IASA - 7

[blackjack]

A one year policy is effective from 4/1/92 to 3/31/93. As of 12/31/92, the UEPR associated with this policy is estimated using the following methods:
1) Annual
2) Semi-monthly pro-rata
3) Daily.

What is the ranking of the resulting UEPR estimates from highest to lowest?


[My Soln:]
Annual Method UEPR = (1-9/12) = 0.25
Semi-Monthly Method UEPR = (1-17/24) = 0.292
Daily Method UEPR = (1-275/365) = 0.247

So ranking from highest to lowest = Semi-Monthly, Annual, Daily

ALL-10 shows Annual, Semi-monthly, Daily. What am I missing here?

[Been There Done That]

Your daily method uses 365.
Your semi-monthly method uses 2(12)=24.
Your annual method uses 12.

One of these doesn't fit.

[blackjack]

Need more help!

PS - Whoops...the topic should refer to IASA Chap 4

[Been There Done That]

Why would a method that divided by 12 be called an annual method when a method that divides by 365 is called a daily method?

[J.T.]

Annual Method UEPR = (1-9/12) = 0.25


Annual method assumes that the policies are written mid year, so 1/2 is earned at the end of the year. The annual portion is .5
Otherwise, your solution is correct.

[blackjack]

Annual method assumes that the policies are written mid year, so 1/2 is earned at the end of the year. The annual portion is .5


Mid-year for this policy (effective 4/1/92) would be 10/1/92, not 12/31/92. In the annual method, do we just ignore those 3 months? Still not seeing it! Sorry to be a pest, but this is driving me nuts!

Thanks for all your help!

[Wigmeister General]

Now you're learning why the exams are stupid. They have stuff on the syllabus that is unnecessary, like the "annual method" of earning.

It's an accounting rule. That's all. The rule has no practical application in the real world any longer. The logic is from the days of slide rules when someone might have had a policy listing of hundreds of policies and had to estimate the UEPR by hand.

So, he took every policy written during the year figuring that the average written date was ..... JULY 1 ..... regardless of the actual date it was written.

[Been There Done That]

LVBIII,

1) There is some stuff on the exams that isn't fully relevant, so what?
2) This particular issue is important, namely, it helps you understand how accountants view things (even today).
3) This particular technique is easy.
4) And as I frequently do, I'll comment that if this problem was not taken from an actual test, it is silly to use it as an example of the types of questions that are asked on exams.

[blackjack]

Thanks for your help!

[J.T.]

Wow, I leave for a couple of hours and this turns into an exam bashing thread.

Blackjack, how are you doing on studying? Are you focusing on this petty problem of Annual computing because you have all the other stuff down, or because you feel overwhelmed?

All10's practice problem is likely to be seen on an exam IMO. Although the annual method is outdated, it isn't difficult to do. I'm not sure why we have to learn all of these court cases presented about reinsurance either, but I feel that overall the exams serve many purposes, most importantly, (for this one) teaching how to reserve. This isn't something I've ever been exposed to (nor will I probably ever be exposed to), but I think it is useful to know if the chance ever occurs.

[blackjack]

JT - Studying is going pretty well. I am just keeping my head down and keep plugging along. I was focused on this small problem, b/c I received a 5 last time on this exam. I NEVER want to go through that again! Too much work put in to find out in the end I came up short. My concern is that you pile up enough of these "petty" problems and I end up with another 5! This sitting, I have focused more on where are my strengths and weaknesses and how several of the papers relate (ie. say the same thing in different terms). I have also spent quite a big part of my study time doing problems, problems, and more problems.

Regarding ALL10 sample problems showing up on an exam, I think it is very possible. I have found several instances where the ALL10 practice problems are very similar to the exam questions. I don't know which came first, ALL10's sample problem or the exam problem, but who really cares. For many papers there is only so much testable stuff.

Good luck!

[J.T.]

Good luck to you too! 5's are horrible. I'm hoping I don't get one. It's my first time to take this exam, and hopefully will be my last. I need a pass for my confidence level.