maintenance expenses discounting

ineedcoffee

I noticed in the Spring 2018 examiner's report of #14 that maintenance expenses were not discounted and the question doesn't mention explicitly when they were incurred. However in an older question, from Spring 2016 #13, maintenance expenses were discounted (using the old method).

I suppose if the question says they are "paid during the time unearned premium is earned" then we should discount them like in Spring 2016, and if there is no mention of when they were incurred like in Spring 2018, then we shouldn't discount?

In the case that we should discount them, should we apply that factor of (1+i)^(0.5-0.3333) to the PV factor? The Spring 2018 solution seems to have applied the -0.5+1/3 adjustment to the duration, so would it be safe to assume the adjustment should be done for the discounting as well?

chrisboersma

With regards to the time value of money, the cash flows other than losses and loss adjustment expenses (i.e., reinsurance costs and maintenance expenses) would also be considered but are not generally material to the calculation of the premium liabilities

In terms of duration - I suspect they are relevant (there's no point using duration = 0, if you can use duration = 1/3), so when calculating duration you probably want to discount and calculate the correct timing (but optional).

I would not recommend ADDING maintenance expenses to claim liabilities in relation to unearned premiums (as the timing is way off).

graham

Hello ineedcoffee

Another thread on this topic is: https://battleactsmain.ca/vanillaforum/discussion/comment/97/#Comment_97

My general feeling on discounting of maintenance expenses is that I would not bother discounting them, but I would include a short note in my solution as chrisboersma referenced that the discounting of maintenance expenses is not generally material. In fact, if you look at the Excel exhibits for the CIA's Premium Liability paper, they do not discount the maintenance expenses. You can see this on sheet: NetPremLiab in column AG. They just multiply their maintenance expense ratio, which is 3%, by the net UPR.

(It really shouldn't matter how they ask the question because the mechanics are explained in the premium liability paper and that's the definitive source for how to do the calculation.)

As a side note, I would ignore sample answer 1 in the examiner's report for this question. Sample answer 2 makes a lot more sense and they do not in fact discount the maintenance expenses in sample answer 2.

ineedcoffee

thank you both!