2016 FallQ15
Hi Just some clarification. Usually when we are given DPAE (it's assumed to be from accounting) so we can't use it for Net Premium liab calculation. In this Question "Maximum" DPAE is given -> is that why, we can just plug it into the formula:
DPAE = Net UPR - Net Prem liab + UE Comm -> and find Net premium liability?
Also if DPAE given is from Asset B/S we can we use that in formula above ?
Lastly -> we always use "Net" APV (claim liab) and "Net" APV (premium liab) unless asked differently ?
Thanks
Comments
Hi,
In the wiki article, I wasn't careful about distinguishing between booked DPAE and maximum allowable DPAE. (As you alluded to, the accounting department doesn't have to necessarily book the maximum.) In all of my calculations, I'm assuming we're calculating the max DPAE. The exam question stated the question more carefully (and correctly) by explicitly saying max DPAE. So that tells you it can definitely be used to get the net premium liability.
If the question gave you the DPAE in the form of the B/S, I think it would probably be fine to use it to get net premium liability but it could also depend on how the question is presented. It's possible they might be trying to trick you into using it as the "max DPAE", but I kind of doubt it. If you're unsure, maybe include a brief note regarding any assumptions you make.
In this question they say explicitly there is no reinsurance so net and gross are the same. If there is reinsurance, you have to be more careful about net and gross. An example of that is 2015.Spring Q12.
Hello just a quick clarification for this question. When calculating the APV for the claim liabilities, the examiner's report is showing Paid in 2016 = 3500 + 20000 *.....
If I understand in correctly, the AY 2014 unpaid is 3500. So only a fraction of it would be paid in 2016. Why do we take the full amount ?
On a side note on the calculation problems in the wiki note. Non of them seem to be asking to calculate the Loss ratio or expense ratio shown in the Appendix Gross Misc tab. Does it mean those are less important ? I am asking because in a different post, it was pointed out that the time period used for trending in the LR calculation (appendix B, sheet B ) was wrong. So wondering if I should still follow the "wrong" time period if It comes for the exam.
They did the calculation all in 1 step and that can be confusing when you're learning.
Let's step back to the end of 2014 for a moment and let the unpaid amount for AY 2014 be A. You could then use the given payment pattern to find the amount expected to be paid in 2015 and 2016 as follows:
The denominator is (100%-10%) in both cases. But in this problem we are at the end of 2015. The current unpaid amount is 3500 but you have to recalibrate the payment pattern because there is 1 less year. In fact, there is only 1 payment left for AY 2015 because the 10%/60%/100% payment pattern is complete after 36 months which is the end of 2016. So if you write it out, the paid amount in CY 2016 from AY 2014 is:
In this exam problem the other term "20000 x ..." is the contribution to the amount paid in CY 2016 from AY 2015.
I always find it easier to deal with each AY separately. It might take a tiny bit longer, but you're less likely to make a mistake.