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    Question

    InsureCo writes a portfolio of 12-month fire insurance

    policies on 1 Oct (policy year Oct–Sep). Premiums are received upfront. Historical claims are seasonal: 30% of claims occur in Nov–Jan, 20% in Feb–Apr, 25% in May–Jul, and 25% in Aug–Oct. Management wants to calculate unearned premium and decide if an unexpired risk reserve (URR) is needed at 31 Mar year-end. Based on seasonality, what is the primary consideration for URR at 31 Mar?
    A No URR—unearned premium is sufficient because claims will be covered by future premiums. Correct Answer Incorrect Answer
    B URR is needed if expected claims & expenses for remaining policy period exceed the unearned premium; seasonality concentrated in Nov–Jan is irrelevant at Mar year-end. Correct Answer Incorrect Answer
    C URR likely required because a higher proportion of claims fall after Mar for the remaining policy months. Correct Answer Incorrect Answer
    D URR not required if reinsurance cedes adequately cover seasonality. Correct Answer Incorrect Answer
    E URR must be set to entire unearned premium as a conservative measure. Correct Answer Incorrect Answer

    Solution

    URR is required when expected claims/expenses for the remaining unexpired term exceed unearned premium. Given seasonality, if significant claim incidence remains in months after Mar for these Oct–Sep policies, URR is likely needed. Reinsurance can affect net estimate but does not remove need for analysis.

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