Excel Sample Question Provided by BA: Sample Question #3
Hello,
For SQ3 in the Excel from BA on Dutil.FA - its goal is to calculate the loss ratio assuming no ceding.
My understanding is the Loss Ratio = Loss / Premiums. I disagree how BA calculated the premiums and I want to clarify what's going on.
The answer key calculates the premiums as = Company A premium [not ceded to the RSP, assuming no ceding] + Participation Ratio * Total Provincial RSP Premiums.
Why are we using the participation ratio? My understanding is we would use the Provincial Expense Allowance, making the premiums = Company A premium [not ceded to the RSP, assuming no ceding] + Provincial Expense Allowance * Total Provincial RSP Premiums.
Am I right? If I am not right, what is the purpose of the PEA outside of this?
Comments
Hi,
The Sample Question3 is very similar to 2015 Fall Exam Q7, part C. In the wiki, we showcase an example of calculating the LR assuming no ceding, and as the examiner report shows, the answer is based on using the new Participation Ratio (just like the Excel Q3), so the first approach you mentioned would be correct!
The PEA is almost like an allowance/reimbursement that the FA gives to the parent company for handling operations and you would use this when you are calculating the " the LR for company A on their share of the pool". This is shown in part A of the 2015 Fall Exam Q7.
I think the wiki does a good explanation of how the different components work depending on which type of LR you need to calculate. Hope this helps - thanks