CAS Exam 6C Spring 2015, Question 19
Study guide: Exam 6C
A new property and casualty insurance company started writing business on January 1, 2014. It has the following loss information as at December 31, 2014:
| Paid Loss | Case Reserves | Incurred Loss | Ultimate Loss | |
|---|---|---|---|---|
| Gross Layer | $32,000,000 | $14,000,000 | $46,000,000 | $60,000,000 |
| Ceded Layer | $12,000,000 | $6,000,000 | $18,000,000 | $26,000,000 |
| Item | Value |
|---|---|
| Discount rate (gross and ceded) | 5% |
| The gross unpaid claims discounted at 5% (excluding PfAD) | $26,804,722 |
| The ceded unpaid claims discounted at 5% (excluding PfAD) | $13,402,361 |
| MfAD for investment return rate (gross and ceded) | 1% |
Cumulative Accident Year Payment Pattern for all layers:
- Percentage paid by 12 months: 50%
- Percentage paid by 24 months: 80%
- Percentage paid by 36 months: 100%
Assume that all payments are made in the middle of the year. The same Margin for Adverse Deviation (MfAD) for claims development is used for both gross and ceded layers.
The following additional information is provided:
- The Unpaid Claims and Adjustment Expenses from page 20.20 are $28,374,091.
- The Unpaid Claims and Adjustment Expenses Recoverable from Reinsurers from page 20.10 are $12,377,727.
- The booked claim liabilities match the actuary's estimate.
- All business is ceded to a single reinsurer with an A.M. Best financial strength rating of C.
Part a (2 points)
Calculate the MfAD for recovery from reinsurance ceded used to determine the Unpaid Claims and Adjustment Expenses Recoverable from Reinsurers.
Part b (0.5 points)
Evaluate and briefly explain whether the calculated MfAD from part a. above is reasonable.
Part c (0.5 points)
This company selected its ceded discount rate to be the same as its gross and net discount rates (its portfolio yield rate). List two other possible sources for the selection of the ceded discount rate.
No current syllabus covers this question; it is kept for the record.
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