Contingent Commission Fall 2019 #14

rosiehanrosiehan
edited May 2021 in CIA.PrLiabs

Hi! I'm a little confused about the difference between J (gross contingent commissions) and Z (contingent commission rate % gross premium)? For the DPAE calculation if it's not explicitly stated that Z = 0% I would have probably used J instead. Thanks!

Comments

  • grahamgraham

    A normal commission is an amount paid by an insurer to a broker for business the broker brings to the insurer. This amount is usually a percentage of premium. (In the same way, a reinsurer might pay a commission to a primary insurer that cedes business to the reinsurer.)

    A contingent commission is an EXTRA commission amount paid by an insurer to a broker if certain conditions are met. These conditions often involve loss ratios or premium volume. For example, the insurer may pay the broker an extra 5% commission if the loss ratio on the brokered policies is less than 70%. In other words, this contingent commission is contingent on the loss ratio being less than 70%. (And again, it works the same way with reinsurers and primary insurers who have ceded business to reinsurers.)

    The difference between gross and ceded contingent commissions is that gross relates to direct + assumed business and ceded relates to ceded business.

    Z (contingent commission rate % gross premium);

    This was a bit tricky. This percentage Z applies to the UPR (Unearned Premium Reserve). In this problem you would multiply Z by the (Direct + Assumed) UPR. The result is then added to the final value for the premium liabilities.

    You can see how this works in the Excel exhibits included as part of the syllabus reading for premium liabilities. Look either at the worksheet labeled GrossPremLiab or NetPremLiab, and the formulas in columns (26), (27), (29).

    If the value of Z was not 0, I think the problem would have been a lot harder because you would have to know the conditions under which this contingent commission would be triggered. I think that's why in the Excel example, they made Z=0% for every coverage.

  • ibsyibsy

    Could you please clarify further regarding rosiehan question on J: both J and Z are labeled "contingent commissions", how is it obvious that we should not include J (or J-K as net) in the PolLiab calculation as contingent commission? Typically since H (UECom end of year) is included in the DPAE calculation, I would have been tempted to include J and K too.

    Thanks.

  • grahamgraham

    I believe the question writers intended the 2 tables of information provided about page 80.10 to be separate from the table of "Other Information". So parts (a) and (b) of this question could have been 2 completely separate questions. The only connection is that in part (b), you needed the value of unearned commissions at the end of the year (H) from page 80.10.

    You would have no way of knowing this however and it appears to be an error in the statement of the problem. The information given for page 80.10 was inconsistent with the table of "Other Information". A similar issue occurred in the contingent commissions exam problem from 2014.Fall Q16. where the given information was not internally consistent.

    So back to your question, I don't think you could have known for certain that they wanted you to use the 0.0% for contingent commissions when calculating DPAE. It would have been just as reasonable to use J-K = 500-250 = 250 as the contingent commission instead of 0.

    Side note: There is something else strange going regarding the 2 sample answers for part (b).

    • The PV factors looked like they are calculated the same way, but the result is different. Sample answer 1 has 0.966 and 0.973 but sample answer 2 has 0.9720 and 0.9778.
    • The value used for ULAE is also different. Sample answer 1 uses 6,000 (because it looks like they forgot to multiply by the ELR of 88%.) Sample answer 2 correctly calculates ULAE = 6,000*88% = 5280 but then on the very next line writes ULAE = 6000, although it appears the remainder of sample answer 2 indeed uses the correct ULAE value of 5280.
    • The final answers are then of course different. Sample answer 1 calculates DPAE=519 whereas sample answer 2 calculates DPAE=1272. I suppose it doesn't matter however because the question asks for the premium deficiency (if any) and since DPAE>0 in both cases, there is no premium deficiency.
  • ibsyibsy

    Thanks for your insights! I hadn't looked sample answer 2, thanks for the info.
    However not sure I follow you regarding the ULAE: you seem to be saying that ULAE should be multiplied by ELR? I believed that it shouldn't, especially regarding the following formula:
    PV = [ ( UPR - FutRe ) x ELR + ULAE ] x PVfctr

    But then I looked over the examiner report, there are 2 different assumptions regarding the ULAE in the 2 sample answers:

    • Sample 1: Assumed ULAE ratio is a % of Premiums: so makes sense to me to not consider ELR here
    • Sample 2: Assumed ULAE ratio is a % of Losses: makes sense to consider ELR.

    To me the first assumption is more intuitive with regards to the concept of ULAE, since unallocated expenses are those not related to specific losses.
    But you seem to be saying Assumption 2 makes more sense to you?

  • grahamgraham

    When I read it this morning, I had in mind % of losses because it was related to some other work I was doing yesterday on ULAE allocation for a completely different purpose. I actually think either should be acceptable for the purposes of the exam.

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