ASOP 20, Discounting of Property/Casualty Unpaid Claim Estimates, provides guidance to the actuary related to services involving discounting of unpaid claim estimates for P&C coverages.
Study Tips
There are 4 ASOPs: (Virtually all of the material in the ASOPs is included in higher-ranked readings.)
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 and subsequent
| reference |
part (a) |
part (b) |
part (c) |
part (d)
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| no prior questions
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In Plain English!
| Question: given an undiscounted reserve estimate, what components are required to calculate the corresponding discounted reserve
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- payment pattern (recoverables should be considered when developing a payment pattern)
- discount rate
| Question: briefly describe 3 possible methods for selecting a discount rate
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- risk-free rate:
- - this is the rate of return from a hypothetical investment with no risk
- - 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 reserve 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
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- 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
