C - CIA MfAD Flashcards
CIA MfAD
one thing PfAD do not cover and one thing it covers when using stochastic models.
- PfAD do not cover the statistical volatility arising from the model
- PfAD covers the uncertainty in whether the actuary has the right model or the right parameter
CIA MfAD
5 (including c1, c2) desirable characteristics of a risk margin (MfAD).
A) the less knowledge about current estimate and its trend, the higher the MfAD.
B) low freq/high sev risks should have higher MfAD high freq/low sev risks
C) longer contracts should have higher MfAD
C1) due to higher exposure to risk
C2) due to longer settlement period
D) the wider the probability distribution around the risk, the higher the MfAD
E) if emerging experience reduce uncertainty, MfAD should decrease
the more skewed the distribution is, the higher the MfAD
CIA MfAD
examples where a large MfAD is appropriate (compared to the best estimate assumption)
- if the actuary has low confidence in the best estimate assumption
- an approx with low precision is being used
- the event assumed is farther in the future
- the potential consequence of the event is more severe
- occurrence of the event is more subject to statistical fluctuations
–when stochastic model indicates variability not identified in deterministic approach
CIA MfAD
features a risk margin (PfAD) methodology should have.
- easy to calculate
- facilitate disclosure of information useful to stakeholders
- provide information useful to users of financial statement
- be consistent :
- -for methodology, across lifetime of contract
- -in assumptions
- -between entities
- -between reporting periods
-vary by product
CIA MfAD
3 general considerations for claim development MfADs (in terms of low and high margin)
significant change in:
INSURER’S OPERATION
(claim management, UW)
DATA ON WHICH THE ESTIMATE IS BASED
(volume of losses, homogeneity)
LOBs
(length of tail, latent claim, liability exposure)
CIA MfAD
examples where it would be appropriate to have a margin of 20% for claim development.
- significant changes due to TORT REFORM
- introduction of new LoB
- significant change expected in future claims
- financial crisis and its effect on longer tailed LoBs
CIA MfAD
7 considerations for MfADs from reinsurance ceded (in terms of low and high margin situation)
- ceded loss ratio
- ceded commission rates
- unregistered reinsurance
- reinsurer under liquidation
- reinsurer with weak financial condition
- claim coverage disputes with reinsurers
- proportion of related party reinsurance
CIA MfAD
3 of the several different types of risk addressed in the MfAD for investment return rates
A/L Mismatch risk
Error in estimating payment pattern for future claims
Asset risk (incl. credit/default and liquidity risk)
CIA MfAD
considerations for MfADs for investment return rates (in terms of low and high margin situations)
- A/L matching
- quality of assets
- loss of capital
- claim payment patterns
- determination of interest rates
- concentration by type of investments
- investment expenses
CIA MfAD
Discuss documentation of MfADs
- Actuaries to document critical considerations in their selections of MfADs
- Actuaries conducting stochastic analyses document what components are modeled as random variables as well as primary assumptions
- documentation for both explicit and stochastic techniques would include support for key decisions
CIA MfAD
Discuss reporting of MfADs
- in the USER’s best interest to be aware of the MfADs selected by the actuary.
- Disclosure in a report should balance between too little and too much
- should ask the question: what qualitative and quantitative information best serves the user’s understanding and decision making?
CIA MFAD
Two alternative formula-based approaches for deriving the margin for investment return.
- Weighted Formula
- Explicit Quantification
CIA MFAD
Give the 3 margins and their formulas to derive the margin for investment return based on the explicit quantification
1- Asset Liability Mismatch risk margin
- Risk Margin = Coverage Ratio x ((Asset Duration - Liability Duration)/(Liability Duration)) x Interest rate movement in runoff period
- Coverage Ratio = (Premium Liabilities + Claims Liabilities)/(Investments + Installment Premiums)
2- Timing risk margin
- Risk Margin = Shortening x Normal Discounted Rate x 10,000
3- Credit risk margin
- Could be estimated by comparing the yield curves of high quality bonds (government, municipalities, big 5 Canadian banks) and other corporate organizations. Then the extra yield is considered as the credit risk spread
