CAS Exam 6C Fall 2017, Question 27
Study guide: Exam 6C
Given the following information, describe four ways in which the AA likely did not follow the appropriate standards of practice or educational guidance and briefly describe what the appropriate action would have been in each instance.
An actuary with ten years of reserving experience is newly hired at a Canadian property and casualty insurance company as its AA to perform the year-end valuation of policy liabilities.
First, the AA determines the unpaid claims, and then deterministically studies the risk of the insurance company's three lines of business. All three reflect the standard risk for policies of their type, and given the company processes and industry situation, the AA selects the following claims development MfADs:
- Personal Property: 2%
- Commercial Property: 3%
- Liability: 12%
In the review of the premium liabilities, the AA selects different claim development MfADs than the ones above, opting to increase each by 1%. For all policy liabilities, the AA selects a recovery from reinsurance ceded MfAD of 1% and multiplies it by the ceded premiums to determine the provision. Finally, the AA selects an investment return MfAD of 150 basis points considering timing risk, regulatory risk, and credit risk. The investment return PfAD is determined by discounting each line a second time using the discount rate net of this margin then taking the difference between these discounted liabilities and the original present value of claim liabilities using the original discount rate.
The AA calculates the actuarial claim liabilities as follows:
- Gross actuarial claim liabilities = gross present value claim liabilities + gross PfAD for claims development + gross PfAD for investment return
- Ceded actuarial claim liabilities = ceded discounted claim liabilities + ceded PfAD for claims development + ceded PfAD for recovery from reinsurance ceded + ceded PfAD for investment return
- Net actuarial claim liabilities = gross actuarial claim liabilities – ceded actuarial claim liabilities
During the review of the reinsurance coverage, the AA discovers a coverage gap on the liability line of business that may threaten the insurance company's financial condition. After fully investigating the issue, the AA notifies senior management of these findings and recommends adjusting the reinsurance coverage in a specific way to eliminate the issue.
Finally, when preparing the AA report, the actuary includes all standard disclosures. This section explains that the new appointment was on February 25, 2016, exactly one week after the resignation of the previous AA. It details the full list of the AA's qualifications and confirms contact with the previous AA regarding their reason for resigning.
Part a (3 points)
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