Fall 2016 Q15

Tony88passTony88pass
in OSFI.MCT

HI Graham,

Hope you have a great long weekend! As the solution is outdated, just wanted to know what you got for the interest rate risk margin?

Thanks,
Tony

Comments

  • grahamgraham

    Hi Tony,

    I hope you have a great long weekend too! Check this link to see if it answers your question:

    The final answer with the new method is 975 (versus the old method, which gives 1005.)

  • Tony88passTony88pass

    Thanks, I got 975 as well :)

  • sant93sant93
    edited October 2021

    Hi Graham,
    For part a, why do we subtract DPAC from UPR to get premium liabilities?

    This is the formula I have for prem liab:
    prem liab = net apv + future re cost + maintenance exp +CPC

    I understand that DPAC is an asset and so it makes sense to reduce your liabilities by it... but just wondering how it ties to the above formula?

    Also, why are we not given the ELR on the UEP? Why do we assume LR = 100%?

    Thanks in advance =)

  • grahamgraham

    They used the formula for DPAE:

    If you assume UEComm = 0 and rearrange to solve for PolLiabs(UPR) (which means the same thing as premium liabilities), you get:

    • PolLiabs(UPR) = UPR - DPAE

    They didn't mention UEComm or Unearned Commission in the given information so you have to assume it's 0.

    Unless I missed something, I don't see where an ELR is used anywhere.

  • sant93sant93

    On my second question, the ELR is not given in the problem. Prem liab = UEP - DPAC.
    Which means they've assumed ELR=100% correct?

  • grahamgraham

    If you're calculating DPAE in the normal way, the ELR comes up in the first step when you calculate PV:

    • PV = [ ( UPR - FutRe ) x ELR + ULAE ] x PVfctr

    Then you apply MfADs to get APV and feed that into the formula for PolLiabs(UPR) (also called premium liabilities):

    • PolLiabs(UPR) = APV + FutRe + maint + contingent commissions

    The last step is to feed this value into the formula for DPAE:

    • DPAE = UPR - PolLiabs(UPR) + UEComm

    But in this problem, you're given DPAE and UPR. If you assume UEComm = 0 then you can rearrange this last formula to solve for PolLiabs(UPR). This is always the case. Algebraically, It doesn't seem to matter what value is given to the ELR. (The ELR would be important if you were calculating the DPAE in the normal way but they already give you the DPAE.)

    If you still think they've assumed ELR = 100%, you'll have to provide the mathematical reasoning so I can see how you're getting to that conclusion. Maybe I'm just missing something obvious?

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