MFAD Source Reading - page 8

thesuperactuarythesuperactuary
in CIA.MfAD

Page 8 - In the source, this part states that "there maybe circumstances in which selection of adverse deviations above the high margin would be appropriate... when the resulting provision for adverse deviation is unreasonably LOW because the mfad is expressed as % of best estimate is unusually low" Could someone explain this part for me ? I am not sure if there is a typo.

Comments

  • grahamgraham

    I've copied the paragraph you're referring to below:

    To explain their reasoning, let's consider this hypothetical example where for some unusual reason, the best estimate is very low relative to the size of the company:

    • Suppose the best estimate of the claims liability net unpaid amount is $1 million but due to special circumstances, the actuary believes the PfAD for this should be $500,000.
    • The problem is then that the normal MfAD range for claims development is 2.5% to 20%, so even if the actuary selected the the top value of 20%, this would only result in a PfAD of $200,000.
    • In this case the actuary might be justified in selecting an MfAD of 50% to get to the desired PfAD of 500,000.

    This type of thing normally shouldn't happen but the actuary needs to have freedom to deviate in special situations.

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