Question 1:
a) State the benefits and drawbacks of discounting the technical reserves.
b) Company A and Company B have always had exactly similarly portfolio of business, each taking 50% of any risk on a coinsurance basis. In their published accounts, company A sets reserves which are intended exactly to pay for outstanding claims, discounted at the rate of interest the company expects to earn on its assets. Company B’s reserves always comprise a 20% margin for prudence above the amount it believes essential to pay these claims, and it doesn’t discount its reserves.
Describe the differences between the accounts of Company A and Company B, as they would appear to an analyst who was not aware of this information.
Question 2:
a) Describe what is meant by the term under-insurance and why clients engage in same?
b) Penny Sue insures her car for Rs 500,000 for a one-year period. The market value of this car is presently Rs 750,000. The insurance policy has an excess of Rs 15,000. One month after taking the policy, Penny Sue meets with an accident.
i) In the event of a net loss claim, how much would she get from her insurer?
ii) In the event of a claim estimated at Rs 100,000, how much would she get from her insurer?
iii) In the event of a claim estimated at Rs 15,000, how much would she get from her insurer?
iv) If the policy had a deductible of Rs 15,000 instead of an excess of 15,000, how would this change your answer to parts (i) to (iii) above?
c) List the three ways insurance companies can use to decrease under-insurance and describe their efficiency in practice.