CIA.Runoff

Short Paper (1 concept): How do you deal with discounting when considering runoff?   Forum

Pop Quiz

What are the considerations when selecting a discount rate or expected investment return rate? (Recall that this question has been asked at least 5 times on past exams! See CIA.Discnt.)

BattlePlan

Based on past exams, the main things you need to know (in rough order of importance) are:

• how to account for the time value of money when evaluating the runoff of claims liabilities

reference	part (a)	part (b)	part (c)	part (d)
E (2015.Fall #13)	see CCIR.ARinstr	see CCIR.ARinstr	discounting & runoff: - approaches
E (2013.Fall #21)	outdated	discounting & runoff: - approaches

In Plain English!

You can think of runoff as calendar year emergence.

The main concept in this reading is that standard approaches for runoff evaluation must be modified to be appropriate for a discounted basis. There are 2 ways of doing this:

discounting approach: discount the paid & unpaid amounts at time t back to time t – 1

subtraction approach: subtract investment income earned during calendar year t on supporting assets and liabilities (easier than the discounting approach)

Note that the paper contains a numerical example of an accident year runoff model. This seems like a good exam question, but given there has been only 1 question on runoff in the past 5 years, and there are so many other important calculations on the syllabus, my guess is that this won't be asked.

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BattleCodes

Memorize:

• 2 ways of handling the time value of money in claims runoff

Conceptual:

• Runoff can be thought of as calendar year emergence.

Calculational:

• none that seems likely to be asked

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  Forum

POP QUIZ ANSWERS

• Considerations in selecting a discount rate: MARY-(IE)-CapG
  • M: METHODS: for asset valuation & reporting investment income
  • A: ALLOCATION: of assets & investment income by LOB
  • R: RETURN: on assets @ B/S date
  • Y: YIELD: on assets acquired after B/S date
  • (IE): INVESTMENT EXPENSES & losses from default
  • CapG: Capital G/L: on assets sold after B/S date