Fall 2022 Practice Exam 1 - Excess or deficiency
Hi,
Had a question about a pretty basic topic but can't wrap my brain around how it's supposed to work.
In question 11 it asks to calculate claims development and uses the excess/deficiency for that. There is a deficiency of 3000 and the result is -3000 in development.
My thought process is that deficit means reserves were 3000 too low at the beginning of the year, so I'd expect there to be 3000 positive development during the year, not negative. Let me know what I'm missing!
Thanks!
Comments
what it means when it is negative here is not that the reserves decreased by 3000, just that the reserves were 3000 less than what it should have been
Right. In other words reserves were 3000 lower at the beginning of the year than they are at the end. Is that right?
No, it just means that the actual development is worse than expected. Example:
Beginning Unpaid: 50000
Expected Ending Unpaid: 45000
Actual Ending Unpaid: 48000
In this case your Deficiency is 3000. You Expected to decrease your reserves by 5000, but only ended up decreasing by 2000. It doesn't necessarily mean your reserves are 3000 lower at the beginning of the year. Intuitively, your reserves should mostly always be higher at the beginning of the year vs the end as claims start closing.
Right that makes sense. In this example of of reserves decreasing less than expected, wouldn't this represent a positive development of 3000 rather than negative?
why do you think that is positive? Your reserves decreasing less than expected is bad for a company as that means that they misestimated their liability and have actually a larger amount of liabilities than expected
Positive as in +3000 rather than -3000, not that it is good for the company.
Take your example but without the expected decrease for simplicity:
Beginning unpaid = 50000
Expected ending unpaid = 50000
Actual ending unpaid = 53000
Deficiency is 3000 but I struggle to see how this is interpretted as -3000 in development as in the practice exam answer.
This is more terminology here as deficiency is usually a negative number and redundancy is a positive number in AA reports. That number there has nothing to do with absolute development but rather the actual vs expected development.