F14 Q22

For determining a materiality standard in regards to the work product related to a rate indication for commercial auto, they use % of WP as a threshold but I'm a little confused by this since WP isn't really something that's discussed as an acceptable standard. Is there something else we could/should have proposed and can you explain why WP was accepted in this instance?

Comments

  • I think this was one of those questions they throw in from time to time that's intentionally a little outside of what's discussed in the syllabus.

    • The first part of part (a) relates to the SAO so you could pick one of the usual SAO materiality standards. This is directly from the syllabus.

    • The second part of part (a) about a rate indication has a different purpose from an opinion on reserves so the materiality standard should be something more directly related to data that's important for indications. And since the only information specifically about commercial auto is the written premium, that's the most reasonable choice, either a percentage or a specific dollar value based on a percentage. I don't think the graders would have accepted anything else.

    • The third part of part (a) about an opinion on the adequacy of reserves for a merger was a trick to get people to select a percentage of reserves for the materiality standard.

  • Hi, for b), is bright-line test an option? I did use it, but the solution didn't mention it at all. Thank you.

  • I don't think the Bright Line Indicator test would be valid here because it only applies when the appointed actuary does not address material adverse deviation. Here, the exam question specifically asks how the appointed actuary would address material adverse deviation.

    In general, it's best to keep your answer as simple as possible, especially since part (b) was only worth 0.5 pts. It was intended to be very straightforward.

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