when may MfAD(inv) < 25 bps?
The answer in the battlecard says that it is less when the best estimate of the discount rate (based on insurers assets) is below 25bps.
2 questions come to mind:
1) If the discount rate is below 25bps, to me that indicates low investment return, but how does that justify choosing MfAD to be lower than 25bps too?
2) My initial response was based on the criteria for choosing margins. In other words, for MfAD(inv) to be lower than 25bps, the assets/liabilities are essentially perfectly matched, the payment patterns of claims are highly predictable, and there is almost no asset risk. Would this qualify?
Comments
I have a preliminary answer...so reason is that when the best estimate of the discount is below 25bps, the smallest margin of 25bps would make discount rates with margin less than zero. To prevent this, the MfAD(inv) has to be less than 25bps. True?
Yes, that is correct. As per the paper (http://www.cia-ica.ca/docs/default-source/2009/209138e.pdf): " While following Standards of Practice, an actuary could derive a discount rate adjusted by margin for adverse deviations that is less than 0%. In practice, actuaries may limit the discount rate to 0% in such situations."
So in this case, as you were alluding to, if you floor the discount rate at 0%, you are essentially using a MfAD(inv) < 25 bps.