CIA Discounting Flashcards

1
Q

Give the fundamental elements of discounting

A

1 - Selecting payment patterns
2 - Selection of discount rates
3 - Application of MfAD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

Give considerations for which of gross, net, or ceded policy liabilities are estimated

A
  • Data availability
  • Cash flow volatility
  • Re program - Type and consistency
  • Discount rate - Ceded may differ from net
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

Give factors to consider in the selection of the rate of return on assets underlying the discounting of policy liabilities

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

What is the portfolio yield rate ?

A

IRR which, when applied to the cash flows, produces the book value at a future date of the corresponding assets

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

What is the difference between PV and APV ?

A
Present Value (PV)
Sum of expected future payments after recognizing the time value of money 

Actuarial Present Value (APV)
APV = PV + PfAD

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

Give considerations in selection of a discount rate for NPV

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

Discount rate options for ceded PV

A

• 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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

Assets supporting policy liabilities are sometimes segregated from assets supporting capital and surplus. Which assets are typically selected to match each of these segments ?

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

Ceded APV =

A

Ceded PV + PfAD Ceded LDF + PfAD Ceded IR – PfAD Ceded RR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

Net APV =

A

Net PV + PfAD Net LDF + PfAD Net IR + PfAD Ceded RR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Gross APV =

A

Gross PV + PfAD Gross LDF + PfAD Gross IR

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

What are considerations an actuary should make in determining the cash flow of future Re costs with respect to discounting premium liabilities?

A

1 - Timing of the payment of applicable Re premiums

2 - Earning period of the unexpired portion of in-force policies

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Define MfAD and PfAD

A

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

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

List considerations when claims would be subdivided into reasonably homogeneous groups for the selection of payment patterns

A

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.

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

List types of payments associated with premium liabilities for which it may be appropriate to select different payment patterns

A

1 - Future claims and LAE
2 - Maintenance expenses
3 - Future Re costs

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

List assumptions that would include MfADs

A

1 - Claims development
2 - Recovery from Re ceded
3 - IRR

17
Q

Briefly explain reasonable assumption related to the effect of the time value of money for Servicing expenses and future Re costs

A

Effect of the time value of money is normally insignificant on these items. Therefore, it is reasonable to assume that the undiscounted value is equal to APV

18
Q

Briefly discuss how investment expenses can affect discount rate

A

It may be reasonable, for example, to reduce the discount rate based on historical investment expenses

19
Q

When does the use of a rate based on the portfolio yield for ceded PV may be appropriate

A

If the company’s investments are sufficient to support its gross policy liabilities
OR
If the assets held by the assuming company to support its net policy liabilities are considered to be similar to the ceding company’s investment portfolio

20
Q

Discuss selection of discount rate for estimation of gross PV

A

If the same discount rate is used for estimating both the net and ceded PV, then the gross PV can be estimated directly using that same discount rate

If ceded PV is estimated using a risk-free rate or the assuming company’s discount rate, then the implied rate underlying the gross PV may not necessarily equal to the selected portfolio yield rate underlying the net PV

21
Q

PfAD clm dev (gross)

A

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

22
Q

PfAD invest return (gross)

A

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