CIA.Runoff

Reading: Educational Note: Evaluation of the Runoff of P&C Claim Liabilities when the Liabilities are Discounted in Accordance with Accepted Actuarial Practice

Authour: Canadian Institute of Actuaries (CIA)

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BA Quick-Summary: Evaluation of the Runoff of Claim Liabilities Runoff evaluations on a discounted basis require adjusting for the time value of money, either by discounting future cash flows or accounting for investment income earned on supporting assets. Consideration on how changes in discount rates over time can impact the valuation of liabilities, including the effect on both the present value of future cash flows and the required provision for adverse deviations. Proper allocation of investment income and consistent treatment of discounting are essential to accurately reflect the financial position of the insurer and meet regulatory requirements.

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E (2013.Fall #21)	outdated	discounting & runoff: - approaches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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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