CAS Sample Question 4/18/25
Hello,
In Question 25 (along with Duration Considerations for P&C Insurers Excel supporting file), they do the incremental CFs, when do we apply that methodology? It wasnt applied in earlier CAS IFRS Sample Questions (4/18)? Can you link to a place in source to confirm what it says?
Thanks!
Comments
Question 4: They have directly provided you the incremental amounts to be paid out in each of the next 3 years. This is trivial.
Question 18: You're calculating the LRC and no time has elapsed which means no adjustment is needed to the payment patterns
Question 25: You'd need to adjust the payment pattern here because what you are provided is the unconditional payment pattern; but your calculation starts after 12 months have already elapsed.
There is no link in the source for this. You need to really understand what is being calculated rather than attempting to memorize when you should or should not make adjustments to the payment pattern.
For question 18 is appears that they do adjust the payment pattern for an average accident date of 1/3. If we are evaluating a contract at inception wouldn't the average accident date be 0.5 assuming accidents occur uniformly over the contract.
Does the 1/3 come from the fact that we are evaluating a group of contracts. Assuming the group has policies in force ranging from 1 day away from expiry to 1 year away from expiry (and those policies are issued uniformly over time so that they are equally likely) then the average accident date of the group would be 1/3?
For example if we have 12 month contracts issued uniformly throughout 2023 then at Dec 31 2023 the average accident date of remaining coverage would be 1/3.
However, say we issue contracts 1 month before they become effective and this group of contracts is onerous such that our LRC at year end includes the LRC for all contracts issued in 2023 and the first month of contracts for 2024, then our average accident date would no longer be 1/3 (it would be longer).
This question is not really clear on the cohort of contracts that are being evaluated which makes it hard to determine an average accident date.
EDIT: I realize this may not directly be applicable to the original post since this is asking about adjusting the payment patterns themselves and not the timing of payments.
Not for the LRC, no.
"Does the 1/3 come from the fact that we are evaluating a group of contracts. Assuming the group has policies in force ranging from 1 day away from expiry to 1 year away from expiry (and those policies are issued uniformly over time so that they are equally likely) then the average accident date of the group would be 1/3?" Yes and the derivation relies on calculus which is not likely to be tested.
"For example if we have 12 month contracts issued uniformly throughout 2023 then at Dec 31 2023 the average accident date of remaining coverage would be 1/3.However, say we issue contracts 1 month before they become effective and this group of contracts is onerous such that our LRC at year end includes the LRC for all contracts issued in 2023 and the first month of contracts for 2024, then our average accident date would no longer be 1/3 (it would be longer)." I think so. Numerically it would be as follows:
For the exam, you can just assume the AAD is 0.333