PACICC -Compensation - 2015 spring 13

cgc2018cgc2018
in PACICC.Comp

Hello, Graham;

the past exam question for this paper, 2015 spring 13, CAS accepted two answers for this questions, I am wondering which way should be the right one according to the paper?

From this paper, bullet point 7, have one numeric example, it seems the right way is PACICC compensated the insured first with all capping condition, then distribution from liquidation will go to PACICC first, the extra amount ( if applies) will go to the insured.

Does this mean , for above past exam question, sample 2 make more sense?

Thank you!

Comments

  • grahamgraham

    Hey cgc2018,

    The correct answer seems to depend on what is meant by "distribution from insurer". The question is not clear on this. There is a big difference in the total reimbursement to the insured between the two sample answers. I agree that sample answer 2 actually makes more sense.

    • Sample Answer 1: This solution seems to assume that the insurer went insolvent after already paying $350,000 directly to the insured. The remaining portion of the claim would then be $50,000, and that's the part that PACICC is responsible for. If you subtract the deductible of $1,000 then PACICC pays $49,000 plus the $350 for the UEP. (They would presumably recover this amount in a future assessment against solvent insurers.) The total reimbursement to the insured is $399,350.
    • Sample Answer 2: This second solution seems to assume that the insurer went insolvent before making any payments to the insured. (The insurer apparently had a case reserve of $350,000 for that claim already set up however). Anyway, PACICC is then faced with the full claim of $400,000, or $399,000 after the deductible, but the maximum is only $300,000 plus the $350 for the UEP. So PACICC pays $300,350. But since the insurer had a case reserve of $350,000, there is still $49,350 left over after reimbursing PACICC for their portion of the payment. The total reimbursement to the insured is $350,000.

    In sample answer 1, If PACICC knew that the insured had already received $350,000 from the insurer, they likely wouldn't want to give them another $49,350!! But assuming PACICC didn't know the history of the claim and were only presented with the remaining unpaid claim of $50,000 (out of the original $400,000) then I guess sample answer 1 would be how it's done.

    In the wiki, I presented sample answer 1 because they were both accepted and sample answer 1 seemed simpler. You can check the old exam problems on this paper, but I don't think any of them dealt with "distribution from the insurer". They were all more straightforward.

  • ChristoRoyerChristoRoyer
    edited February 2023

    Thank you for the summary!
    There is one detail I'm not sure about the Sample Answer 1. If a payment of $350,000 is made to the insured by the insurer, couldn't we assume it is net of deductible? Meaning the insured has already assume the $1,000 even before the implication of the PACICC.
    This way, we wouldn't have to apply it when calculating the amount owed by the PACICC to the insured and the answer would be $1,000 higher.
    Is it a valid way to reason this?

    Edit:
    Ah, nevermind that, I just realized that if we do this, we will actually be completely ignoring the deductible since the insured will received the whole amount in the end. Just writting it made me realize it didn't make sense. I'll leave the comment here in case someone comes up with the same bad reasoning one day.

  • grahamgraham
    edited February 2023

    Thank you on behalf of all future Exam 6C candidates. :) It's a true crowd-sourcing effort! And I have also linked to this discussion from this location in the wiki:

  • ChristoRoyerChristoRoyer

    Let's say we use Option #2, but with today's limits. Would it be something like that?

    • The amount owed for unpaid claims to the insured is $399K.
    • For Unearned Premium, it is 350$
    • Since the new limit for property is $500K, PACICC gives 399K + 350$ = $399 350 to the insured
    • Afterward, PACICC receives $350K from the insurer's distribution (can we consider this coming from the liquidators?)
    • So in the end, we can say that f the money the insured receives, $350K "comes from" the insurer while $49 350 is from the PACICC (Same answer as option #1 in the initial problem).
  • Staff-T1Staff-T1

    Well not really because from option 2 as described by Graham, PACICC would pay the full claim. So technically, with a 500K limit, there would be nothing form the insurer's disbursement

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