Examination: Subject SA3 General Insurance Specialist Applications

Faculty of Actuaries Institute of Actuaries
EXAMINATION
5 April 2005 (am)
Subject SA3 General Insurance

Specialist Applications
Time allowed: Three hours
INSTRUCTIONS TO THE CANDIDATE
1. Enter all the candidate and examination details as requested on the front of your answer
booklet.
2. You have 15 minutes at the start of the examination in which to read the questions.
You are strongly encouraged to use this time for reading only, but notes may be made.
You then have three hours to complete the paper.
3. You must not start writing your answers in the booklet until instructed to do so by the
supervisor.
4. Mark allocations are shown in brackets.
5. Attempt both questions, beginning your answer to each question on a separate sheet.
6. Candidates should show calculations where this is appropriate.
AT THE END OF THE EXAMINATION
Hand in BOTH your answer booklet, with any additional sheets firmly attached, and this
question paper.
In addition to this paper you should have available the 2002 edition of the
Formulae and Tables and your own electronic calculator.
Faculty of Actuaries
SA3 A2005 Institute of Actuaries
1 Company A is a large international insurance and reinsurance group whose statutory
returns show annual gross earned premiums in excess of $5,000m. The company
writes all classes of business from a large number of offices widely spread across the
globe.
You are an actuary within Company A. The company measures the performance of
its underwriters on taxable profit, including credit for investment return. Investment
return is credited at a notional rate of interest decided before the start of the financial
year.
Company A is aiming to increase taxable profit in the next financial year. The budget
for each portfolio of business written in Company A must be submitted in June so that
the group can finalise the overall figures by the end of July.
The underwriting manager of a niche commercial insurance business within Company

A is responsible for $200m of annual gross premium which has been stable at this
level for many years. Company A has set a budgetary target for this portfolio of
increasing taxable profit from $20m to $24m in the next financial year. This business
is underwritten in 6 offices each of which operates in a different country. Over half of
this business is written in the London Market. Most of the policies in this portfolio
have two year exposures and the risk exposure increases from zero at a uniform rate
over the policy period. Policies are written evenly over the course of the year.
For this portfolio acquisition costs have consistently been 20% of gross premiums and
reinsurance spend has been 17% of premiums. The reinsurance has been well used
and in the manager s opinion has been key to smoothing profits. Company A has
asked the underwriting manager to halve the amount of reinsurance purchased.
Internal expenses have been cut over the past two years from 15% to the current year
budget figure of 13% of gross premiums. The mean duration of claim settlement is
four years from policy inception.
This underwriting manager has asked you for a report outlining the options open to
him to achieve the company profit target explaining the advantages and disadvantages
of the options.
(i) Discuss the possible options open to him that you would consider for your
report. [47]
The underwriting manager has expressed dissatisfaction at the rate of investment

return credit, telling you that he is getting more on his own fixed interest investments.
He also disagrees with Company A s decision to cut his reinsurance spend by a half.
(ii) Explain why the underwriting manager s view may be different from
Company A s view. [18]
[Total 65]
SA3 A2005 2
2 The FSA is in the process of changing the capital requirements from solvency margin
to Individual Capital Assessment (ICA).
(i) Describe the core elements of the new proposals under the headings of ECR,
ICA and ICG. [4]
(ii) Describe the three components of the ECR calculation. [4]
(iii) Discuss the advantages and disadvantages to a general insurance company of

ICA compared with ECR. [6]
(iv) Outline the main areas that are expected to be covered in the ICA format
proposed by the FSA. [9]
(v) For each of the risk types itemised under these proposals:
(a) State each risk and suggest a basis for modelling each of them.
(b) Explain, with examples, how each risk may be correlated with the
others.
[7]
(vi) You are the actuary for a London market company writing commercial
property business both insurance and reinsurance. Describe how you would
parameterise the model of the insurance risk. [5]
[Total 35]
END OF PAPER
SA3 A2005 3

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Faculty of Actuaries Institute of Actuaries

5 April 2005 (am)

Subject SA3 General Insurance

Time allowed: Three hours

INSTRUCTIONS TO THE CANDIDATE

4. Mark allocations are shown in brackets.

6. Candidates should show calculations where this is appropriate.

AT THE END OF THE EXAMINATION

The underwriting manager of a niche commercial insurance business within Company

The underwriting manager has expressed dissatisfaction at the rate of investment

(ii) Describe the three components of the ECR calculation. [4]

(iii) Discuss the advantages and disadvantages to a general insurance company of

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