2018.Spring Q14
In Question 14 of the Spring 2018 exam question, why in the sample 1 solution do we have a separate duration for the Maintenant Expenses than the one calculated for the total Premium Liabilities? And why is the duration chosen for the Maint Exp equal to 1/3?
Comments
But about the maintenance expenses: I believe sample answer 1 is incorrect and you should follow sample answer 2 for how to deal with maintenance expenses:
In sample answer 1, the duration (or average accident date) of 1/3 is calculated near the bottom of page 8 of the source reading. So, they are only counting maintenance expenses over this same period. Then they divide by 1.03 to account for discounting.
But if you look at the example in the Excel file that is included with the source text, this is not how maintenance expenses are handled. They do not multiply by 1/3 and they do not discount maintenance expenses. You can see this in columns AF, AG, and AJ on either the GrossPremLiab or NetPremLiab worksheets. The source reading specifically says that maintenance expenses are not material with respect to discounting, although discounting them is still permitted.
Your other question about why the duration is different for maintenance expenses versus total premium liabilities is that maintenance expenses are a calendar year value and are a percentage of the calendar year UPR. In other words, they only extend over 1 year at a time. But premium liabilities extend for several years (until those claims are closed) so the duration is much longer.
In sample answer 2, the maintenance expenses are simply calculated as 2.5% x 90,000 which is consistent with their Excel examples. They are not multiplied by 1/3 and are not discounted. This is how I would handle maintenance expenses on the exam.
Hi Graham,
Quick question. For the upcoming exam, if there were a question like this, to calculate the duration and the premium liabilities for the interest rate margin, we would not need to add in a component for maint expenses and calculate the associated duration for maint expenses correct?
Thank you
If you're asking whether you have to discount the maintenance expenses, the source text says that discounting maintenance expenses is not material. You do have to include the maintenance expenses in the overall calculation however.
Note that the examiner's reports do sometimes discount the maintenance expenses so if you get a question like that, I would include a phrase in your answer stating that the source text says discounting is not material.
There is an error in sample solution 2:
I think the factor for PV(@2.5%) should be 1.025^(0.5-1/3) correct? That's how it's taught in the wiki.
yes that's correct. Where as you getting this screenshot from? I am seeing the right numbers on the CAS website
I got it from the BattleTable from the wiki.
Maybe the examiner report has been updated?
Edit: looks like they do update examiner reports
The one on CAS website is different than the one from the link in the wiki, they also use the correct 1.25% instead of the 0.5%
This is so strange - Stealth update? The CAS is normally pretty adamant against updating mistakes in their past exams. But anyways as long as you are clear
Yes, this is surprising.
I've also noticed the syllabus is sometimes updated during the exam cycle and links to online text references are sometimes changed without notification. I emailed the CAS about this and they responded that it's the candidate's responsibility to periodically check for syllabus and other changes at any time during the exam cycle. Seems a but unfair but I don't think they will change their policy.