Fall 2018 Q16

jyjk0519jyjk0519
in CCIR.ARinstr

Hello,

Could you explain the payment pattern?

I am not sure why for 2016, 2017 the numbers chosen such as 0.3/0.8 and 0.5/0.8 and 0.5/0.5 are chosen.

Also the A, is the ceded liability just the same as the unpaid claims recov as an asset? same logic?

Thank you

Comments

  • grahamgraham
    edited September 2021

    Payment pattern:

    Another way of expressing this (incremental) payment pattern given in the question is:

    • 12 months: 20%
    • 24 months: 30%
    • 36 months: 50%

    Note that often the payment pattern is given in cumulative form, but here it is incremental. Anyway, you have to rebase the payment pattern for each year. The given data is "as of" the end of 2017 so for each AY, we have to distribute the payments across subsequent calendar years.

    • For 2017, we already have 20% paid at the end of 2017 so we have to rebase the remaining 80%. That means 30%/80% will be will paid in 2018 and 50%/80% will be paid in 2019. At that point, the claims are fully paid.
    • For 2016, we have an additional year of payments: We have 20% paid at the end of 2016 and 20%+30% = 50% paid at the end of 2017. So at the end of 2017 we have to rebase the remaining 50%. That means 50%/50% will be paid in 2018, and at that point all claims are fully paid.

    A:

    Yes, the liability for the ceded unpaid amount is the same as the asset for the unpaid claims recoverable. The ceded liabilities and reinsurance recoverable assets should always balance out.

  • jyjk0519jyjk0519

    Hi Graham,

    Also for the discount rate, we use book values of the bonds but sometimes in the question we seem to use the market value. Could you clarify thedifference between the two and when each should be used?

    Thank you,

  • grahamgraham

    That's from a reading that's no longer on the syllabus. If you have to calculate the discount rate based on bonds, they should either tell you whether to use book or market value, but more likely they will give you only one or the other so you wouldn't have a choice.

    Actually, the most likely version of this type of problem is that they give you the discount rate directly so you wouldn't have to worry about book or market value anyway.

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