, 38a, 38b and 38c provided below.
Chapter 6
Page 20
A new discussion on the EU Gender Directive has been added.
Chapter 8
Page 1
The first sentence of Core Reading now reads:
Lloyds is a key player in the worldwide general (non-life) insurance and

reinsurance market, with just under 25.5 billion of gross written premium in
2012.
IFE: 2014 Examinations The Actuarial Education Company

Page 4
The final sentence of Core Reading now reads:
By the end of 2011 there were 57 managing agents, managing a total of 87

active syndicates and 5 RITC syndicates.
Page 10
The second sentence of Core Reading in Section 3.2 now reads:
In addition, Lloyds in aggregate must demonstrate overall solvency (that

is, based on the aggregate of all members exposures or net liabilities) to the
regulator (the Prudential Regulation Authority, PRA) by holding additional assets
centrally (known as the central assets for solvency).
Chapter 9
Page 8
A new list has been added after the first paragraph on page 8. This reads:
Reserves booked will usually be greater than best estimate due to:
smoothing of results
difficulty in setting reserves, particularly reinsurance recoveries
requirements of regulatory bodies
peer pressure.
Page 17
A new portion of Core Reading has been added, which discusses uncertainty arising
from the treatment of large losses.
Page 28
A new sentence of Core Reading has been added, at the end of the section on broker
mergers. This reads:
This can be a particular issue for commercial risks where both insureds and
brokers are far bigger than the insurers.

Chapter 10
Page 4
The start of the third paragraph now reads:
Industry-wide (or industry-source) data is collected and compiled by member

offices of particular organisations, for example, the ABI (Association of British
Insurers) and Lloyds of London in the UK.
Page 7
A new use of data has been added to the list of bullet points:
catastrophe modelling.
Page 10
Two new users of data has been added to the list of bullet points:
risk management
catastrophe modelling.
Page 11
The second example now reads:
Example
In the UK, an insurer should have kept at least enough data to be able to compile
the statutory returns to the PRA (Prudential Regulation Authority). There are
similar requirements in some other countries.
Page 15
The last sentence above Section 3.3 now ends:
.... say, half the retention.

Page 16
The last sentence of the example now reads::
The former will provide claims details to be entered onto the insurers systems
or onto bordereaux, while claims from the latter will be entered by the insurers
own staff.
Page 17
A new sentence has been added before the first paragraph of ActEd text. This reads:
Both premiums and claims information may be bulk figures, and thus policy and
claims details are hard to access.
The fifth paragraph now reads:
It may be time consuming for staff to enter such data into a computer system
and so only major losses may be broken out from claims bordereaux, with the
residual being entered as a bulk item. It is quicker to integrate data received
electronically into the system.
Page 18
The last sentence in the paragraph discussing length of tail now reads:
This is particularly true of classes that are subject to significant delays in claim
notification or slow loss development.
The last sentence above the examples now reads:
But the fact that the information will vary from risk to risk does not lend itself to
systematic data capture; often this is the case with London Market data.
Page 21
A new sentence has been added after Question 10.8. This reads:
Clear links are needed between underwriting and claims databases eg via policy
reference numbers.

Page 22
The last paragraph now reads:
Written premiums are the premiums an insurer expects to receive over the
duration of the policy. Written premiums may be before or after commission.
The insurer should calculate the net written premiums by deducting any
reinsurance premiums from the gross premiums.
Page 26
The second list of bullets now includes a third point:
the speed of notification.
Page 28
The third paragraph from the bottom of page 28 now reads:
In the London Market, policies are often coinsured by a number of different

insurers. In these cases, the lead insurer will normally be responsible for
handling the claim (although the second on the slip may also be involved) and
will advise reserves to the following insurers. It is common for following
insurers to use the reserve advised by the leader, although some insurers do
alter the reserve for contentious claims where there are issues such as policy
coverage.
Page 29
The last sentence of the second paragraph now reads:
This is likely to occur some time after the original claim payments are made and
the amounts are normally recorded as negative claim payments with a code to
identify the type of receipt so that claim severities can be better assessed.
Page 30
Another sentence has been added to the list of bullet points:
for a claim made by a minor who can reclaim on attaining the age of 18.

Page 31
A new sentence has been added to the end of the second paragraph, which reads:
Inwards claims are likely to have a catastrophe indicator and recoveries may be
proportional.
A new discussion has been added to the end of the section on reinsurance recoveries.
This reads:
The amount of the reinstatement premium would therefore be allocated to the claim(s)
that had necessitated the use of the reinstatement cover.
It is unlikely that one will allocate IBNR and paid claims to individual risks except
for large London Market contracts.
Indeed, it is very difficult to allocate IBNR to an individual claim because, by

definition, we dont yet know about it and therefore cant know which claim to allocate
it to.
Page 39
A new sentence has been added to the end of the section on check digits. This reads:
The policy number is often used as a link between different databases,

eg claims system and policy or client system.
Chapter 12
Page 9
A new sentence has been added to the final paragraph of Core Reading. This reads:
The level of regulatory capital required to support the business may also be
considered.
Page 12
The penultimate paragraph of Core Reading now ends:
Such superimposed inflation could be as a result of future step changes in

average claim size arising from a change in the law or be reflective of the
historical level of inflation seen in the claims.

Chapter 13
Page 9
The first paragraph in the section on reporting years now reads:
Using this cohort, we group claims according to the year (or other period /
cohort) in which they are reported to the insurer or reinsurer, irrespective of the
original period of the claim event or when the insurance policy incepted.
Page 12
A new paragraph has been added before the section on prioritising work / materiality.
This reads:
It should also be noted that the selected development period does not need to
be the same length as the selected cohort period. For example, projections of
underwriting year cohorts showing quarterly development periods are common.
Page 16
Two more examples have been added to the top of the page. These are:
latent claims, such as claims arising from exposure to asbestos, pollution

and health hazards
other special or non-standard risks, such as Periodical Payment Orders in
respect of private motor insurance.
Page 26
A fourth bullet point has been inserted into the list. This reads:
A change in the period before non-active claims are reviewed either to

chase for outstanding information or to close the claim as a nil claim.
Therefore, the first sentence of Core Reading after Question 13.12 now reads:
The first four examples above might be expected to cause a one-off change in
the way that claims develop.

A new sentence has been added to the bottom of page 26. This reads:
For some changes in claims handling procedures, which only affect the
development of incurred claims, it may be appropriate to rely more heavily on
paid development data for the projection.
Page 27
The second paragraph under the section on claims reviews now reads:
However, if such reviews are infrequent, or if a large one-off review has been
carried out, or if the company undertakes the reviews more frequently than it has
in the past, it may be necessary to adjust the development pattern derived from
the data.
Page 28
A paragraph has been added to the section on seasonality. This reads:
Seasonality can also impact the speed at which claims are processed for
example, fewer claims may be processed during December when there are a
greater number of Bank Holidays.
Page 39
A new sentence has been added before Question 13.18. This reads:
In many cases it can be useful to undertake projections on both paid and

incurred data, and to compare and understand the differences in order to gain
helpful insights and select the most appropriate approach.
Page 40
The first paragraph now ends:
...if conservative case reserves are set up at the outset or if case reserves are
held for claims which subsequently settle for nil.
Page 44
The last sentence on page 44 now reads:
We can also use curve fitting to smooth development patterns or to select a tail
factor to allow for development beyond the oldest development period.

Page 48
A new sentence has been added under the first paragraph of Section 3.4. This reads:
As noted above, it is also a simple method to apply and is especially useful

when data is scanty, unreliable or missing altogether.
Page 59
The paragraph at the end of the bullet points now reads:
We note that the definition of claim numbers affects the average claim sizes.
For example, whether nil claims are included or excluded will affect the selected
average claim sizes (all other things being equal). It is of utmost importance to
ensure that the claim frequency and claim severity are consistent.
Page 61
A new bullet point has been added to the list of strengths. This reads:
Enables more accurate adjustments to be made (where these only affect

the frequency or the severity of claims) which would not be possible with
other (aggregate) methods.
Page 69
The second paragraph of Core Reading now reads:
In determining the need for an additional reserve the extent to which different
categories of business can be aggregated should be considered, such that
anticipated future profits from some categories of business may offset potential
inadequate premiums in other categories.
Chapter 14
Page 2
Two new points have been added to the first list of bullets. These are:
the emergence of new types of claim

changes in the way claims are settled for example, if more claims are
settled in the form of Periodical Payment Orders (rather than as lump
sums).

Page 4
The last sentence of the first paragraph now reads:
We are interested in the uncertainty of reserves, including its impact on the

capital backing the insurance liabilities and its sufficiency.
A new bullet point has been added to the bottom of page 4. This reads:
Inform the management / Board of the insurance company to assist with

ongoing decision making, for example in what areas to expand or contract
the volume of business being written.
Page 30
A new bullet point has been added to the list. This reads:
Stress and scenario tests around the most significant assumptions and
key areas of uncertainty.
Chapter 15
Page 14
Another example has been added. This reads:
business written on a risk attaching basis compared with a claims made

basis. This is because late reported claims will fall into a subsequent policy
year. This was discussed in Chapter 13.
Page 21 22
New Core Reading has been added to Section 5.2 and a new section has been added
discussing the reserving cycle.
Page 25
This page has been deleted.

Chapter 17
Page 3
The final paragraph now reads:
Medium-dated fixed-interest stocks, index-linked stock where available and, to a

very limited extent, equities and real estate are the likely choices of assets to
support longer-tail insurance classes.
Page 4
The second bullet point now reads:
earnings inflation, medical inflation and judicial inflation will affect bodily
injury claims for liability business.
The first sentence of the last paragraph has been deleted.
Page 6
In the third paragraph of Core Reading, the first sentence now reads:
The way in which an insurer chooses to invest the assets supporting the free
reserves will be influenced by the size of the free reserves, and by permissible
holdings based on the regulatory regime to which the insurer is subject.
Page 10
The last sentence of Core Reading has been deleted.
Page 22
The second bullet point now reads:
regulatory constraints, for example, those imposed by Lloyds, the

Prudential Regulation Authority (PRA) and the Financial Conduct
Authority (FCA).
Page 29
The first sentence now reads:

The insurer could then attempt to reduce this probability to an acceptable level.
However, it is highly dependent on the chosen probability distribution functions,
and other assumptions such as those around dependencies between risk types,
products and so on.
Page 36
A new section on reverse stress and scenario testing has been added. We recommend
that you insert new pages 36b and 36c below into your Course Notes.
Chapter 21
Page 12
The third and last paragraphs of Core Reading now refer to the PRA instead of the
FSA.
Chapter 23
Page 7
The penultimate bullet now reads:
territory USA, Western Europe, Asia-Pacific, South/Central America,

Africa, MENA (Middle East and North Africa) and so on
Chapter 24
Pages 2 and 4
New Core Reading has been added to pages 2 and 4. We recommend that you remove
pages 1 4 from your Course Notes and use replacement pages 1 4c below.
Page 8
A new bullet point has been added to the list on page 8. This reads:
reinsurance offset / recoveries.

Page 9
The penultimate paragraph now reads:
We may deem the unearned premiums less deferred acquisition costs carried
forward to be insufficient to cover the cost of the claims and expenses that will
be incurred in the period of unexpired risk. That is, if we wrote a potentially
lossmaking contract (onerous contract) in the previous period, then not only
will we need to recognise any premium to be earned in a future year, but we will
also recognise the reserve that we need to put aside to cover the risk that we
undertook: We should therefore establish an additional reserve for unexpired
risk.
The excess of that reserve over any corresponding reserve at the end of the
previous year will form part of the outgo in the latest accounting year.
Page 17
The Core Reading on IFRS and UK GAAP has been updated. We recommend that you
remove pages 17 18 from your Course Notes and use replacement pages 17 18c
below.
Chapter 25
Page 2
An additional paragraph has been added to the explanation of the consistency

accounting concept. This reads:
Since actuaries are crucial in the reserving process it is important to

understand that variations in the level of prudence applied year on year lead to
releases of profit (potential for profit manipulation) which is against the
accounting principles. Therefore one of the most important things in the
reserving cycle is consistency.
Page 3
Further explanation of IFRS Phase II has been added. We recommend that you remove
pages 3 4 from your Course Notes and use replacement pages 3 4c below.
Page 8
Further Core Reading has been added. We recommend that you remove pages 7 8
from your Course Notes and use replacement pages 7 8 below.

Chapter 26
Page 9
The deadlines on this page have been amended. We recommend that you remove pages
9 10 from your Course Notes and use replacement pages 9 10 below.
Glossary
Page 1
The final phrase has been deleted. This was:
an example being the Claims Reserving Manual published by the Faculty and
Institute of Actuaries.
Page 7
The definition of a bordereau has been updated to read:
A detailed list of premiums, claims and other important statistics provided by

ceding insurers to reinsurers (or by coverholders to insurers in direct
insurance), so that payments due under a reinsurance treaty (or delegated
authority schemes in direct insurance) can be calculated.
Page 10
The definition of a claim cohort has been updated to read:
A group of claims with a common period of origin. The period is usually a

month, a quarter or a year. The origin varies but is usually defined by the
incident date of a claim, the date of reporting of a claim, the date of payment of a
claim, or the date when the period of cover to which a claim attaches
commenced.
Page 14
The definition of deferred acquisition costs has been updated. The first sentence now to
reads:
Acquisition costs relating to unexpired periods of contracts in force at the

balance sheet date.

Page 18
In the definition of experience rating, the end of the first paragraph now reads:
...a collar or corridor.
Page 19
The definitions of Financial Services and Markets Act 2000 (FSMA)* and Financial
Services Authority (FSA)* have been deleted.
Page 20
A new definition of fronting has been included. This reads:
Fronting
Fronting occurs when an insurer, acting as a mere conduit, underwrites a risk

and cedes all (or nearly all) of the risk to another insurer which is technically
acting as a reinsurer. The ceding or fronting insurer will typically receive a fee
for its involvement to cover its expenses and profit.
In insurance the term fronting may also be used to describe the process
whereby an individual effects a policy for him/herself but tries to save money by
putting the policy in someone elses name.
Page 39
In the definition of required solvency margin, FSA has been changed to PRA.
Page 46
The definition of Value at Risk has been changed to:
Value at Risk (VaR)
In financial mathematics and financial risk management, Value at Risk (VaR) is a

widely used measure of the risk of loss. For a given probability and time
horizon, VaR is defined as a threshold value such that the probability that the
loss on the portfolio over the given time horizon exceeds this value is the given
probability level.

Pages 48 52
The following items have been added to the list of abbreviations:
ATAFs Age to age factors

ATUFs Age to ultimate factors
BAU Business as usual
FCA Financial Conduct Authority
ORSA Own Risk and Solvency Assessment
PRA Prudential Regulation Authority
SCR Solvency Capital Requirement
TAS Technical Actuarial Standard
The following items have been deleted from the list of abbreviations:
FSA Financial Services Authority

GRIP General insurance premium Rating Issues working Party
GRIT General insurance Reserving Issues Taskforce

2 Changes to the ActEd Course Notes
Chapter 1
Page 27
The penultimate sentence in Question 1.15 should read:
A total of 5,500 was paid in claim settlements in 2012.
Chapter 2
Page 19
The last sentence now reads:
For example, the European Court of Justice recently ruled that a persons sex can no
longer be used to calculate insurance premiums.
Chapter 3
Page 37
A new paragraph of ActEd text has been added, to follow the new Core Reading on the
use of telematics in motor business.
As stated above, we recommend that you remove pages 3738 from your Course Notes
and use replacement pages 37, 38a, 38b and 38c provided below.
Chapter 6
Page 19
A new explanation has been added to the penultimate bullet of page 19. This reads:
For example, under the EU Gender Directive, European insurers are no longer allowed
to use gender as a rating factor. (This is discussed further below.)"

Pages 20-21
A new ActEd discussion has been added to supplement the new Core Reading on the
EU Gender Directive.
Chapter 9
Page 3
A new bullet has been added at the top of the page:
Portfolio movements: Unexpected changes in the volume and mix of business

can cause an insurer uncertainty.
Page 17
A new ActEd discussion has been added to supplement the new Core Reading on the
uncertainty arising from the treatment of large losses.
Chapter 10
Page 11
The final paragraph has been updated to read:
The PRA is one of the successors to the FSA (Financial Services Authority), with
effect from 1 April 2013. Amongst other things, it is responsible for the supervision
and regulation of insurance companies in the UK.
Page 31
A new discussion has been added to the end of the section on reinsurance recoveries.
This reads:
The amount of the reinstatement premium would therefore be allocated to the claim(s)
that had necessitated the use of the reinstatement cover.

It is unlikely that one will allocate IBNR and paid claims to individual risks except
for large London Market contracts.
Indeed, it is very difficult to allocate IBNR to an individual claim because, by

definition, we dont yet know about it and therefore cant know which claim to allocate
it to.
Page 51
The final paragraph in the section on uses and users of data now reads:
The full development team for a computer system should include senior management,
accountants, underwriters, claims managers, marketing, investment, computing staff,
risk management staff, catastrophe modellers and reinsurers, as well as actuaries.
Page 56
Two more points have been added to Solution 10.5. These are:
Risk management: monitoring the size and nature of risks written, identifying
aggregations of risk, implementing risk controls
Catastrophe
modelling: assessing and quantifying catastrophe risks.
Chapter 13
Page 89
The second table in Solution 13.24 part (iii) should read:
Ratios 0.7255 0.8017 0.9232 0.9986

Ppn claims paid to date 0.5362 0.7390 0.9219 0.9986
Ppn claims O/S 0.4638 0.2610 0.0781 0.0014
Year 2012 2011 2010 2009
O/S claims 22,919 18,038 5,041 95
Outstanding Claims Reserve 46,093

Chapter 14
Page 36
A new point has been added to the last list of bullets. This reads:
stress / scenario tests
Chapter 15
Page 14
An ActEd explanation has been added to the new Core Reading bullet point. This reads:
business written on a risk attaching basis compared with a claims made

basis. This is because late reported claims will fall into a subsequent policy
year. This was discussed in Chapter 13.
Page 21 22
ActEd text has been added to help explain the new Core Reading.
Page 28
The last bullet point on the page has been deleted.
Page 31
In Solution 15.8, the development factor for 2008, development period 1 has been
corrected to 1.284 instead of 1.294.
Chapter 21
Page 12
A new sentence of ActEd text has been added after the third paragraph of Core Reading.
This reads:
The Board for Actuarial Standards (BAS) has now been replaced by Financial
Reporting Council (FRC) Board.

Chapter 24
Pages 17
Additional ActEd text has been written to supplement the new Core Reading on IFRS
and UK GAAP.
As stated above, we recommend that you remove pages 17 18 from your Course
Notes and use replacement pages 17 18c below.

3 Changes to the Q&A Bank
Part 2
Question and Solution 2.19 has been deleted.
Part 3
The end of Question 3.10 part (iv) has been corrected to read:
... calculate a revised estimate of the ultimate gross claim payments for the 2012
accident year.
Part 4
In Solution 4.17 part (ii), the third bullet point now refers to the PRA instead of the
FSA.
In Solution 4.22 part (ii), the last bullet point now refers to the PRA instead of the
FSA.
Part 6
Question 6.18 part (ii) has been corrected. We recommend that you remove pages 7 8
from this Q&A bank and use replacement pages 7 8 provided below.
In Solution 6.11 part (iii), the last two bullet points have been updated to say 2014 and
2016 respectively.
In Solution 6.18 part (ii):

for the third half mark, the mean of the loss ratio distribution truncated at 100%
is 86.5
for the fourth half mark, the mean of the loss ratio distribution truncated at 80%
is 85.1.

4 Changes to the X Assignments

A comment has been added to each solution detailing what part of the course it covers.
Assignment X1
Questions X1.8 and X.19
Part (iii) of Question X1.8 has been deleted and a new Question X1.9 has been written.
We recommend that you remove pages 3 4 from your X1 Assignment and use
replacement pages 3 4 provided below.
Solutions X1.8 and X1.9
Part (iii) of Solution X1.8 has been deleted and a new Solution X1.9 has been written.
We recommend that you remove page 15 16 from your X1 Assignment and use
replacement pages 15 16 provided below.
Assignment X2
Question X2.3
This has been replaced with a new question, which reads:
A rich friend of yours has just become a Lloyds Name. He has joined a syndicate that
writes only marine insurance. List sources of risk and uncertainty which will affect the
return that he makes from his capital outlay. [6]
Solution X2.3
This has been replaced with a new solution. We recommend that you remove
page 3 4 from your X2 Assignment and use replacement pages 3 4 provided below.
Assignment X3
Solution X3.5
In part (ii), one of the headings in table has been corrected. It now says Percentage
developed instead of Grossing up factor.

Assignment X4
Question X4.4
This question has been replaced. It now reads:
Give reasons for correlations between different lines of business and describe how
allowance can be made for correlations within a stochastic model. [4]
Solution X4.4
page 3 4 from your X Assignment and use replacement pages 3 4c provided below.
Assignment X6
Question X6.2
This question has been rewritten. We recommend that you remove page 1 2 from
your X Assignment and use replacement pages 1 2 provided below.
Solution X6.2
page 1 4 from your X Assignment and use replacement pages 1 4c provided below.

5 Other tuition services

In addition to this CMP Upgrade you might find the following services helpful with
your study.
5.1 Study material
We offer the following study material in Subject ST7:

ASET (ActEd Solutions with Exam Technique) and Mini-ASET
Flashcards
Mock Exam A and the Additional Mock Pack
Revision Booklets
For further details on ActEds study materials, please refer to the 2014 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.
5.2 Tutorials
We offer the following tutorials in Subject ST7:

a set of Regular Tutorials (lasting three full days)
a Block Tutorial (lasting three full days)
For further details on ActEds tutorials, please refer to our latest Tuition Bulletin, which
is available from the ActEd website at www.ActEd.co.uk.
5.3 Marking
You can have your attempts at any of our assignments or mock exams marked by
ActEd. When marking your scripts, we aim to provide specific advice to improve your
chances of success in the exam and to return your scripts as quickly as possible.
For further details on ActEds marking services, please refer to the 2014 Student
Brochure, which is available from the ActEd website at www.ActEd.co.uk.

6 Feedback on the study material

ActEd is always pleased to get feedback from students about any aspect of our study
programmes. Please let us know if you have any specific comments (eg about certain
sections of the notes or particular questions) or general suggestions about how we can
improve the study material. We will incorporate as many of your suggestions as we can
when we update the course material each year.
If you have any comments on this course please send them by email to ST7@bpp.com
or by fax to 01235 550085.

All study material produced by ActEd is copyright and is sold
for the exclusive use of the purchaser. The copyright is owned
by Institute and Faculty Education Limited, a subsidiary of
the Institute and Faculty of Actuaries.
Unless prior authority is granted by ActEd, you may not hire

out, lend, give out, sell, store or transmit electronically or
photocopy any part of the study material.
You must take care of your study material to ensure that it is

not used or copied by anybody else.
Legal action will be taken if these terms are infringed. In

addition, we may seek to take disciplinary action through the
profession or through your employer.
These conditions remain in force after you have finished using

the course.

ST7-03: Insurance products types Page 37
Motor property
Motor insurance is a good example of a class of insurance where possible risk

factors can be identified, but it is generally difficult to regard them as meeting
the criteria needed to use them as rating factors.
For example the following are all risk factors:

the number of miles driven
the density of the traffic where the car is driven
the ability of the driver
the speed at which the vehicle is usually driven and its general level of
performance
the ease with which the vehicle can be damaged and the cost of repairing
it
the theft risk
weight of the vehicle
fire risk.
These are generally not all measurable or quantifiable statistics.
However, at the time of writing, there is in many countries a gradual increase in

the use of telematics, whereby the driving behaviour and other factors can be
monitored through the use of a black box. This makes some of the above factors
measurable, and the results can be used to help price the policy.
The term black box here doesnt refer to a box that is black (although it might be!).
Rather, it is a device or system that is placed in a motor vehicle to monitor the way in
which the vehicle is driven. It can measure speed, acceleration, braking, etc as well as
monitoring exactly when the vehicle is driven. Its called a black box because we will
generally know very little about its inner workings.
Therefore, the insurer cannot depend on information on these risks received

from the policyholder as there is considerable scope for the policyholder to
stretch the truth in his or her favour or be too subjective about his or her own
skills.
Question 3.17
Name some other risk factors for motor insurance that can also be used as rating factors.

Page 38a ST7-03: Insurance products types
Question 3.18
State whether the following risk factors are likely to affect the frequency of claims, the
size of claims, or both:
(i) where the car is driven
(ii) how expensive the car is to replace / repair
(iii) how fast the car is driven.
Type of cover is the most important rating factor, as varying the type of cover
can exclude an entire class of claims.
For example, third party cover will not include any claims for accidental damage to the
insureds own vehicle.
Policy excess is also an important rating factor as it too will affect claim sizes.
Many small claims may be eliminated altogether leading to a reduction in claim

frequency and expense savings.
An excess may be compulsory (for example for a young driver) or optional to

secure a reduction in the premium. Typically insurers will offer proposers a
choice of excess levels.
Other rating factors are proxies for those risk factors for which direct
information is unreliable. These include:
the use to which the vehicle is put (eg for business use)
the age of the vehicle
the occupation of the policyholder and other drivers
whether there are additional drivers of the vehicle as well as the
policyholder
sex of main driver
age of policyholder and other drivers
whether or not driving is restricted to certain named drivers
make and model of vehicle
the extent of any modification to the engine or body
location of policyholder (eg postal code)
where the vehicle is kept overnight: on the road / on a driveway / in a
garage etc
whether or not the driver has any driving convictions
past experience.

ST7-03: Insurance products types Page 38b
Question 3.19
The age of the policyholder and the address of the policyholder are proxies for which
risk factors?

Page 38c ST7-03: Insurance products types
This page has been left blank so that you can slot the replacement pages
into your Course Notes.

ST7-06: General insurance markets Page 19
3 Regulatory and fiscal regimes
3.1 The need for supervision
Why should insurance business suffer more legislation than, say, umbrella
manufacturers? One of the reasons is that there is more scope for the purchaser to lose
out financially. When you buy an umbrella, you have a look at it, and if you like it, you
pay the price. However, with insurance, you pay the price at the start of the contract
and you have to trust the insurer to pay valid claims as and when they arise in the future.
The uncertainty underlying insurance business means that it is not just a question of
trusting the honesty of the insurer. The insurer may be very well meaning, but if the
insurers business is not soundly managed, you may find that the insurer has collapsed
by the time you need to make a claim.
In many countries, therefore, there are specific rules and regulations that apply to
general insurers. Different countries adopt different approaches to the regulation of
insurers operations.
3.2 Effect of the regulatory regime
The following regulatory restrictions on the actions of a general insurer may be

encountered in one or more countries of the world:
Restrictions on the type of business that a general insurer can write or

classes for which the insurer is authorised. An authority could prevent an
insurer from writing volatile classes of business or classes where it had little
expertise.
Limits or controls on the premium rates that can be charged.
For example, the authorities in some US states, eg Massachusetts, set the

personal motor premium rates that must be charged. Some states require that
rates are filed (sent to the relevant state department for approval) prior to an
insurer using them. An authority could also set a maximum or minimum
premium or restrict the way in which the premiums are calculated. For example
an authority could set a maximum allowance for expenses defined as a
percentage of the gross premium.

Page 20a ST7-06: General insurance markets
A requirement that the general insurer maintains a minimum level of

solvency, measured in some prescribed manner, ie a minimum level of free
assets. This might, for example, be calculated as a proportion of premiums
written.
Restrictions on the types of assets or the amount of a particular asset that

a general insurer can take into account for the purposes of demonstrating
solvency. This might be with the possible aim of avoiding risky investments or
increasing diversification.
A requirement to use prescribed bases for calculating premiums or for

valuing the general insurers assets and /or liabilities when demonstrating
solvency.
Restrictions on individuals holding key roles in companies.
Licensing of agents to sell insurance and requirements on the methods of

sale and disclosure of commission / broking terms.
A requirement to pay levies to consumer protection bodies.
Legislation to protect policyholders if a general insurer fails.
Question 6.9
Suggest possible legislation that could be used to protect policyholders if a general

insurer fails.
EU Gender Directive
The EU Gender Directive was passed in 2004, being aimed at implementing the
principle of equal treatment between men and women in the access to and
supply of goods and services.
In its original form, the EU Gender Directive included an opt-out in respect of

financial and insurance products provided that certain conditions were met. In
March 2011, the European Court of Justice gave its ruling on the legality of the
insurance opt-out provision, concluding that it is not valid and should therefore be
removed with effect from 21 December 2012. From that point, insurance
companies have no longer been able to use gender as a rating factor.
However, insurance companies are careful to avoid the use of proxy rating
factors (ie highly correlated to gender) that might be deemed to be indirect
discrimination and thus also not permitted.

ST7-06: General insurance markets Page 20b
Clearly, the inability to differentiate between gender when setting premium rates
is having significant implications for insurance pricing, particularly for motor
insurance where there are material observed differences in claims experience
according to gender at certain ages.
Each insurer is likely to set premium rates based on the expected mix of business by
gender but there is the risk that the mix of male / female policyholders turns out not to
be as expected. The introduction of this legislation has therefore increased the
uncertainty of insurers claims experience and profitability.
It is not yet clear how premium rates or underwriting practices have changed as
a result of the ruling. However it is likely that premiums have not simply met in
the middle, but that there have been additional contingency loadings for the risk
of business mix by gender not being as expected within the unisex pricing.
In other words, this legislation has also led to increased uncertainty in premium rates, at
least in the short term, and hence higher risk margins being charged by insurers.
Other possible regulations
Other regulations that could be imposed on general insurers include:

requirement to provide detailed reports and accounts at prescribed intervals
requirement to purchase reinsurance
requirement to hold a claims equalisation reserve
limits on contract terms
advertising restrictions
prescription to hold certain assets.

Page 20c ST7-06: General insurance markets
into your Course Notes

ST7-09: Modelling uncertainty Page 15
3.2 Incorrect dependencies
A number of the variables in the model will be correlated with one another; for
example, interest rates and claims inflation.
Question 9.10
How might interest rates and claims inflation be correlated?
It is important that the dependencies are programmed correctly. The

correlations can be regarded as additional parameters, and it is essential that
they are not overlooked.
3.3 Change in case estimate reserving philosophy
Reserving philosophy within a company will change from time to time.
Example
If claims handlers have under-reserved a case in the recent past, they may be
inclined to overestimate future claims to compensate.
There may also be changes in reserving philosophy following a change in senior

personnel.
This could involve a change in reserving methods, or a change in the basis used for the
reserve estimates (within an acceptable range).
If changes in reserving philosophy are known, it may be possible to make

adjustments.
3.4 Planned or unplanned changes in mix
If the mix of business changes significantly, either as a result of the company

pursuing a particular strategy or through unknown causes, the development
pattern is likely to change, and in an unpredictable way.
This increases the difficulty of selecting appropriate parameters with which to model
the business.
Changes in business mix were also discussed in Section 1.2.

Page 16a ST7-09: Modelling uncertainty
3.5 Large and exceptional claims
Large claims
Large claims can be expected to have different frequency and severity

distributions to attritional and catastrophe claims. They are also likely to have
different development patterns. There may also be differences in development
pattern based upon the type of large claim.
Example
A large windstorm claim may develop at a different rate to a large flood claim,
although both types of claim may be experienced in a property book.
It is normal practice to remove large claims from the development and project
these separately.
Uncertainty may also arise in how a large claim is defined. They could be
defined as claims over a particular threshold limit (possibly with a different
threshold for different perils, often set to achieve sufficient data and with an eye
on the reinsurance programme), or large claims may be a subjective
management decision.
If the threshold for what constitutes a large claim is too low, then a large quantity of
data will be excluded from the attritional claims triangulation, and this will result in the
triangulation data (and the reserve estimates) being less credible.
However, if the threshold is set too high, then more large claims will be included in the
attritional triangulation data, and this will increase the volatility of the projection.
In practice, the definition of a large claim might be set at the retention limit for the
non-proportional reinsurance programme. This would make a projection of net of
reinsurance claims much easier. (Reinsurance reserving will be discussed in
Chapter 23.)
If the threshold limit method is chosen, there is the additional uncertainty as to

whether this increases over time, and at what rate. Effectively the threshold
would decrease going backwards through cohorts.
An insurer is likely to increase the definition of what constitutes a large claim

periodically, in order to allow for claims inflation and maintain the real value of the
threshold. Hence prior origin years might well have a lower threshold than the current
origin year. The rate of inflation to apply to the threshold limit is likely to be uncertain
and will often differ from the rate at which attritional claims inflate.

ST7-09: Modelling uncertainty Page 16b
On some occasions, there may be an absence of large reported claims, and the
reserving actuary may wish to add a loading to reflect this fact. This will give
rise to additional uncertainty.
Catastrophes
Catastrophic losses can take the form of one immense loss, such as an oil-rig explosion.
Alternatively, there may be many smaller insured losses, all stemming from a common,
identifiable event such as a hurricane.
Catastrophes are typically hard to predict, so are hard to reserve for.
One way to reduce the impact of catastrophic losses is to write business in a wide range
of geographical locations and across many classes. Catastrophe reinsurance will also
help (more of this later in the course).
Latent claims
Catastrophic claims can also result from sources that were unknown, or for which a
legal liability was not expected, at the time of writing the business. The cost of such
claims cannot be calculated with any accuracy for the purpose of setting reserves.

Page 16c ST7-09: Modelling uncertainty

ST7-15: Assessment of reserving results Page 21
The speed at which the bottom of the cycle is reached and rates begin to harden
is often increased by external factors such as large catastrophe claims, which
can reduce profitability and increase the pressure on rates to harden. Rates then
continue to increase (harden) until we are back in a hard market and the process
starts all over again.
The length of the underwriting cycle varies by class of business and territory. For
example, in some UK personal lines classes, it is around seven years. It will be
dependent on, for example:
macro-economic effects, eg people pay less for insurance and claim more when
economic conditions are poor
investment conditions (if it is expected that good returns can be made on
invested premiums then the insurer may be prepared to offer softer premium
rates)
major industry losses, eg natural disasters or terrorism.
5.2 Impact of the underwriting cycle on the assessment of reserves
The underwriting cycle can have an influence on claims development. For example in a
hard market, individuals who perceive themselves as low-risk may choose to self-insure
rather than pay high premiums, resulting in anti-selection against the insurer.
When assessing the reasonableness of the results of a reserving exercise, we

should consider whether we have allowed appropriately for the underwriting
cycle.
One way to allow for the underwriting cycle in reserving exercises is to use a
rate index when deriving the initial expected loss ratios for use in credibility-type
methods.
We should be careful, however, when selecting appropriate rate indices because:
Rate indices are typically only available for renewal business and
therefore may not adequately allow for any differences between new and
renewed business.
Rate indices can sometimes be constructed largely based on highly

subjective information (such as the underwriters views rather than hard
data).

Page 22a ST7-15: Assessment of reserving results
In addition to changes in the actual premium charged, there may also be

changes over time in the terms and conditions or limits and deductibles of
the cover provided, which will also impact on the profitability of the
business being written, and which are not necessarily reflected in the rate
indices.
Changes in these elements of the cover tend to vary in relation to different

phases of the underwriting cycle: as the market hardens, insurers remove
or reduce the more optional and often expensive parts of the cover,
and these then gradually come back in again as the market softens.
In an ideal world any rate index should attempt to take account of these
changes, which are inevitably more difficult to quantify than pure changes
in the premium charged.
Question 15.11
What impact will the following have on claims development patterns?

(i) looser terms and conditions
(ii) lower deductible.

ST7-15: Assessment of reserving results Page 22b
6 The reserving cycle

Recent studies have also suggested the existence of a reserving cycle which
is highly correlated with the underwriting cycle.
This appears to show that in a soft market, incurred claims development patterns
are slower to develop (or longer-tailed) than in a hard market so that an
unadjusted projection can underestimate ultimate claims in a soft market (and,
equivalently, overestimate them in a hard market, when insurers can afford it).
Potential reasons for this phenomenon include:

the effect of weakened terms and conditions
an increasing tendency to dispute claims
a possibly less conservative approach to case reserving when results are
worse
The evidence of a reserving cycle is more noticeable for business which is

already thought to be longtailed.
The initial expected loss ratio can be chosen to take account of changes in the reserving
cycle as well as changes in the underwriting cycle.
This over-estimation or under-estimation of reserves is a decision to be made by

the Board. It should not impact the actuarys best estimate, although he or she
may wish to indicate a range of best estimates within which he or she believes
that the Boards decision should lie.
The general insurer is likely to wish to flatten the reserving cycle:

so that reserves are more accurate. This reduces the likelihood of insufficient
reserves being set up in past years, which will have a detrimental impact on the
ongoing business
so that the profitability of the business can be more readily understood.
Appropriate decisions can then be made as to whether to continue, contract or
expand a class.

Page 22c ST7-15: Assessment of reserving results

ST7-17: Investment principles and asset liability matching Page 36b
13.7 Reverse stress and scenario testing
A complementary case of stress and scenario testing is reverse stress testing.

Some regulatory authorities require firms to carry out reverse stress testing,
which is an assessment of scenarios and circumstances that would render its
business model unviable.
Reverse stress testing differs from general stress and scenario testing in that the
starting point is the assumed outcome of business failure, thus the exercise
being the identification of circumstances where this might occur, whilst the latter
looks at the resulting outcomes arising from specified changes in
circumstances.
In other words, a reverse stress and scenario test identifies the circumstances / model
assumptions required for the business to fail.
This is in contrast to the more common use of a stress or scenario test which analyses
the effect on the business of a given set of circumstances / assumptions.

Page 36c ST7-17: Investment principles and asset liability matching
This page has been left blank so that you can slot the new pages into your
Course Notes

ST7-24: Accounting methods Page 1
Chapter 24
Accounting methods
Syllabus objectives
(u)(i) Describe the methods and principles of accounting for general insurance
business and interpret the accounts of a general insurer.
(ii) Describe the changes to accounting methods expected under IFRS.
0 Introduction
There are two distinct methods used by general insurers to present their accounts:
annual (or accident year) accounts, which consider all income earned and outgo
incurred in a year and permit the release of profits at the end of that year
funded (or underwriting year) accounts, which consider the business written in
each year and do not permit the release of profits until the end of a subsequent
year (usually the third year).
Section 1 gives a broad overview of the two methods, which are then discussed in detail
in Sections 2 and 3. In Section 4 we discuss whether the accounts of a general
insurance company reflect the true underlying profitability of the company. Section 5
goes on to explain how to construct simple accounts.
This chapter contains a lot of additional explanation and a number of questions, to help
illustrate the Core Reading and explain how these principles work in practice.

Page 2 ST7-24: Accounting methods
1 Methods of accounting
1.1 Annual accounting
Annual accounting is the basis of accounting for general insurance business in

the UK.
Annual accounts are usually used for most forms of direct insurance (eg motor,
household, employers liability, commercial property).
Under annual accounting, we consider all income earned and outgo incurred in a
year and can release profits at the end of the year. That is, income is recognised
as earned - and the consequence is that profit or loss might arise from the
business earned on that year.
We carry forward unearned income into the next accounting period. The
premium element of this is called unearned premium and unearned premium
reserves and unexpired risk reserves are created.
For example, if an annual policy is written on 1 September 2013, then for the 2013
calendar year, the earned premium will be one-third of the premium (assuming uniform
risk over the policy year) and the other two-thirds of the premium will be carried
forward into the 2014 calendar year.
We also refer to this approach as deferral and matching because we defer

profit release until the accounting period when the contracts are exposed to the
risk of insured events.
Profit is crystallised in the year the premium is earned the basis of all this is
the accrual principle. This is not a cash basis (where, if you have a two-year
policy, you earn half the premium in the first year and half in the next). Rather,
the income recognition is matched to the risk taken in each period. Out of this
flows the profit or loss made on the business.
Annual accounts have traditionally been referred to as one-year accounts. You may
also see them referred to as accident year accounts.
The term accident year refers to a grouping of claims according to the year in which the
loss event actually occurred, irrespective of when they are reported or paid, and the year
in which cover commenced.

1.2 Funded (three-year) accounting
An alternative accounting approach, known as funded accounting or three-year

accounting, was previously used by Lloyds of London and London Market
companies operating in the Lloyds market.
Funded (or three-year) accounts were introduced in Chapter 8. They are typically used
for Lloyds, reinsurance and marine and aviation business.
Under funded accounting, we considered the business written in each year and
could not release profits until the end of three years.
Lloyds of London now also uses an annual accounting basis, but the legacy of
funded accounting remains in internal financial management as the underwriting
year accounting approach is consistent with the way Lloyds syndicates manage
capital.
Funded accounting is used in Lloyds when we calculate the reinsurance to

close (RITC) and release profits to the Lloyds Names.
It is also used by companies when we calculate the emerging profit and when we
calculate underwriting and reserve risk, which may be reduced to reflect
investment income that will be earned on assets held against reserves and on
premiums received in relation to the current and prior underwriting years.
Funded accounts are also referred to as underwriting year accounts.
The term underwriting year refers to a grouping of claims according to the year in
which cover commenced, irrespective of when the loss event occurred, and when the
claims are reported or paid.
1.3 Reserving models
We typically associate accident year reserving models (based on accident year

cohorts) with annual accounting, and we associate underwriting year reserving
models (based on underwriting year cohorts) with funded accounting. However,
many Lloyds syndicates and London Market companies continue to use
underwriting year approaches, but then apply an adjustment to determine
reserves on an annual accounting basis.
The process of converting underwriting year results to accident year results is discussed
further in Section 0.

Page 4a ST7-24: Accounting methods
2 Annual accounting
2.1 Introduction
In the annual accounting model for insurance contracts, we need to consider the
following:
Income earned premiums, reinsurance recoveries received or accrued

when the relevant claim has been recognised / paid, investment income,
and changes in premium reserves / risk reserves / reinsurance reserves,
Outgo claims, claims handling expenses and other expenses paid and
changes in claims outstanding (including IBNR) in the accounting period,
reinsurance premiums, commissions, profit commissions, underwriting
charges / taxes
Assets deferred acquisition costs, reinsurers share of unearned

premium reserves, reinsurers share of claims outstanding
When policies are written the insurer pays commission and other initial
expenses. At the accounting date those acquisition costs have been paid out but
not wholly incurred for any policy that is unexpired at the time, just as part of
the premium received has not yet been earned. (You could think of them as
unincurred expenses, but the name DAC is universally used.) DAC is
usually a significant asset in the insurers accounts. It is like a negative reserve.
Decreasing DAC reduces the insurers profit, just as increasing reserves does.
Liabilities unearned premium reserve, additional unexpired risk reserve,

claims outstanding
Debtor and creditor balances reflecting outstanding payments due to or

from policyholders, brokers and reinsurers.
Alternatively one can consider the building blocks as the premium (involves
income) and the risk assumed (reflected in a liability) the model is based on the
insurer being able to price the risk sufficiently well so that after paying the
claims / paying the admin and getting the return on the investment of the money
paid in premium, they will be able to make some profit.
The precise layout of the published accounts will vary depending on the accounting
rules in place.

ST7-24: Accounting methods Page 4b
2.2 The technical account
The technical account (or revenue account) shows the basic trading profit from writing
insurance business for a given period. Note that strictly speaking, this terminology is
only needed for Subject SA3 (it has an asterisk in the Glossary).
To develop a clear understanding of the intricacies of a general insurers accounts, it is

useful to start with the most basic model of how profits are made up.
In its most basic form, profit for a given year can be expressed as:
profit = money in money out increase in reserves

Page 4c ST7-24: Accounting methods

There are a few other differences between UK GAAP and IFRS mainly because,
for instance, IFRS 4 permits a range of accounting policies from previous
regimes. Hence there is currently some divergence across the board from IFRS
reporters.
For instance:
Under UK GAAP, discounting is only permitted under very limited
circumstances for general insurers (ABI SORP requires a run-off period of
more than four years on average for the classes to be discounted).
The definition of acquisition costs to be discounted is also prescribed in
the ABI SORP, but in IFRS you could have a different definition if the
previous reporting regime was different.
ABI SORP is the Statement Of Recommended Practice issued by the

Association of British Insurers.
Under UK GAAP the definition of insurance contracts is the same as

under IFRS, but the disclosure requirements (information in addition to
the amounts in the financial statements) are not as onerous for general
insurers.
The IFRS Phase II project on insurance contracts is in the process of developing

a full measurement basis. Measurement / presentation and disclosure will be
new and different under Phase II. The proposals are for a prospective
measurement model comprising three components:
probability weighted estimate of future cash flows
discounted for the time value of money
a risk margin.
This is discussed further in Chapter 25, Interpreting accounts.
This represents a fundamental change from the annual accounting model. The
International Accounting Standards Board (IASB) is liaising with the industry,
supervisors and national financial reporting authorities as it develops these
proposals. The timetable for implementation is subject to change, although
details of the current timetable can be found on the IASBs website.
Solvency II is a revised risk based approach to determining capital requirements

across the European Economic Area.
Solvency II is discussed in Chapter 26, Regulation and also covered in Subject CA1
and Subject SA3.

Page 18a ST7-24: Accounting methods
The IFRS Phase II proposals are broadly in line with the proposals for measuring
insurance liabilities for Solvency II, although at a detailed level there are
significant differences. The detailed IFRS proposals are beyond the scope of
this course and will be subject to change up until a final standard is produced.
It is also worth saying that the current UK GAAP regime is also in the process of
being changed from 2015. In the particular case of insurance a new standard
for accounting for insurance under UK GAAP is currently being developed by the
Accounting Council and there is still a lot of debate surrounding this.
If you are interested in the IFRS proposals, you can find more information on the
International Accounting Standards Board website, www.iasb.org.uk.

ST7-24: Accounting methods Page 18b
3 Funded (three-year) accounting

In Section 2 we saw how one-year accounts are based on the premiums earned within a
year. The structure of funded accounts is quite different. Funded accounts are based on
premiums written in a given year. The premiums for policies written in a particular
year are kept in a special fund for a period that is specified at outset. The most common
period is three years, hence the alternative name of three-year accounts. At the end of
the third year the profits for that particular block of business are assessed.
This chapter and the Core Reading use the terms funded accounting and three-year
accounting interchangeably. However, it is important to remember that other
accounting periods (eg two or four years) are also used on a funded basis.
3.1 Example of three-year accounts
Suppose an insurer commences business on 1 January 2011, accounting for profits on a

three-year basis.
All the premiums for business written in 2011 are notionally kept in a separate fund and
all claims and expenses relating to this business are paid from this fund. We shall refer
to the amount in this fund at time X as Fund2011,X
At the end of the first year of trading (ie at the end of 2011), there is one fund of amount
Fund2011:31/12/2011
During 2012, a new fund is started which will hold all premiums and cover all claims
and expenses in respect of business written in 2012. Note that the 2011 fund will still
be maintained to account for premiums, claims and expenses relating to business written
in 2011. At the end of 2012 there will be two funds: Fund2011:31/12/2012 and
Fund2012:31/12/2012.
A third fund is opened on 1 January 2013 for business written in 2013. All the
premiums, claims and expenses for these policies are accounted for within the 2013
fund.
The convention with funded accounts is to close a fund at the end of its third year.
(Hence, three-year accounts.) So at 31 December 2013, the 2011 account will be
closed.

Page 18c ST7-24: Accounting methods

ST7-25: Interpreting accounts Page 3
Prudence has been described as the inclusion of a degree of caution in the

exercise of the judgements needed in making the estimates required under
conditions of uncertainty, such that gains or assets are not overstated and
losses or liabilities are not understated. We may interpret this as meaning that
the greater the uncertainty, the greater should be the tendency to aim at reserves
exceeding the expected value of the liabilities, as a natural consequence of
seeking to avoid understating the liabilities.
Under IFRS Phase II there is a proposal that the measurement of insurance

liabilities should reflect risk to the extent that it would be reflected in the price of
an arms length transaction between knowledgeable, willing parties.
This is not a component of current GAAP or IFRS. The proposal under Phase II
is to value liabilities at the discounted probability-weighted value of cash flows
plus:
a risk margin amount or margin reflecting an assessment of uncertainty
associated with insurance risk, and
a residual margin the expected profit or loss of a contract at outset,
excluding excess investment returns and risk margins.
This was discussed in Chapter 24, Accounting methods.
Question 25.1
General insurers have historically not discounted their reserves. Do you think that this
practice has been consistent with the interpretation of prudence described above?
The reason for constructing the accounts will influence the size of margins that will be
included in the accounts. Accounts that are produced to demonstrate solvency are
likely to be prepared on a more cautious basis than those prepared for management,
which are produced to give a realistic picture of the profitability and financial strength
of the company.
In addition, the concept of prudence under IFRS Phase II is different from that
under UK GAAP, in that it does not allow the creation of hidden reserves or
excess provisions by the deliberate understatement of assets or income or the
deliberate overstatement of liabilities or expenses.

Page 4a ST7-25: Interpreting accounts
Under IFRS, an insurer need not change its accounting policies for insurance
contracts to eliminate excessive prudence. However, if an insurer already
measures its contracts with sufficient prudence, it shall not introduce additional
prudence. Introducing additional prudence would not make the accounts more
reliable or relevant and vice versa, and therefore the change would not be
allowed.
Other than as described in this chapter, candidates for Subject ST7 examinations
will not be expected to be familiar with the accounting concepts and principles
that apply in any particular country. They may, however, be expected to discuss
the problems that arise in defining such concepts and principles and putting
them into practice, and the implications for the interpretation of insurers
accounts.

ST7-25: Interpreting accounts Page 4b
2 Interpreting accounts
Before attempting to interpret the accounts of an insurer, we should become
familiar with the statutory rules governing the preparation of the accounts and
the accounting rules and conventions that apply in the country concerned.
This paragraph can be related back to the actuarial control cycle. Before we can
monitor the experience of an insurer, we should be familiar with the economic and
commercial environment in which the insurer operates.
Though subject to some variation from country to country, the published

financial statements of insurers are usually prepared on a going concern basis
and are intended to give a true and fair view of the insurers performance and
financial position. We should examine them to see whether they have been
affected by any changes in accounting practice and, if so, to find what the effects
of such changes may have been.
We should consider the basis used for the valuation of the assets and the
treatment in the accounts of realised and unrealised capital gains and losses. If
assets are shown at market value, we should consider the vulnerability of the
asset values to changes in market conditions.
Lets consider Company A and Company B and for each company calculate the
solvency ratio, a useful measure of financial strength. The solvency ratio is defined as
free reserves divided by net written premiums.
Company A Company B
Total assets 740m 740m
Total liabilities 650m 615m
Net written premiums 500m 500m
Solvency ratio 18% 25%

Page 4c ST7-25: Interpreting accounts

ST7-25: Interpreting accounts Page 7
But if we discovered that:

Company Y writes more volatile business
Company Y discounts claim reserves and has few margins
Company X assesses reserves with very large contingency margins
then we might establish that Company X was in fact much stronger. For example, if
the liabilities of both companies were to be assessed on a consistent and moderately
conservative undiscounted basis, the results might be:
Company X Company Y
Total assets 260m 260m
Total liabilities 160m 200m
Net written premiums 300m 300m
Solvency ratio 33% 20%
Profitability
Different reserving bases can also distort the picture for profitability. However, it is
much less clear whether profit will be understated or overstated.
Question 25.3
Is it true that a company with a strong reserving basis will always show smaller profits
than an equivalent company with a weaker reserving basis?
Conclusion
The strength of the reserving basis can have a distorting influence on the apparent
financial strength and apparent profitability.
We may be able to get an indication of the strength of the reserves by examining

individual accounting items (both gross and net of reinsurance if separate
figures are available) and various ratios of these accounting items, and
comparing them with their counterparts in the accounts of earlier years.
The extent to which this is feasible will depend on the amount of detail given in
the financial statements.

Page 8 ST7-25: Interpreting accounts
There are some useful disclosures that are normally present in any set of
accounts, such as:
triangles in the case of IFRS
fair value hierarchy of investments to check asset valuations and their
potential volatility
disclosures around reserves to work out reserve releases /
deterioration etc.
Among the ratios that we may consider are:

incurred claims to premium income
incurred expenses to premium income
commission to premium income
operating ratio / combined ratio
outstanding claims reserve to claims paid
outstanding claims reserve to premium income
outward reinsurance premium income to gross premium income
reinsurers share of reserves to gross reserves.
A sharp rise in premium income may be a sign of competitively low, and perhaps
unprofitable, premium rates. It may also affect the progression of other items
such as the ratio of the reserve for outstanding claims to the earned premiums,
the new business strain and the statutory minimum solvency margin.
In the next section we will look at the key values and ratios that might be considered
when analysing a general insurers accounts including the ratios mentioned above.

ST7-26: Regulation Page 9
Timeline for implementation
There are two implementation dates for Solvency II, one for regulatory authorities and
one for insurance companies.
It is currently expected that the Solvency II responsibilities of supervisors and

EIOPA (the European Insurance and Occupational Pensions Authority) will be
switched on with effect from 1 January 2014.
Solvency II requirements would be switched on for companies on 1 January

2016.
These dates have not yet been finally agreed.
4.2 Development of Solvency II
Lamfalussy process
The new Solvency II framework has been created in accordance with the
Lamfalussy four-level process.
The Lamfalussy framework was drawn up by the Committe of Wise Men in 2001,
chaired by Baron Alexandre Lamfalussy.
It is basically a step-by-step guide on how to introduce new legislation. It allows

legislation to be developed and implemented gradually over a period of time.
The four stages of the Lamfalussy process are:
Level 1 developing an EU legislative instrument that sets out the key

framework principles, including implementation powers (completed in
2009 but with amendments planned in October 2013)
Level 2 developing more detailed implementing measures and technical

standards (to be finalised when level 1 is agreed)
Level 3 developing supervisory guidance and common standards, and

conducting peer reviews and consistency comparisons (to be finalised
when level 2 is agreed)
Level 4 enforcement across the Member States (to be finalised when

level 1 is agreed).

Page 10 ST7-26: Regulation
Development has been supported through a number of Quantitative Impact

Studies (QIS) that insurance companies have been asked to complete, and
through liaison with national supervisory bodies.
EIOPA has provided technical advice and support to the European Commission
for the development of the implementing measures under Level 2, and is
responsible for producing the Level 3 additional guidance.
(EIOPA is the European Insurance and Occupational Pensions Authority and is

one of the EUs main financial supervisory bodies and was previously known as
CEIOPS.)
Solvency II will be discussed in considerably more detail in Subject SA3.

ST7: Q&A Bank Part 6 Questions Page 7
(a) Using the method of moments to fit a normal distribution to the data,
estimate the required pure premium for a stop loss layer 15% excess of
85% loss ratio for 2014.
(b) Estimate the required pure premium for a stop loss layer 20% excess of
100% loss ratio using a log-normal distribution.
Hint: You should use the expressions given following part (iv) below for the
limited expected value function. [6]
(iii) Draw a rough bar chart of the data and explain which distribution you would
choose for setting rates. [3]
(iv) It is suggested that rates on the business have deteriorated over the period.
(a) Discuss briefly whether the data suggest that this is true.
(b) Outline how you would allow in the calculation of the stop loss premium
for any such decline in rates. [4]
Note
For a random variable X with density function f(x) and distribution function F(x) the
limited expected value function E(X;x) can be expressed as:
yf ( y )dy + x(1 - F ( x))

-
The limited expected value E(X;x) for each distribution can be evaluated as follows:
Normal
x- m x- m x - m
E ( X ; x) = mF - sf + x 1 - F
s s s
Log-normal
s 2 log x - m - s 2 log x - m
E ( X ; x) = exp m + F + x 1 - F
2 s s
where F is the distribution function of the standard normal and f the density function
of the standard normal distribution with mean m and standard deviation s .
[Total 18]

Page 8 ST7: Q&A Bank Part 6 Questions
2 Exam-style questions
Question 6.19
An insurance company that writes only motor insurance has a financial year running
from 1 January to 31 December.
On 1 May, a broker sold an annual policy with a premium of 450. The company
received the premium, net of 14% commission, on 15 June. No claims were made
under the policy. In addition to the commission, the marginal costs incurred from this
policy totalled 10 on acquisition and 1 at the start of each month thereafter, finishing
on 1 May one year later.
The company earned 1% per month on its assets in the first calendar year (ie from 1
May to 31 December), and 0.8% per month in the second year (ie 1 January to 30
April).
Assume that the company prepares its accounts on the basis of acquisition costs being
20% of written premium, and that IBNR is calculated on a very crude basis, namely as
5% of premiums earned in the year.
(i) Stating all further assumptions and ignoring the impact of taxation, show how
this individual policy will affect the companys accounts for each of the two
calendar years in question. [15]
(ii) Explain, in detail, how your answer would differ if the company decided at the
end of the first calendar year that for policies written during that year, the
premiums would be inadequate to cover the claims that would emerge from the
policies in future. [4]
[Total 19]

ST7: Assignment X1 Questions Page 3
Question X1.8
You are the actuary with an insurer that has experience of writing motor insurance over
a number of years. The insurer is considering establishing a separate class for classic
motor vehicles (ie collectors items).
(i) By considering each risk factor, discuss how the risk arising from policies in this
class might differ to that arising from standard motor insurance. [7]
(ii) Describe how the companys approach to new business acquisition may have to
change. [3]
[Total 10]
Question X1.9
List the factors relating to the external environment that may affect claim frequencies or
amounts for motor insurance policies. [6]
End of paper

Page 4 ST7: Assignment X1 Questions
into your X Assignments

ST7: Assignment X1 Solutions Page 15
Other focused ways of selling policies are:

making special arrangements with affinity groups such an owners club []
setting up a stall at classic car rallies []
through specialist motor brokers []
through other specialist motor organisations. []
[Maximum 3]
Solution X1.9
Comment
This question is testing your ability to apply the ideas in Chapter 7, External
environment.
Both claim frequencies and amounts
a change in speed limits []

a change in the use of speed cameras []
a change in societal trends, eg a reduction in drink driving []
an unusually severe winter []
the introduction of speed-restricting technology in vehicles []
Claim frequencies
an increase in crime rates []

a change in the effectiveness of car security systems []
a change in the stringency of driving tests []
a change in attitudes to claiming, leading to an increase in the frequency of
liability claims []

Page 16 ST7: Assignment X1 Solutions
Claim amounts
tax on car parts []

legislation increasing the amount of cover that must be provided []
legislation requiring the use of car safety equipment (eg seat belts or childrens
seats), leading to a decrease in the cost of bodily injury claims []
publicity regarding a fault with a particular make of car (eg a batch of cars sold
with faulty brakes), leading to higher court awards for compensation []
a shortage of mechanics, leading to an increased cost of labour []
a change in procedures for building / repairing cars, leading to a change in the
cost / ease of repairing cars []
a change in driving habits (eg an increase in motorway driving and a decrease in
driving in city centres) this may be due to factors such as congestion charges
[]
a change in economic growth (eg in a recession, fewer people may buy big, new,
expensive cars, so the average claim size may fall) []
a change in the rate of price inflation []
a change in the rate of court award inflation []
a change in exchange rates, which may affect the cost of claims made overseas
(ie people driving their cars abroad) []
[Maximum 6]

incomplete, ie data fields missing, due to: []

poor systems design []
poor user processes []
inadequate information collected at outset by the insurer []
inadequate information collected at outset by third parties []
nonexistent data for: []
new class of business []
new territory (may occur because of globalisation of markets) []
unusual risks []
infrequent claim events []
certain rating groups (eg very old people, unusual classes) []
extreme values (where data does not exist or is too volatile to be usable)
[]
data not completely relevant due to changes in: []
external factors (eg global weather patterns) []
policy terms and conditions []
underwriting philosophy []
claims management processes []
[Maximum 10]
Solution X2.3
Comment
This question is testing Chapter 9, Modelling uncertainty. You should consider all the
components of an insurers return, eg premiums, claims, expenses etc.
Premiums may not be enough to cover the expected claim cost. []
This may be due to:

the underwriting cycle leading to lower rates []
anti-selection if the rating structure is incorrect []
inadequate data upon which to price the risks. []
Premiums could be too high, leading to lower than expected volumes of business and a
failure to adequately cover fixed expenses. []
Claims experience may be higher than expected. []

This could be due to:

catastrophes
latent claims
aggregations of risk
poor policy wording
higher than expected claims inflation
unfavourable judicial decisions. [ each, total 1]
Higher than expected expenses, commission or expense inflation. [1]
Low investment income, falls in assets values or increased taxation of returns. [1]
Other possibilities:
adverse currency movements
failure of third parties, eg reinsurers
changes in legislation
mis-management of the syndicate. [ each, total 1]
[Maximum 6]

but there is not always sufficient credible data to enable this. []

[Maximum 3]
(ii) Parameter uncertainty
This is the uncertainty that arises when choosing the parameters for the model. []
It is a result of the statistical variability in the past data used as a starting point for
setting the parameters []
for example due to the presence in the past data of an unusually large claim. []
Parameter uncertainty can be reduced by exercising actuarial judgement when selecting

parameters []
although this uncertainty can never be removed completely. []

[Maximum 2]
(iii) Process uncertainty
This is the uncertainty that arises because of the inherent randomness of the process
being modelled. []
It would exist even in the absence of model and parameter uncertainty. []
The process uncertainty is reduced if modelling large numbers of reasonably

independent risks []
but will be unavoidable when modelling small numbers of correlated risks. []

[Total 2]

Page 4a ST7: Assignment X4 Solutions
Solution X4.4
Comment
This topic is covered in Chapter 14, Stochastic reserving models.
Correlations between lines of business
Lines of business can be correlated because:

they are impacted by similar events, eg a windstorm could impact both
household and commercial property accounts []
legal changes can affect several lines of business, eg a change in the discount
rate required to calculate bodily injury awards would affect both employers
liability and motor classes []
the same claims team may handle claims from several lines of business and so
changes to claims handling may impact on more than one line []
problems with data may affect more than one line of business. []
[Markers, award each for any distinct reasons, up to a maximum 2.]
Allowance for correlations in a stochastic model
A correlation matrix could be used ... []
... however this only allows for very simple dependencies between classes. []
A copula is a more flexible approach, because it allows for multiple dependencies. []
For example, the Gumbel copula and the t-copula allow for increased correlations in the
tails of the distribution. []
However, it can be difficult to parameterise dependencies from data, so judgement is

important. []
The user must specify:

underlying loss distributions for the classes of business []
a two-way correlation matrix between all distributions []
the form of the copula. []
[Maximum 4]

ST7: Assignment X4 Solutions Page 4b
Solution X4.5
Comment
The Core Reading for this question is covered in Chapter 16, Reserving use of ranges
and best estimates.
The key points to consider when communicating a best estimate reserve are:
Who the recipients are, their level of knowledge and how they will use the
information. [1]
How we get across that the best estimate is just an estimate []
that there are other possible reasonable estimates []
that the actual result is likely to be different from the best estimate. []
How we clarify that the best estimate is just the mean of the distribution ... []
it will not necessarily reflect the most likely outcome []
particularly if the distribution is positively skewed. []

Page 4c ST7: Assignment X4 Solutions

ST7: Assignment X6 Questions Page 1
Question X6.1
A general insurance company has been selling steady volumes of business for many
years. The company has the following reinsurance treaties in place:
A quota share arrangement under which 60% of the business is ceded. The
reinsurer pays the insurance company an override commission of 7% of the
reinsurance premium.
A 10-line surplus treaty, with a maximum retention limit of 1m.
An excess of loss treaty that pays 90% of all losses above 0.5m, the premium
for which is calculated as 3% of the insurers gross written premium.
The treaties operate in the order given.
(i) Give a formula that, for a surplus treaty, relates the expected maximum loss
(EML) to the retention (r) and number of lines (l). [1]
(ii) A company director has written asking if you can give him an indication of the
maximum amount that the company would have to pay out as a result of an
individual claim. Set out the points that you would make in reply. [4]
(iii) Comment on the suggestion: The quota share treaty is better than the excess of
loss treaty since the quota share treaty pays commission whilst the excess of loss
treaty costs the insurer. This must also mean that the excess of loss reinsurer is
making more profit than the quota share reinsurer. [5]
[Total 10]
Question X6.2
(i) State the objectives of regulation. [3]
(ii) List the key activities of the IAIS. [1]
(iii) List the capital requirements that an insurance supervisor might impose on an
insurer. [3]
(iv) Describe the disadvantages to insurers of complying with the IAIS Core
Principles (ICPs). [3]
[Total 10]

Page 2 ST7: Assignment X6 Questions
Question X6.3
A general insurance company, which writes only direct business, accounts for all its
business on an accident-year basis.
Comparison of the companys solvency margin (excess of assets over liabilities) with
the solvency margin for other direct insurers shows that the companys solvency margin
has fallen, whereas the margin for most other companies has risen.
Explain the extent to which comparison of the solvency margin of different insurance
companies can validly be made, and describe the factors that would need to be taken
into account if the purpose of the comparison were to establish the likelihood of future
insolvency. [14]
Question X6.4
You are a consultant actuary. One of your clients is considering the purchase of a
general insurer that only sells motor business. Initially, you have been given two years
accounts for the insurer, which are as follows:
Year X Year X+1

Written premiums 15.0 16.0
Earned premiums 14.5 15.5
Claims paid 16.0 12.0

Increase in o/s claims reserves 5.5 1.5
Expenses paid 1.5 1.6

Increase in DAC 0.1 0.1
Investment income 9.0 4.0
Tax 2.9 1.1

Dividends 7.0 7.5
Retained profit 1.7 4.1

Assignment X6 Solutions
Solution X6.1
Comment
This question tests your understanding of the material in Chapter 22, Determining
appropriate reinsurance, as well as building on your understanding of Surplus
reinsurance, from Chapter 5, Reinsurance products (2).
(i) Formula
EML (1 n)r [1]
(ii) Maximum loss
There is no maximum amount that the company could lose. Theoretically, losses are
infinite. []
For anything above 0.5m, (net of quota share and surplus) the insurer only pays 10% of
the excess. There is reduced, but still unlimited, liability above this cut off point. []
The size of the original, gross of reinsurance claim that would result in a net (of quota
share and surplus) claim of 0.5m is dependent upon whether the surplus treaty is used
and the number of lines used. []
A gross claim as small as 1.25m would result in a net claim of 0.5m if no surplus
lines were used, but a claim as high as 13.75m could also result in a net claim of 0.5m
if the full 10 lines were used. [1]
Although the maximum retention under the surplus treaty gives no guaranteed
maximum that we reasonably expect to lose, it does give a reasonable indication. []
In this case the maximum is 1m, net of the quota share treaty. []
If a claim for this maximum of 1m did come in the insurer would pay 0.55m. []
All of these figures assume that the reinsurers stay solvent. If any of the three reinsurers
default, the amount could rise sharply. []
[Maximum 4]

(iii) Comment on suggestion
The quota share arrangement does pay override commission []
but only to reimburse the insurer for the costs associated with setting up and
servicing the reinsured policies (eg underwriting, pricing, new business administration).
[]
So the benefit of the commission is only to compensate for costs that the insurer has
incurred. []
With excess of loss the insurer keeps all the profit that is loaded into its premium rates.
[]
However, the cost of reinsurance is loaded into the premium paid. []
When deciding which is best we must think about the benefits of reinsurance not
just the costs. []
There could be other benefits, eg technical assistance, although this is more likely to
come from the broker rather than the reinsurer. []
The key benefit of excess of loss is to protect the companys solvency (and stability of
profits) against large claims. []
Quota share would not be so effective in this respect so how can you say that it is
better? []
It is impossible to say which reinsurer is making the most profit. We should look at a
risk-adjusted profit. The excess of loss reinsurer may be taking more risk. [1]
[Maximum 5]
Solution X6.2
Comment
This is a Core Reading question from Chapter 26, Regulation.
(i) Objectives of regulation
Key objectives of regulation and supervision are to promote efficient, fair, safe and
stable insurance markets and to benefit and protect policyholders. [1]

Further objectives include:

enhance overall efficiency of the financial system []
reduce transaction costs []
create liquidity []
facilitate economies of scale []
encourage economic growth []
help allocate resources efficiently []
manage risk []
encourage long-term savings. []
[Total 3]
(ii) Key activities of IAIS
The IAIS:
issues global principles, standards and guidance papers []
provides training and support on issues related to insurance supervision, and []
organises meetings and seminars for insurance supervisors. []
[Maximum 1]
(iii) Capital requirements
Examples of regulatory capital requirements include:

requirement to deposit assets to back claims reserves []
requirement to maintain a minimum level of solvency []
use of prescribed bases to calculate premiums, asset values and liabilities to
demonstrate solvency []
requirement to hold a claims equalisation reserve []
the use of prescribed bases to calculate premiums, asset values and liabilities to
demonstrate solvency []
requirement for risk-based capital calculations and ICA analyses []
requirements in respect of the capital model, eg the requirement to satisfy the
use test, so that the capital model and results should be used to help manage
the business. []
[Maximum 3]

Page 4a ST7: Assignment X6 Solutions
(iv) Disadvantages of complying with IAIS ICPs
Disadvantages include:
valuations may be less prudent, eg where the regulation requires assumptions to
be based on actual experience, without including margins []
a risk-based approach could increase the volatility of results, leading to: []
more volatile distribution of profits []
reduce the availability of capital []
broader reporting requirements may mean that intra-group arrangements will
have to be disclosed []
this may bring further disadvantages, eg tax implications for
arrangements that take place across different territories []
increased costs of regulatory supervision, which may be passed onto insurers via
increased levies []
increased costs of compliance []
loss of market confidence if insurers are seen not to comply with recognised best
practice. []
[Total 3]
Solution X6.3
Comment
The Core Reading for this question is covered in Chapter 25, Interpreting accounts.
Comparison can validly be made between the solvency margins of two companies, but
there are many factors that will distort this comparison. These factors should be taken
into account where possible, ie comparison can only be made to a limited extent. [1]
Factors to take into account when comparing the solvency margins
In the text below, less risk implies that there is a lower likelihood of insolvency.
Size of margin
Larger margin stronger office []

Smaller margin more risk []

ST7: Assignment X6 Solutions Page 4b
Size of margin in relation to variation in outgo
More business more risk (so bigger margin needed) []

Often quote required solvency margin as proportion of written premiums []
Required margin depends on classes of business (affecting the variability of outgo) []
Diversification
Smaller unit size of policies less risk []

Fixed benefit classes less risk []
Greater geographical spread less risk []
Wider spread of business mix less risk []
Suitable spread of investments less risk []
More business usually means wider spread less risk []
Asset values
If assets are valued on a mark-to-market basis, then a company with a bigger proportion
of assets that are temporarily undervalued by the market might be less risky than would
appear from the published returns. [1]

Page 4c ST7: Assignment X6 Solutions

ST7 Pu 14 PDF

Загружено:

Сведения о документе

Оригинальное название

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

ST7 Pu 14 PDF

Загружено:

Авторское право:

Доступные форматы

ST7: CMP Upgrade 2013/14 Page 1

This CMP Upgrade contains:

All changes to the Syllabus objectives and Core Reading.

The Actuarial Education Company IFE: 2014 Examinations

1 Changes to the Syllabus objectives and Core Reading

1.1 Syllabus objectives

Syllabus objective (k)(iv) has been changed to:

(iv) Describe the Mack and bootstrapping approaches to reserving.

1.2 Core Reading

A new discussion on the EU Gender Directive has been added.

The first sentence of Core Reading now reads:

Lloyds is a key player in the worldwide general (non-life) insurance and

IFE: 2014 Examinations The Actuarial Education Company

The final sentence of Core Reading now reads:

By the end of 2011 there were 57 managing agents, managing a total of 87

The second sentence of Core Reading in Section 3.2 now reads:

In addition, Lloyds in aggregate must demonstrate overall solvency (that

The Actuarial Education Company IFE: 2014 Examinations

The start of the third paragraph now reads:

Industry-wide (or industry-source) data is collected and compiled by member

The second example now reads:

The last sentence above Section 3.3 now ends:

.... say, half the retention.

IFE: 2014 Examinations The Actuarial Education Company

The last sentence of the example now reads::

The fifth paragraph now reads:

The last sentence above the examples now reads:

The Actuarial Education Company IFE: 2014 Examinations

The last paragraph now reads:

The second list of bullets now includes a third point:

the speed of notification.

The third paragraph from the bottom of page 28 now reads:

In the London Market, policies are often coinsured by a number of different

The last sentence of the second paragraph now reads:

Another sentence has been added to the list of bullet points:

IFE: 2014 Examinations The Actuarial Education Company

Indeed, it is very difficult to allocate IBNR to an individual claim because, by

The policy number is often used as a link between different databases,

The penultimate paragraph of Core Reading now ends:

Such superimposed inflation could be as a result of future step changes in

The Actuarial Education Company IFE: 2014 Examinations

The first paragraph in the section on reporting years now reads:

latent claims, such as claims arising from exposure to asbestos, pollution

A change in the period before non-active claims are reviewed either to

IFE: 2014 Examinations The Actuarial Education Company

A paragraph has been added to the section on seasonality. This reads:

In many cases it can be useful to undertake projections on both paid and

The first paragraph now ends:

The last sentence on page 44 now reads:

The Actuarial Education Company IFE: 2014 Examinations

As noted above, it is also a simple method to apply and is especially useful

The paragraph at the end of the bullet points now reads:

Enables more accurate adjustments to be made (where these only affect

The second paragraph of Core Reading now reads:

the emergence of new types of claim

IFE: 2014 Examinations The Actuarial Education Company

The last sentence of the first paragraph now reads:

We are interested in the uncertainty of reserves, including its impact on the

Inform the management / Board of the insurance company to assist with

Another example has been added. This reads:

business written on a risk attaching basis compared with a claims made

This page has been deleted.

The Actuarial Education Company IFE: 2014 Examinations