CAS Exam 9 Spring 2016, Question 14
Study guide: Exam 9
Given the following information for an insurer's property-casualty line of business for accident year 2015:
- The risk-free rate is 2%.
- The new money yield is 6%.
- The insurer has the following projected loss reserve payout pattern:
| Development Year | 1 | 2 | 3 |
|---|---|---|---|
| Percentage Paid | 27.3% | 33.7% | 19.0% |
The remaining liabilities are paid out evenly over the following two years.
- Losses are paid at the end of each year.
Part a (1 point)
Calculate the Macaulay duration for the accident year 2015 loss reserves.
Part b (0.5 points)
The company is considering funding this liability with a bond portfolio having a duration equal to the duration of loss reserves. Explain if this is an appropriate choice if the inflation rate is currently 3%.
Part c (1 point)
Explain why having mismatched duration of assets and liabilities is not necessarily a major problem for P&C insurers, and identify a situation when it becomes a problem.
No current syllabus covers this question; it is kept for the record.
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