Runoff
HI Graham,
Can you please explain to me what does claims runoff mean? Not sure I understand this at all.
Also as related question to run off, there is this question from the Battlecards in the CIA Mfad wiki:
"Reasons to select lowest MfAD(clms) margin of 2.5% (3)'' and the first answer given is
* LOB commuted to reinsurer and is in runoff
Can you explain what does this mean?
Thank you very much!
Comments
The definition of runoff given in the CIA reading on runoff is calendar year emergence. If you have $1,000 of liabilities for a specific group of claims on Dec 31, 2020, then there will likely be some development on those claims during 2021, 2022, 2023,... and so on. This development is the runoff. Eventually all claims will have reached ultimate and the runoff is complete.
The reason for selecting the lowest MfAD for claims when a line has been commuted to a reinsurer and is in runoff is that no new claims are coming onto the books. The only source of uncertainty is development on those existing claims but as these claims get older (or "run off") there is less and less of a chance for adverse development. That means you can select a low MfAD.
Hope that helps!
Thank you Graham, this definitely helps!
Was thrown off by the wording when it actually just means development, time to rest
1) I notice the formula for runoff is the same as that of "Excess or Deficiency". Would you say, they are conceptually the same? In Graham's example runoff sounds more like development but from the formula I understand it more as the gap between the actual losses and the expected losses paid in a specific calendar year
2) Since "Excess or Deficiency" is now calculated on an undiscounted basis under IFRS-17, do you know if the CAS is still expecting us to know how to calculate it on a discounted basis given that this paper has not been removed from the syllabus?
1) No, they are not the same. Graham is not referring to the formula in the CIA.Runoff paper which is closer to an Actual vs Expected calculation and is describing what actuaries refer to as running off an accident year.
2) I think only people on the exam committee will be able to answer that for you. Anyone outside of the CAS is purely guessing at this point
Actually I think @graham was referring to the formula in CIA.Runoff because calendar year emergence is how the paper defines runoff. Also the paper mentions that the evaluation of runoff is computed using the formula that I identify as excess or deficiency, so I don't understand how they are not the same
I am answering in relation to the original battlecard highlighted - Runoff in that context means winding down an Accident Year until IBNR and case eventually reaches 0.
Is there a difference between runoff and LIC?
Runoff means the insurer is no longer writing new business and is just covering claims on policies that have previously been written. You'd still have LIC on runoff
So the calculation for Excess (Deficiency) is different between
CCIR and Runoff.
In CCIR
excess (deficiency)
= (Undiscounted Liabilities for incurred claims at Prior year end)
But in Runoff
I took this from Fall 2015 Q 13 (I reword it by removing the years and changing it to laymen terms)
excess (deficiency)
= Discounted Reserve at Prior Year
– Paid Claims in period
If you can see the formula is similar in nature but with two key difference,
When we are asked to calculated excess, how do we know which we are doing?