2018 Spring 14
Hello,
Just would like to clarify something regarding some components of the Interest Rate Risk.
1) Payment Pattern difference between Clms and Prem Liabilities
Like this scenario, if it takes 48 months to develop fully there would be 3 different timings of CF between 12-24, 24-36 and 36-48. However, for prem liabilities it would be 4 different timings correct? So would that mean premium liabilities always has 1 more than clm liabilities in terms of payments?
2) Including Maint Expense in Interest rate risk
To get the prem liabilities you would need to include maint expense, however for the portion of ABS Value of Change in Assets - Change in Liabilities, you would not need to include maint expense and its duration once again like the sample solution 1 correct?
Thank you,
Comments
Question 1:
Yes, that's actually how I think think about the difference myself. The reason is that for claims liabilities, your starting point (for the most recent AY) is age 12 months, but for premium liabilities, the starting point is age 0 months, because these claims are all in the future.
Question 2:
Correct. You've already included maintenance expenses in the calculation of premium liabilities so when you do the ABS part you don't need to include it again.
Note that the ΔA calculation does use the duration of 3.0 in the ABS calculation but that's because the asset duration had not already been incorporated.
Also, the source text states that discounting for maintenance is usually not material, so I don't believe it's necessary to discount the maintenance expenses even though the examiner's did. Without discounting the duration is 0.3333 and with discounting, it's 0.3236. Then the final answer without discounting is 1,077.65 (versus 1,078.33 with discounting maintenance as given in the examiner's report, so very little difference.)
Hi Graham,
For your answer on question 2 above, just wanna get a further confirmation on:
1) if we need to include the Maintenance Expense duration of 1/3 when calculating the CapReq(IntRateRisk)
or
2) if we can simply assume the maintenance expense duration is same as the prem liab duration
As per your comments above, what I understand is we still need to include the Maintenance Expense duration of 1/3; whether this 1/3 is discounted or not is not important as it is not material as per the source text.
But in a separate discussion (link below), you mentioned sample answer 2 is more correct and there is no need to include the Maintenance Expense duration of 1/3. i.e. all we need to do for maintenance expense is to include it in the APV(Prem Liab).
To me, sample 2 answers looks like we simply assume the maintenance expense duration is same as the premium liab.
https://battleactsmain.ca/vanillaforum/discussion/comment/1371#Comment_1371
Actually, I forgot about the answer I gave that you linked to above. When I answered that, I had gone back to the Excel exhibits and noticed that sample answer 2 was more consistent with the source text (versus sample answer 1.) Note that the answer obtained in sample answer 1 was 1,078 and in sample answer 2 was 415, very different.
So there seem to be 3 acceptable options for dealing with maintenance expenses in an interest rate risk margin calculation (according to various examiners' reports):
What I had said in my other post is that the 3rd option above seems to be the most consistent with the source text.
As far as what is actually correct or what the graders will currently accept, I can't say for certain. The last published example of an MCT problem where you had to calculate the interest rate risk margin was 2019.Fall Q19 (see link below) and you did not have to deal with maintenance expenses at all. I suspect this will be how such a question will be asked going forward to avoid the ambiguity with maintenance expenses.
Thanks Graham for the clarification
can someone share their answer for assuming maint expenses has the same duration as premium liabilities? I get 1038 is this correct?
Yeah that is right