CAS Exam 6C Fall 2014, Question 17
Study guide: Exam 6C
The following information is available for a property and casualty insurance company as at December 31, 2013. All amounts are in thousands dollars ($000s).
| Accident Year | Gross Cumulative Paid Losses | Gross Case Reserves | Gross Ultimate Losses | Gross Earned Premiums |
|---|---|---|---|---|
| 2012 | 110,000 | 12,000 | 157,500 | 245,000 |
| 2013 | 80,000 | 20,000 | 165,375 | 255,000 |
The cumulative accident year payment pattern is as follows:
| Age (months) | 12 | 24 | 36 | 48 |
|---|---|---|---|---|
| % cumulative paid | 50% | 70% | 85% | 100% |
- The company began operations on January 1, 2012.
- Assume all payments are made in the middle of the year.
- Discount rate: 3%.
- Margin for Adverse Deviation (MfAD) interest rate: 0.5%.
- MfAD reinsurance recovery: 2.0%.
- The insurer entered into a quota share reinsurance agreement where it ceded 25% of its losses with a date of loss after January 1, 2013 to a reinsurer.
- Net unpaid claims discounted with Provision for Adverse Deviation (PfAD) are $117,229.
- Future tax rate is 35%.
- The reported reserve is equal to the actuarial reserve (net unpaid claims discounted with PfAD).
Part a (2.5 points)
Calculate the MfAD for claims development.
Part b (1 point)
Calculate the estimated effect of discounting the asset for future income taxes.
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