ASOP.20

Reading: “Actuarial Standard of Practice No. 20, Discounting of Property/Casualty Claim Estimates,” June 2023.

Author: Actuarial Standards Board of the American Academy of Actuaries

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BA Quick-Summary: ASOP 20 - Discounting ASOP 20 provides guidance for actuaries on discounting claim estimates, including unpaid claim estimates and future claim estimates associated with prospective risk transfer or risk retention, to present value. The standard addresses: the selection of discount rates assumptions on payment timing consideration of recoverables risk margins It also includes requirements for actuarial communications and disclosures to ensure transparency and consistency in the discounted unpaid claim estimates.

Study Tips

Important updates to the June 2023 (from 2011) are these terms:

• "unpaid claim estimate" has been updated simply to "claim estimate"
• "discounted unpaid claim estimate" has been updated simply to "discounted claim estimate"

The 2023 version of ASOP 20 is more comprehensive and detailed compared to the 2011 version, reflecting changes in actuarial practice and standards. The updates ensure that actuaries consider a broader range of factors and provide more detailed and transparent communications.

There are 4 ASOPs: (Virtually all of the material in the ASOPs is included in higher-ranked readings.)

• ASOP.20 (Discounting)
• ASOP.36 (SAO)
• ASOP.41 (Communications)
• ASOP.43 (Reserve Estimates).

Estimated study time: 30 minutes (not including subsequent review time)

BattleTable

Based on past exams, the main things you need to know (in rough order of importance) are:

• this reading has not been tested on any exam from the year 2012 to Fall 2019 when the exams stopped being published.

reference	part (a)	part (b)	part (c)	part (d)
no prior questions

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In Plain English!

The Basics of Discounting

Question: given an undiscounted reserve estimate, what components are required to calculate the corresponding discounted reserve

• payment pattern (recoverables should be considered when developing a payment pattern)
• discount rate

Question: briefly describe 3 possible methods for selecting a discount rate

risk-free rate:

   - this is the theoretical rate of return of an investment with zero risk with respect to payment timing and amount

   - in practice, it would be the rate of return for a very low-risk investment with a timing pattern similar to the payment pattern for the given claim liabilities

portfolio yield:

   - this is the average yield on investments within a selected asset portfolio

   - this method provides better matching of liabilities & assets (assuming the timing & value of asset earnings matches the payment pattern of the reserve liabilities)

selection by another party:

   - the actuary uses a rate selected by someone else

   - the actuary must disclose this (or be held responsible for the selection)

Question: identify required disclosures related to an actuary's work involving discounting

Section 4.1 in the source text for ASOP 20 has a list of 10 items, many of which are obvious. You can give this section of the source text a quick read, but here are a few that Alice picked out. (Remember this is a low-ranked reading so it's likely there will be no questions on the exam.) Now is also a good time to review the memory tricks DAM and CRISIS-LQ from ASOP 41 Communications.

dates: accounting date, valuation date, review date

DAM: Data, Assumptions, Methods for the discount rate selection

uncertainties around the payment pattern

difference between discounted & undiscounted reserves

range: if a range of estimates is provided, actuary should describe the basis for the range

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Miscellaneous Facts

Here are some miscellaneous facts that are probably good to know. You can review these facts in Battle Quiz #2.

#	Question	Answer
1	Does ASOP 20 apply to unpaid claims for future events?	No, only to claims from past events.
2	Does ASOP 20 apply to ratemaking discounting?	No, ratemaking is excluded.
3	Does ASOP 20 apply to recoverables?	Yes, must consider timing & amount of recoverables.
4	What is the biggest driver of discounted vs undiscounted estimates?	Timing of payments, not the ultimate total loss amount.
5	According to ASOP 20 (discounting) identify the 3 discount rate basis approaches.	Risk-free, portfolio yield, rate selected by another party (with disclosure).
6	According to ASOP 20 (discounting) identify the key portfolio approach consideration?	Match asset duration to claim payment timing & use net investment return.
7	According to ASOP 20 (discounting) identify 3 dates that must be disclosed?	Accounting date, valuation date, review date.

mini BattleQuiz 2

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