MfAD Selection Memory Trick
From Section 5: Explicit Assumptions - Deterministic MfADs
Investment Return Rates: MAP (I like to think of a treasure map leading me to lots of $$. Investments want to make $$ too!)
- Matching (asset & liability) cash flows --> unmatched pick high
- Asset risk (credit/default & liquidity) --> uncertain pick high
- Payment Pattern Estimation --> uncertain pick high
Claims Development: OLD (I think of claims development the same as claims getting OLDer)
- Operations (changes, turnovers, no guidelines --> pick high)
- Line of Business (long tail coverages, change in legislation --> pick high)
- Data (not homogeneous, stable, credible --> pick high)
Reinsurance Recovery: FUL (Once your appetite for risk is full, you'll want to pass the rest off to reinsurance)
- Financial condition of reinsurer (if poor --> pick high)
- Unregistered reinsurance proportion (if high --> pick high)
- Loss Ratio (ceded). If high --> pick high
Comments
Lol. That's an A+ memory trick! It made me laugh which means I will remember it. I'm going to put this directly in the wiki and the BattleCard quiz. Thanks! Slay the beast!
Hi Graham,
I have a question here, can you explain why uncertain payment pattern here leads to picking high Mfad for investment?
Thanks,
Tony
The length of the payment pattern affects how long the insurer may keep the "money" it has set aside for claim payments. If a payment is made earlier than expected, then there is less time for that money to earn investment income so the insurer's investment return rate is effectively lower. A higher selection for investment MfAD recognizes this risk.