Exam 19F #18 - Unpaid Claims and Adj Expense from B/S vs from Loss triangle

Battleacts2Battleacts2
in CCIR.ARinstr

There has been a question confusing me often regarding Unpaid Claims and Adj. Expense (UCAE) read from different sources.

For the example in Exam2019Fall #18, From balance sheet , we read Net APV(UCAE CY2018)=184,500-16,500=168,000. That should includes UCAE from all prior accident years remains in CY2018. Is it right?

Then from the below loss triangle, we read Net APV(UCAE CY2018)=(198,000-30,000)+(195,000-65,000)+(175,000-75,000)=398,000, which is much greater than 168,000 calculated from balance sheet above. Isn't it should be less and equal to 168,000?

When calculate inv. Yield, we use UCAE from from balance sheet(179000-16000), but when we calculate inv income for 2018, we use UCAE from loss triangle ( [163000+130000]/2 ). Is there particular reason? Why they are not interchangeable to use?

Can anyone explain?

Comments

  • grahamgraham

    Let me address your last question first about the calculation of the investment yield and investment income:

    Usually in excess (deficiency) ratio problems, the exam problem provides the investment yield as given information, but in this problem they didn't. Instead, they provided the total investment income from insurance operations (5,200) and you had to work backwards from the balance sheet information to find the investment yield. The answer was 3.0% and the calculation follows the example in the wiki given here:

    Once you know the investment yield is 3%, you can calculate the investment income earned on just the UCAE for AY 2017 as of CY 2018. For this, you have to use only the UCAE for AY 2017. You cannot use the UCAE from the balance sheet because (as you correctly observed) the balance sheet provides the total for all AYs. This calculation is explained in the excess (deficiency) practice template in the CCIR.ARinstr reading.

    For your first question about why the balance sheet information seems inconsistent with the triangle information, I think you are correct:

    • The net UCAE value of 398,000 from the triangles for CY 2018 is for 3 AYs only: 2016, 2017, 2018.
    • But the net UCAE value of 168,000 from the balance sheet for CY 2018 is for all AYs and should be greater than the triangle value (unless AYs 2015 and prior have a negative UCAE which wouldn't make sense).

    So unless I'm missing something, the information provided in the problem does seem to be internally inconsistent. (This has happened on exam problems before.)

  • Battleacts2Battleacts2

    Thank you for the explanation.

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