ASOP 20: Discounting of P&C Loss & LAE Reserves

Question 1

Recommended Practices: Context

Answer 1

She should select assumptions & methodologies that are appropriate for that context.

Question 2

How to determine payment timing:

Answer 2

The assumptions & considerations used to determine the payment timing estimates should be the same as those used to determine the full value reserves.

Question 3

3 Methods to derive discount rate:

Answer 3

• Risk Free
• Portfolio
• Discount rates requested by another party

Question 4

Describe the risk free approach

Answer 4

uses a rate close to the risk free rate. This could be

determined from fixed income assets with low investment risk and similar timing characteristics to the unpaid losses

Question 5

Describe the portfolio approach

Answer 5

anticipated return on a selected asset portfolio (net of

investment expenses)

Question 6

Describe what to do when using discount rates that are requested by another party

Answer 6

The actuary needs to disclose that she is not responsible for these rates (otherwise she will be held responsible).

Question 7

List a few disclosures regarding Discounting of P&C LLAE Reserves

Answer 7

• Assumptions behind the selected discount rate & the support for those assumptions
• Difference between the undiscounted and discounted reserves
• Whether the discounted reserves include a risk margin, and if so, the basis for the margin
• Significant limitations that may have had a material impact on the results