Sample-18
when do we use the avg time and avg accident date for the present value of loss?
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when do we use the avg time and avg accident date for the present value of loss?
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Sorry could you be more clear what you are referring to? I do not know what sample-18 is
sorry i mean the excel exhibit of sample questions from CAS
the average loss date for the AY is in the middle of the year. This is covered in Exam 5
In the CAS sample questions 18, the FCF present value for LRC is calculated using (Avg time - (0.5 - Avg Acc date)).
But, in the Duration excel file, App C Sheet 1 - LRC(onerous), row 35, PV is calculated using (Time) only, without adjusting for avg accident date. Note, both the examples are LRC calculation.
For LIC: I confirmed both in DR excel illustration and sample question that PV is calculated using time only, which makes sense.
My understanding is that avg accident date adjustment should have been made in the Duration LRC calc as well to adjust for earning of policies over period and their subsequent accidents happening accordingly. Can you please help clarify my understanding, also, when to use the avg accident date adjustment in LRC ?
You are right that there is a discrepancy there. My thought process when I try to reconcile both files is as follows:
You should always apply the AAD adjustment factor for losses when calculating the LRC
Thank you!
Just to be clear on what this AAD adjustment is, the AY payment pattern given is an LIC payment pattern which assumes an average accident date of mid-year. LRC may have a different avg accident date and so we need to adjust the timing of these payments to reflect the LRC AAD?
In the Duration example what would the average accident date be? Since 50% of premium has been earned by the end of the year would we assume 12 month contracts and uniform writing. If that is the case the AAD would be 1/3?
For part D "Fully describe how the loss component of the company would be impacted if the company entered into a reinsurance agreement that resulted in a net gain or a net loss."
Part of the answer key suggests 0.25 marks were awarded for stating that the LC would be reduced but the LC is specific to the underlying insurance contract and these are measured separately from reinsurance contracts held.
I understand setting up a LRECC but I dont understand how this would change the LC?
The AAD is always going to be 1/3 and you would always assume 12 months contracts and uniform writing. Although, you can just scale the 1/3 as needed depending on contract length (I think) The derivation was in the old premium liabilities paper which was the precursor to the LRC and is no longer on the syllabus which means I think you'd only need to memorize 1/3.
Yes, you are right here. I think what they are talking about here is the Net loss component, which is the LC less the LRECC, but I agree that the answer as-is, is not correct
Thanks! As a heads up I think the AAD calculation is discussed on the new LRC paper on page 47 but seems like a very tricky thing to ask on an exam so I wont worry too much about it.
https://www.casact.org/sites/default/files/2023-05/6C_CIA_Educational_Note_IFRS_17_Actuarial_Considerations_Related_to_Liability.pdf
You are right actually so it is still in the syllabus. I thought it wasn't and must have missed that. But yes I don't think it is important and just memorizing 1/3 should be sufficient
Is there a simple rationale behind the AAD adjustment calculation? It seems strange to use the 0.5 year yield to discount for 0.5-(0.5-0.33)=0.33 years.
Would we technically need to have a 0.33 year yield but this is just an approximation to make the data needed for the calculation more concise?
Thanks!
The explanation is on page 46 of the LRC paper. It's basically to adjust for the fact that as time passes, a smaller portion of the original coverage remains. Fewer accidents are expected toward the end of the period because fewer risks are still "active."