CIA MfAD

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Author:
ED_6C3
ID:
270377
Filename:
CIA MfAD
Updated:
2014-04-12 20:31:23
Tags:
6C
Folders:
CIA Requirements
Description:
6C
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  1. Reasons for deviations from expected experience
    • error of estimation
    • deterioration or improvement of expected experience from unexpected influences
    • statistical fluctuations
  2. Desirable characteristics of risk margin
    • less is known about estimate, higher should risk margin be
    • risks with low frequency and high severity should have higher risk margin
    • contracts persisting over a longer timeframe should have a higher risk margin
    • risks with a wide probability distribution should have higher risk margins
    • to the extent that emerging experience reduces uncertainty, risk margin should decrease
  3. Desirable characteristics of risk margin methodology
    • consistent methodology for the entire contract lifetime
    • method and assumptions consistent with sound insurance pricing practices
    • vary by product based on risk differences
    • be easy to calculate
    • be consistently determined between reporting periods and between entities
  4. Larger margin is appropriate if
    • actuary has less confidence in the best estimate assumption
    • approximation with less precision is being used
    • event assumed is farther in the future
    • potential consequence of the event assumed is more severe
    • occurrence of the event assumed is more subject to statistical fluctuation
  5. 3 categories of MfAD
    • claims development: % of claim liabilities; 2.5% to 20%
    • recovery from reinsurance ceded: % of ceded reinsurance, 0% to 15%
    • investment return rates: deduction from investment rate, 0.25% to 2.00%
  6. Cases where margin can be higher or lower than bounds
    • higher for unusually high uncertainty
    • higher when resulting provision is unreasonably low because best estimate is low
    • lower for investment return rate if initial rate is lower than 0.25%
    • lower when reinsurer runoff where all treaties are commuted (low claim MfAD)
    • lower for insurer with aggregate stop loss reserved at the stop loss limit
  7. Factors influencing the margin for claims development
    • claims management: systems, personnel, guidelines, procedures
    • operations: underwriting personnel, adequacy of staffing, guidelines for UW
    • data on which estimate is based: volume, homogeneity, new exposure, mix of bus.
    • line of business: environment (legislative / judicial / gov), length of tail, retention
  8. Factors influencing the margin for recovery from reinsurance ceded
    • proportion of related party reinsurance
    • ceded loss ratio and commission rate
    • unregistered reinsurance
    • reinsurers under liquidation or with weak financial conditions
    • claim coverage disputes with reinsurers
  9. Factors influencing the margin for investment return rates
    • mismatch risk between payment of claims and availability of liquid assets
    • error in estimating the payment pattern of future claims
    • asset risk including credit/default risk and liquidity risk
  10. Methods for calculating interest rate MfAD
    • weighted formula: MfAD = iPM - min(iPM,iRFM x (1 - k))
    • explicit quantification: asset/liability mismatch + timing + credit risk margins
    •    coverage ratio = (premium liability + claim liability) / (investment + instalment premium)
    •    A/L mismatch: coverage ratio* i * (DA - DL) / DL
    •    timing risk: L / (1 + d*)D = L / (1 + d)(1 - k)D, k = % change in D
    •    credit risk: yield curve of high quality bonds vs corporations
  11. Reasons to dismiss prescription around setting assumptions
    • entails significant and time-consuming testing and review of industry data
    • requires a large number of possible assumptions or variations to be covered
    • difficult to anticipate all the unique company circumstances
    • ranges would need periodic updating to reflect emerging experience
    • undermines integrity and responsibility of the AA
  12. Quantile approaches
    • multiples of σ: simplicity, practicality
    • percentile or confidence level: most commonly applied (VaR)
    • CTE: average outcome exceeding Qth percentile
  13. Evaluating quantile approaches
    • the less is known about the current estimate and its trend, the higher the margin (σ,CTE)
    • risks with low frequency and high severity should have higher risk margin (σ,CTE)
    • contracts that persist over a longer timeframe should have higher risk margin (none)
    • risks with a wide probability distribution should have higher risk margin (σ,CTE)
    • to the extent that emerging experience reduces uncertainty, risk margin decreases (σ,CTE)

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