CAS Exam 6C Spring 2019, Question 14

Study guide: Exam 6C

The following information is available for the valuation of the premium liabilities as at December 31, 2018. All amounts are in thousands of dollars ($000s).

Item	Value
Net written premium in the last 12 months	100,000
Gross unearned premium	65,000
Net unearned premium	55,000
Selected general expense ratio	28%
Portion of expenses related to policy servicing cost	25%
Expected reinsurance premium	4,000
Gross present value losses and loss adjustment expenses (LAE)	51,900
Projected net undiscounted loss ratio including LAE	80%
Discount rate	3%
MfAD for claims development	6%
MfAD for recovery from reinsurance ceded	0.5%
MfAD for investment return rates	0.25%
Contingent commission	2,000
Unearned commission	2,700
MCT risk factor for premium liabilities	15%
Initial Deferred Policy Acquisition Expense (DPAE)	6,500

The cumulative accident year claim payment pattern is as follows:

Age (Months)	% Paid
12	40%
24	100%

Part a (2.5 points)

Calculate the net premium liabilities as at December 31, 2018.

Part b (0.5 points)

Determine whether the initial DPAE should be reduced.

Part c (0.75 points)

Fully explain the impact on the return on equity (ROE) of a reduction of the initial DPAE.

Part d (0.5 points)

Identify two different evaluation methods on which the projected loss ratios underlying the premium liabilities can be based.

Part e (0.5 points)

Calculate the capital required at target for premium liabilities in the MCT.

No current syllabus covers this question; it is kept for the record.

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