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

4 considerations when selecting PAYMENT PATTERNS for claims liabilities

Answer 2

Homogeneity of groups

Payout period (split long vs short tail)

Credibility (supplement historical experience with external experience)

Question 3

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 3

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 4

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 4

(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 5

CIA DISCOUNTING

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

Answer 5

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

Legislative or Product Change

Question 6

CIA DISCOUNTING

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

Answer 6

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