IFRS17 bonus question
for part (d), why did we add LIC and RA to calculate the z-value? I would think LIC already has RA embedded, by doing this are we not double counting?
as well, the question in part (d) had this little blurb of (mu and sigma = 0.1), to me it sounded like mu was given (=0.1) but we calculated mu again in the answer so I was confused.
Lastly I did not know question (b) was asking us to calculate RA by different LOB until I read the answer. I also was unsure whether the insurance risk meant capital available or capital required. Hopefully the question can clarify this.
Comments
Hi, yes in part(d) it should say PVFCF instead of LIC. And also mu is supposed to be unknown while sigma is given. You are also right that it should be clarified that the question is looking for RA by LoB.
I don't really see on my end why insurance risk will be related to capital available. Question seems fine for that particular point @graham
Why do we determine the RA based on the % of capital released at a given point in time?
I thought we would systematically decrease the total capital held by the % released and discount (total initial insurance risk capital - cumulative capital released) at each point in time if we're truly requiring compensation for capital held, not released
For part (b), does the "FCF" in "LIC PV(FCF) by Line of Business" stand for Future Cash Flows or Fulfillment Cash Flows?
my guess would be that since Fulfillment Cash Flows inherently takes a PV, they mean PV(Future CF)?
@adipelino yup you are right. I made a mistake there whoops. I will correct it.
And yes I meant Present value of future cash flows. Fulfilment cash flows include the RA which I did not want to include in the question.
For part b. Why are we using a cumulative payment pattern instead of an incremental payment pattern to calculate PV factor?
I think because we're starting with the given capital amount (insurance risk margin) and slowly releasing it as we're providing services. As risk is released, we need less capital to support it. So it's not really a 'payment' but a release of capital we need to support the decreasing risk over the life of the contract. This was my understanding when I asked about it at least
@adipelino is right
The concept is similar to calculating the value of a commutation of a reinsurance agreement whereby we need to calculate the PV of the cost of capital
Does discounting always use the year end t = 1,2,3,..., instead of 0.5, 1.5, etc.?
for part (b), why do we need to calculate cost of capital (pre-tax). I used directly the cost of capital, 6%.
cost of capital is usually stated on an after-tax basis while Risk adjustment is a pre-tax figure. This is why you would need to make the adjustment
Replying to @thesuperactuary , I believe you're referring to discounting at t=0.5,1.5,2.5 in the sample questions from CAS (Question 4), and discounting at t=1,2,3,... in all other sample questions including examples from commutation risk margin calculations [https://www.battleactsmain.ca/pdf/commutation_random_problems.pdf] and Solvency 2 risk margin calculations [https://www.battleactsmain.ca/pdf/Odomirok.Ch25_(17S.20)_v02.pdf].
I believe this is because in the CAS sample question, it gives you a specific yield curve where maturity periods are 0.5, 1.5, 2.5
@Staff-T1 , can you confirm if this is the correct reasoning?
Thanks!
Yes the given yield curve is at half-year periods. If it is not specifically mentioned, you can discount at mid year or year end though. Just state your assumptions