2018.Spring Q15b - sample answer 1

grahamgraham
edited October 2019 in CCIR.ARinstr

There is a typo in the examiner's report for this question. They add investment income to the numerator instead of subtracting it (+1520.7 instead of -1520.7) but the answer they gave is correct, 63.4%. Note that they did do it correctly in sample answer 2. Thanks to xQEDx for noticing this!

Comments

  • yunal911111yunal911111

    In fact, can you please explain why the investment income should be subtracted instead of adding?

    My understand is to calculate the discounted LR as at YE 2017, the discounted ultimate loss for AY 2014 as of 2017 YE consist of Discounted unpaid as of YE 2017 for AY 2014+ Accumulated Paid payments for AY 2014 prior to Dec 31, 2017 + investment income prior to Dec 31, 2017 for AY 2014 unpaid claims to account for the time value of the money (just like a FV calculation).

    Please let me know!

  • chrisboersmachrisboersma

    discounting the loss ratio means we account for time-value of $'s
    Premium are paid in advance: $ unearned --> paid later --> Premiums [revenue] PLUS investment income from premium reserves [revenue]
    Claims are paid later: $ unpaid --> discounted --> Claim Cost [expense] less investment income from claim reserves [revenue]

    Anything claims related should be in the numerator. Anything premium related should be in the denominator. You'll note we add "like" items (premium revenue + investment revenue from premium) and calculate differences between un-like items: claims expense - investment revenues from claims.

    Undiscounted Loss Ratio = Claims / Premiums
    Discounted LR = [Claims - II (Unpaid)] / [Premium + II(Unearned)]

    Not much is said in the materials about this. However, it is intuitive.

  • grahamgraham

    Thx @chrisboersma. This formula is also discussed in the CIA.MfAD wiki article here:

    It's just a straight application of the formula.

  • jptardif2jptardif2

    Hi Graham,

    I know this is very last minute, but aren't we making a mistake by using the CY 2017 annual yield of 3% to calculate the investment income from UPR, which happened in 2014? I used the information in the triangles to get the CY 2014 yield, which would be 3.5% instead of 3%.

    Thanks,

  • grahamgraham
    edited October 2019

    What numbers are you using when you multiply by 3.5%

    In the solution, all of the values being multiplied by 3% are quantities from 2017, so that's ok. They're looking at investment income generated from money that's "lying around" during CY 2017 (that is associated with the various AYs) so they have to use the investment rate from 2017 as well.

  • jptardif2jptardif2

    There is no UPR for AY 2014 in CY 2017 though?

    I assumed the II from UPR for AY 14 happened in 2014, so I needed the investment yield in 2014 and used an average of beginning and ending UPR for that year.

    Does that make sense?

  • grahamgraham

    Sorry, I was looking at the solution for part (a).

    You make a very good point about the UPR calculation in part (b). I checked your investment return of 3.5% and I got the same thing:

    • CY 2014 return
    • = 1855 / avg(0, 105986)
    • = 3.5%

    I think the whole problem is a little messed up though. As you said, there is no longer any UPR for 2014 when you're at the end of 2017. So at the end of 2017, there should no longer be any adjustment for UPR. The UPR has been earned and according to the formula given in the source text, you don't earn investment income on EP when calculating the discounted loss ratio.

    It might just be a defective problem.

  • michaeletkinmichaeletkin

    So was discounted loss ratios removed as of spring 2020?
    Are these types of questions out of scope now?

  • grahamgraham

    Yep. You can ignore it.

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