C - CIA Discounting

Question 1

CIA DISCOUNTING

NET = GROSS - CEDED.
2 of the three items are estimated, 3rd is derived

4 considerations for selecting which 2 items should be calculated directly.

Answer 1

DATA AVAILABILITY
not appropriate to determine directly CEDED if there is limited history of ceded data

CF VOLATILITY
different volatility of CF by LoB warrant different approach

REINSURANCE PROGRAM
do not determine NET directly if NET retention level changed significantly
—–
DISCOUNT RATE:
if CEDED discount rate NE to NET discount rate, then GROSS = NET + CEDED. If ceded discount rate = net discount rate, then it does not matter which 2 are determined first.

Question 2

CIA DISCOUNTING

3 fundamental elements involved in the discounting aspects of policy liabilities

Answer 2

1) selection of PAYMENT PATTERNS
2) selection of DISCOUNT RATES
3) selection of MfADs

Question 3

CIA DISCOUNTING

4 considerations when selecting PAYMENT PATTERNS for claims liabilities

Answer 3

Homogeneity of groups

Payout period (split long vs short tail)

Credibility (supplement historical experience with external experience)

Question 4

CIA DISCOUNTING

2 ways of selecting PAYMENT PATTERNS for undiscounted amounts of claims liabilities.

Answer 4

1) derive payment patterns directly from paid LDFs

2) use historical ratios of paid losses to selected ultimate losses at various maturity dates

Question 5

CIA DISCOUNTING

3 individual components of PREMIUM LIABILITIES for which it may be appropriate to select different PAYMENT PATTERNS

Discuss the TIME VALUE OF MONEY effect on these components

Answer 5

(1) future claim costs
(2) maintenance expenses
(3) future reinsurance costs
(2) and (3) are are paid over the earning period of the unexpired portion of in-force policies. Time Value of money may not be MATERIAL for these, so APV may equal UNDISCOUNTED

Question 6

CIA DISCOUNTING

The (discount rate) expected investment return rate for calculation of the PV(CF) is that to be earned on the assets which supports policy liabilities.

6 items on which it depends

Answer 6

1) method of valuing assets
2) allocation of assets by LoBs
3) return on assets as of balance sheet date
4) yield on assets acquired after balance sheet date
5) investment expenses and losses from default (C-1 risk)
6) capital gains and losses on assets sold after balance sheet date.

Question 7

CIA DISCOUNTING

Define Portfolio Yield Rate

Answer 7

It is the Internal Rate of Return (IRR) at which the PV(CF) = current book value of portfolio

Question 8

CIA DISCOUNTING

3 possible selections of Discount Rate used to determine the PV(ceded liabilities)

In what situation it is APPROPRIATE to use such discount rate

Answer 8

(1) same discount rate used for net present value (portfolio yield rate)
(2) risk free rate
(3) discount rate used by reinsurer

(1) if the cie’s investments are sufficient to support its gross policy liabilities
or
if the assets held by the reinsurer to support its net policy liabilities are similar to the insurer’s investment portfolio

(2) and (3) if a high proportion of policy liabilities are ceded

Question 9

CIA DISCOUNTING

Describe the 3 types of MfADs

Answer 9

CLAIM DEVELOPMENT
-% of claims liabilities excluding PfADs
-apply MfAD to the PV
-range from 2.5% to 20%
varies by LoB
varies between Gross, Ceded and Net Liabilities

REINSURANCE RECOVERY
-apply MfAD to the ceded PV
Range from 0% to 15%
vary by year and LoB

INVESTMENT RETURN RATES
-difference between PV(disount rate MfAD) - PV(discount rate)

Question 10

CIA DISCOUNTING

Gross APV
Ceded APV
Net APV

Answer 10

Gross PV
+ PfAD claims dev (gross)
+ PfAD investm return (gross)

Ceded PV
+ PfAD clm dev (ceded)
+ PfAD investm return (ceded)
- PfAD reins. recov (ceded)

Net PV
+ PfAD clm dev (net)
+ PfAD investm return (net)
+ PfAD reins recov (ceded)

Question 11

CIA DISCOUNTING

PfAD clm dev (gross)

PfAD invest return (gross)

Answer 11

PfAD clm dev (net)
+ PfAD clm dev (ceded)

PfAD invest return (net)
+ PfAD invest return (ceded)

Question 12

CIA DISCOUNTING

Adjustments to PAYMENT PATTERNS of FUTURE CLAIM COSTS (in premium liabilities) as compared to those from claims liabilities

Answer 12

Avg Acc. Dt and Avg Pmt Dt underlying future claim costs

Legislative or Product Change

Question 13

CIA DISCOUNTING

3 considerations when determining CF of FUTURE REINSURANCE COSTS (in premium liabilities)

Answer 13

TIMING OF PAYMENT of reinsurance premium

EARNING PERIOD of unexpired portion of inforce policies

the potential for future reinsurance costs to change due to market pressure or chg in portfolio