2015 Fall Q26a
did the definition of "reasonably self evident" change or is it typically used interchangeably with "substantially all"?
I am wondering how I should handle a similar question on the exam since I am assuming that these are 2 separate methods for testing for risk transfer.
I answered that contract #1 does not meet the "reasonably self evident" criteria because the premium isn't low and there is a loss ratio cap. (Self Evident is described as low premium and possible chance of significant large loss). The solution stated that the contract does meet "reasonably self evident" but gave reasons from the "substantially all" criteria.
Comments
While the wiki lists these two as distinct methods, note that Method 2 is named " 'substantially all' exception." It is essentially an exception to Method 1. When you find that existence of risk transfer is not reasonably self-evident according to Method 1, but that risk transfer does exist due to transfer of substantially all risk according to Method 2, it is Method 2 that prevails.
Ok. That makes sense. Thank you.
Sure, good luck.
Based on the sample answer, how do we know contract 1 has the reasonable provisional commission ? Thanks
The fact that contract 1 adheres to the "reasonably self-evident" criterion hinges on the fairly high levels of quota-share and LR cap. It is not related to the commission.
The given commission structure for contract 1 does not make sense. But, it is not relevant to answering the questions asked.
I added a footnote to the Battle Table about the gap in the commission structure for Contract 1, although as @Staff - AC mentioned, it doesn't affect the answer to the question.
Hi,
For Fall 2015 Q26, if we didn't comment on the high loss ratio cap in part a and just statred that substaintially all is met through the quota share, would we still get full credit?
As you see in the text, the NAIC definition of "reasonably self-evident" is ambiguous, and the clarity that a CAS work group tried to bring around it is contested by the authors.
"High loss ratio cap" is not in a codified definition of it by any means. But, will the grader take liberties in penalizing you, because you did not have it and somebody else did? Possibly. In this case, the more sensible explanations you bring, the more it helps you.