
MfAD  Defn
 Difference between the assumption for a calculation and corresponding BE assumption
 A factor applied to PV of a BE or to BE of an assumption to reflect its uncertainty

PfAD  Defn
 Difference between the actual result of a calculation and corresponding result using BE assumptions
 The additional provision resulting from the application of MfAD

APV  Defn
APV = PV + PfAD

APV vs. FV
 similarity: both recognize time value of money and risk margin for claim liabilities
 differences (discount rate): FV uses market yield; APV uses avg yield on BV of selected assests under APV

Considerations for selecting which of net / gross / ceded to estimate policy liab directly and then compute the 3rd
 Data availability: if sparse cede data can't directly estimate ceded; estimate gross and net directly
 Discount rate: if cede dif from net; estimate net and cede directly or gross and cede directly (assuming that know cede and gross/net are similar)
 Payment Pattern: If dif between cede and net; estimate gross and net directly (may not have a good view of cede payment pattern)
 Reinsurance program: if net retention changed significantly over the years can't use net as starting point; estimate gross and net directly

Considerations for dividing claims into homogeneous groups for selecting payment patterns
 Groupings used for valuation on undiscounted basis
 Length of payout period
 Existence of a predetermined schedule of payments

Methods to derive payment patterns
If undiscounted amounts based on:  paid development, derive directly from paid LDFs
 other methodologies, use historical ratios

Payment patterns  Future claim cost (premium liabilities)
Consistent with those from claim liabilities. Adjustments required to reflect:  AAD and average payment date underlying future claim costs
 Legislative or product changes
 Other considerations similar to those affecting claim liabilities

Payment patterns  Maintenance expenses / future reinsurance costs (premium liabilities)
 Paid over earning period of unexpired term of IF policies
 Time value of money may not be material and APV = undiscounted value

Considerations for CF of future reinsurance costs (premium liabilities)
 Timing of payment of applicable reinsurance premiums
 Earning period of the unexpired portion of IF policies
 Potential for future reinsurance costs to change due to market pressures, changes in the underlying portfolio, etc.

Defn of portfolio yield rate
IRR, that when applied to CFs of company, produce BV of assets

Consideration rate of return on assets supporting liabilities
 Method of valuing assets and reporting investment income
 Allocation of those assets and income among LOB
 Return on the assets at BS date
 Yield on assets acquired after BS date
 Capital G/L on assets sold after BS date
 Investment expenses, and credit risk (losses from default)

Criteria for selection of asset portfolio for deriving discount rate
Selected assets would be  sufficient to support net policy liabilities
 generate a CF consistent with CFs from net policy liabilities

Considerations in selection of discount rate for net policy liabilities
 Reinvestment Risks and Asset Liquidation (if assets and liability CFs donâ€™t align):
 Effect of reinvesting positive net CF / asset liquidation to address negative net CF
 blend of current portfolio yield, expected future reinvestment rates and expected G/L from liquidation
 Investment Expenses: reduce
 Credit Risk: reduce to reflect
 Expected losses due to defaults
 Impact of concentration of investments
 Asset depreciation risk (in credit risk of investment return MfAD)

Options for discount rate of ceded liabilities
 Discount rate for net (i.e., a portfolio yield rate) appropriate if company's investments
 sufficient to support gross
 similar to reinsurer's
 Riskfree rate based on market yield on gov bonds with duration matching expected liability duration (conservative)
 Reinsurer discount rate

Reasons for considering dif than portfolio yield
 Mismatch in duration of assets and liabilities (Reinvestment Risk, Liquidation of Assets)
 Investment Expenses
 Credit Risk
 Future Assets

Risk free rate
 Reflect current or new money return rate for riskfree portfolio of assets with appropriate duration
 May be determined using avg market yield on gov bonds that match expected liability duration

Porfolio yield (formula)
sum [(eff market yield x duration x market value) / (duration x market value)]

