Q18 and the AAD adjustment

kybazzi

I'm trying to understand when you need to include it and when not.

• Is it ever included for LIC?
• A lot of the questions have incremental payment patterns given, and you just use 0.5, 1.5, etc. timing for discounting. I'm confused about when to know to apply the adjustment.

Staff-T1

It's never included for the LIC as it is just a LRC adjustment
Most of the questions are discounting for the LIC which is why they don't apply the adjustment. You only need to do it for the LRC

janetng2

The average accident date for unearned premium is 4 months, not mid-year. That's why t = 0.33, 1.33, 2.33, etc for discounting LRC. The derivation of the AAD can be found in this old paper (there's probably a newer version):

https://www.casact.org/sites/default/files/database/studynotes_cantin7can.pdf
Page 59 - appendix F

kybazzi

Thank you for the link!

I want to understand better the difference between LRC and LIC in terms of the pattern. LIC has future cashflow patterns that are basically given a business-based assumption about their timing, which is why the problems typically use a %/year along with mid-year assumptions. This is because the claims are already incurred and thus can be aggregated and approximated accordingly.

LRC on the other hand is based on unearned premium, and as per the derivation above, gets the AAD adjustment after assuming uniform earning pattern.

Is above an accurate/sufficient explanation for the difference in treatment for future cashflows between LRC vs. LIC?

Staff-T1

I'm not sure about "business-based assumption" but yes generally it is fair to assume uniform payment within a year, which is why you discount at the midpoint for the LRC.

Yes for the LRC. Also the latest derivation for the AAD is found in the LRC paper in section 7, but I doubt that you would be required to know the derivation for the exam