Fall 2016, Q15
For APV of claim liabilities is there a reason why they didn't calculate PV of AY 2014?
for AY 2015 -> $20000 the calculation makes sense
E.g. For AY 2014 @ 2%, i think it should be: PV = 3500/(1.02^0.5). I think they mentioned it in sample2 solution, not sure why they won't do it in the other solutions.
Comments
Sample answer 1 is a little confusing because they calculate the APV of 2014 and 2015 together. They calculated the paid amounts in each of CY 2016 and 2017 (each of which consisted of contributions both AY 2014 and 2015) and then discounted those amounts. Their total answer for the APV of the claim liabilities for all AYs was 24,350.
In sample answer 2, they did separate calculations for AY 2014 and 2015. The result was 3,647 for AY 2014 and 20,703 for AY 2015 which adds up to the same value of 24,350.
I would probably have done the problem the way they did in sample answer 2 but it still may be instructive for you to work through sample answer 1 to deepen your understanding. Let me know if you have any further issues in figuring this out.
I'm wondering why we calculate the PV of AY 2014 as 3500/(1.02^0.5). Why don't we consider the time period 1.5 as well like how we did for AY 2015?
Hi,
This is because the current unpaid for AY 2014 will all be completely paid out in the next immediate period (Jan 1 2016 - Dec 31 2016) and discounted back 0.5 years. Nothing will be paid in the time period @ 1.5.
For AY 2015, 50% will be paid out from Jan 1 2016 - Dec 31 2016 with a time period of 0.5, while the remaining 40% will be paid out from Jan 1 2017 - Dec 31 2017 with a time period of 1.5
Makes sense, thank you for the quick reply!
Is there another way to calculate the duration of the premium liabilities in this question? I'm not sure I understand the age in the solution given.
Hi,
The solution in the Examiner's report uses the old method of calculating duration for Premium Liabilities.
You can find the new method here: https://battleactsmain.ca/wiki6c/CIA.PrLiabs#2016.Fall_.2315_Redone
Hey,
How do we know that all of the unpaid claims from AY2014 will be paid out in the period Jan 1 2016 - Dec 31 2016?
Thanks,
Claims are fully paid out after 3 years according to the payment pattern. As such the last payment will be made 3 years after the AY begins. That would be Dec 31 2016 (AY beings on Jan 1 2014)