2018 Fall Q13

wschwart9wschwart9
edited January 2020 in Odomirok.15-P

Part A: In the question it mentions to "provide two reasons". In the examiners report it shows multiple samples (8). Is the expectation that two of the samples need to be provided for full credit?

Part B: Would "retroactive reinsurance purchases" be an acceptable answer? My thoughts are yes since Schedule P is net of reinsurance - unless I am missing something.

Thanks!

Comments

  • grahamgraham
    edited January 2020

    It's good you're looking at this problem because it's a really good exam problem to study and the answers are very well explained in the examiner's report.

    Part A:

    • Yes, you would need to provide 2 of the 8 sample answers to receive full credit. Each sample shows 1 reason to suspect that reserves are inadequate. The problem is worth 2 points in total so each reason is worth 1 full point.
    • For this type of question, you need to have memorized a handful of diagnostics relevant to Sched P and then select 2 that are appropriate.
    • The link to Formula Summary: Schedule P at the top of the wiki article shows sample diagnostics relevant to Schedule P that you can choose from. The first 4 sample diagnostics shown in that summary correspond to the first 4 sample answers in the examiner's report.

    Part B:

    • The answer "retroactive reinsurance purchases" would be valid, but note that it is very similar to "retention" since both relate to reinsurance arrangements. If you listed both, you might only get credit for one of them.
    • I was a little surprised they accepted both "retention" and "commutation" since both of those relate to reinsurance. If I were taking the exam, I would try to think of reasons that are more different from each other.
    • Be sure to check "common errors" as listed in the examiner's report. It seems they generally want answers that are as different from each other as possible, not just variations on the same thing.
  • wschwart9wschwart9

    Perfect, thank you very much for the thorough response!

  • OwarnockOwarnock

    A few questions:

    Is there still a link somewhere to Formula Summary: Schedule P that shows sample diagnostics? I’m not seeing it on the wiki.

    Would it have been an acceptable answer to say that in the average case outstanding triangle in AY 2015, the average case outstanding amounts are increasing across the calendar years indicating inadequate reserves?

    Can you explain what is meant by the unadjusted reported loss development method?

  • Staff - ACStaff - AC

    I'll find out about the Formula Summary and let you know.

    Average reserve will start out increasing through development years before they turn to decrease; this would not be an indication of inadequate reserves.

    The sample answer itself is a rudimentary answer. It could be that the average reserve is decreasing "along the diagonal" to reach a more adequate level, for example due to change in business mix. And it's also possible that reserves are weakening so that using historical reported ldfs will result in understating required reserves.

    They are referring to a Berquist-Shermann-style adjustment to reported ldfs by projecting the latest levels of case OS back to the history of the triangle. This is a topic of Exam 5.

  • grahamgraham

    Here is the formula sheet:

    https://battleacts6us.ca/pdf/Summary_(6US)_05_Sched_P.pdf

  • amberxmcamberxmc

    Thanks! I have the same question about two reasons (two metrics) in part a.!:)))

  • Staff - ACStaff - AC

    amberxmc, has your question been answered by the previous posts here?

  • arch1892arch1892

    Just to clarify, they make mention of adjusting LDFs because if there is a change in case reserve adequacy or settlement patters or mix of business, assumptions of chain ladder method would no longer hold, correct?

  • Staff - ACStaff - AC

    Yes, correct.

  • jono1234jono1234

    This question is confusing to me. I don't see how one could conclude that reserves are inadequate given what's in the question. Would it be better to have said "provide reasons a user might suspect that reserves may be inadequate?" Even in the first sample question, they make the assumption that the actuary may be using a reported development method, which is not really said anywhere.

    So is the answer for us to find diagnostics/triangles that would show changes happening, and then come up with a method that the actuary may have used that would result in inadequate reserves?

  • Staff - ACStaff - AC

    This is again a badly written question. Part b's reasons for change negate part a's assertion that reserves are inadequate.

    If none of the items of part b were in play, then you might conclude from those triangles that reserves are inadequate. This statement stands on the observed average case os's: it is not related to the method the actuary uses to develop to ultimate.

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