Fall 2015 Q13c)

jptardif2

Hi Graham,

I keep reading the solution to that problem but just can't get my head around it. Could you expend a bit more on what they mean in their answer?

Thank you so much,

graham

The exam question 2015.Fall Q13c is:

• Describe 2 approaches to account for the time value in money when evaluating the runoff of claim liabilities.

The answer is directly from the CIA.Runoff reading at the top of page 4. Sample answer 1 is copied almost exactly from the reading. But I doubt very many people thought to memorize that. The examiner's were being lazy when they constructed this question. It's a bad question because if they felt this methodology is important, they should have just asked you a proper calculation question.

I think sample answer 2 in the examiner's report is probably the best/simplest of the sample answers provided. It's something you could reasonably have come up with even if you didn't memorize the specific bullet points from the source text. It says you can either of the following:

• incorporate (add) investment income to the excess/deficiency amount
• discount all values to time 0

And even that is a little confusing because it seems to say that you only have to do one of the above, not both. But we already know from the calculating the excess(deficiency) ratio on a discounted versus undiscounted basis, you have to consider both discounting and investment income. The difference here is that you discount all the way back to t=0.

In any case, this is a reading that is rarely tested. Although there is a pretty good calculation type problem that could be asked from this reading, I think it has a very low probability of being asked so I didn't discuss it in the wiki for CIA.Runoff. I mentioned it there however, in case anyone has studied everything else thoroughly and is looking for more material study. Ha!

I'm not sure if my explanation is very clear, but that's about as clear as I can make it without asking you to spend significantly more time studying that low-ranked reading.