RMAD Carried or Point Estimate?
When coming up with a standard for Risk of material adverse deviation... I can't seem to get it clear if we should multiply 10% of carried reserves? Or 10% of actuary net loss and lae point estimate? To determine if there is RMAD... do we add that standard to the carried? Or the Actuary point estimate?
****Example****
Carried = 21M
Actuary Est = 22M
Range = 18M to 24M
Which of the below is right?
Standard = 10%(21M) = 2.1M; 2.1M + ****21M**** = 23.1M which is less than 24M so yes RMAD
Standard = 10%(21M) = 2.1M; 2.1M + ****22M**** = 24.1M which is greater than 24M so no RMAD
Standard = 10%(22M) = 2.2M; 2.2M + ****21M**** = 23.2M which is less than 24M so yes RMAD
Standard = 10%(22M) = 2.2M; 2.2M + ****22M**** = 24.2M which is greater than 24M so no RMAD
Comments
There is no single correct answer for the standard of materiality, although some answers certainly make more sense than others.
Your first and third statements above are correct because you must use the carried reserves in the test.
But for the materiality standard you can use 10% of carried reserves or 10% of actuary's estimate, or many other options provided you can justify them. According to the COPLFR source text, here are some choices for the standard of materiality:
The test for RMAD is given here in this example in the wiki:
Makes sense, thank you!
I have a similar question for Spring 2019 #22. Is the reason they used 10% of the point estimate rather than 10% of the carried reserves for the materiality standard because the question said "indicated loss and LAE reserves"? I'm not understanding the difference between the point estimate and the carried reserves, and what language differentiates them for the purpose of selecting the materiality standard.
Yes, in this problem, the word "indicated" makes the difference.
An actuary comes up with an actuarial indication of what reserves should be. This may be a point estimate, a range, or both.
In reality, management of the company gets to set the carried reserves. The actuarial indication is a big influence on what happens with the carried reserves, but in some cases, management might choose to be more conservative and hold more reserves than is actuarially indicated, or do the opposite and hold less. That is why you might see a difference in the actuarial indication/point estimate and what is actually carried.
Typically, for these types of problems, you should use carried reserves for the materiality standard - this was an exception.
i have a question on the lines of calculating the amount of adverse reserve development that would cause RBC to regulatory action level, with given info -
Net recorded Loss and LAE reserves: 61
Statutory surplus: 150
Risk Based Capital: 32
Actuary's range of unpaid Loss and LAE: (50,70) with 60 as central
(reference: 2010, Q36 part c)
I wasn't able to find the question you were referring to. It's a fairly complex calculation which is why usually when given a choice, I would defer to % of reserves or % of surplus.
You would choose the top end of the next lower RBC range. Set this equal to TAC/ACL. TAC = PH surplus given (let's ignore the discount for simplicity at this point) MINUS some reduction in surplus (let's call it X). ACL is calculated as usual (50% of RBC Cap Required). Solve for X.
You are trying to find X, which is the reduction in surplus that would cause RBC to fall to the next action level.