CIA Discounting Flashcards
Give the fundamental elements of discounting
1 - Selecting payment patterns
2 - Selection of discount rates
3 - Application of MfAD
Give considerations for which of gross, net, or ceded policy liabilities are estimated
- Data availability
- Cash flow volatility
- Re program - Type and consistency
- Discount rate - Ceded may differ from net
Give factors to consider in the selection of the rate of return on assets underlying the discounting of policy liabilities
1 - Method of valuing assets and reporting investment income
2 - Allocation of income and assets among lines
3- Return on assets at balance sheet date
4 - Yield on assets after balance sheet date
5 - Capital gains/losses on assets sold after balance sheet date
6 - Investment expenses and losses from default
What is the portfolio yield rate ?
IRR which, when applied to the cash flows, produces the book value at a future date of the corresponding assets
What is the difference between PV and APV ?
Present Value (PV) Sum of expected future payments after recognizing the time value of money
Actuarial Present Value (APV)
APV = PV + PfAD
Give considerations in selection of a discount rate for NPV
1 - Assets selected to support liabilities
2 - Reinvestment risk
-Reinvestment of positive net cash flows
-Company’s investment strategy
3 - Liquidation of assets
4 - Investment expenses
Discount rate options for ceded PV
• Portfolio Yield Rate
Same discount rate used for NPV
• Risk-Free Rate
Reflects current or new money yield
• Assuming Company’s Discount Rate
Reflects evaluation from the Re’s point of view
Assets supporting policy liabilities are sometimes segregated from assets supporting capital and surplus. Which assets are typically selected to match each of these segments ?
Common for a subset of an insurance companies assets, such as bonds, to be matched to policy liabilities while riskier assets, such as equities, are matched to capital and surplus
Ceded APV =
Ceded PV + PfAD Ceded LDF + PfAD Ceded IR – PfAD Ceded RR
Net APV =
Net PV + PfAD Net LDF + PfAD Net IR + PfAD Ceded RR
Gross APV =
Gross PV + PfAD Gross LDF + PfAD Gross IR
What are considerations an actuary should make in determining the cash flow of future Re costs with respect to discounting premium liabilities?
1 - Timing of the payment of applicable Re premiums
2 - Earning period of the unexpired portion of in-force policies
Define MfAD and PfAD
MfAD
Difference between the assumption for a calculation and the corresponding best estimate assumption to reflect the uncertainty in the variable
PfAD
Difference between the actual result of a calculation and the corresponding result using best estimate assumptions additional provision resulting from application of a MfAD
List considerations when claims would be subdivided into reasonably homogeneous groups for the selection of payment patterns
1 - Groupings used for the valuation of the liabilities on an undiscounted basis
2 - Payout period (splitting longer from shorter tailed)
3 - Existence of a predetermined schedule of payments for a group of claims.
List types of payments associated with premium liabilities for which it may be appropriate to select different payment patterns
1 - Future claims and LAE
2 - Maintenance expenses
3 - Future Re costs