CIA.Duration

Question 1

Areas where the concept of duration is important (4)

Answer 1

• Calculating Interest rate risk margin
• Calculating investment return rate risk margin
• Matching assets & liabilities
• Modeling market risk

Question 2

What does duration measure?

Answer 2

Sensitivity of PV(CFs) to interest rate changes

Question 3

Types of duration measures (3)

Answer 3

• Macaulay Duration
• Modified Duration
• Effective Duration

Question 4

What is the formula relating Macaulay Duration & Modified Duration

Answer 4

Modified Duration = Macaulay Duration / (1+discount rate)

Question 5

Contrast effective duration to modified duration

Answer 5

• Effective duration accounts for situations where a change in interest rates changes the cash flows (modified duration does not account for this)

Question 6

Things to consider in calculating duration for claim & premium liabilities (1-4)

Answer 6

1. Consistency of assumptions: assumptions for the duration calculation should be consistent with the discounting calculation from the valuation
2. Duration calculation by LOB: if use same payout patterns as for discounting then total duration is a weighted average with weights = APV by LOB
3. Duration calculation on a combined LOB basis: use effective duration
4. When changes in interest rates are small: modified duration and effective duration are approximately the same

Question 7

Things to consider in calculating duration for claim & premium liabilities (5-6) (Additional Considerations)

Answer 7

5. Accident date adjustment #1: adjust duration calculation for future accident date
6. Adjust FAD for policy terms of other than 12 months

Question 8

Things to consider in calculating duration for claim & premium liabilities (7) (MCT)

Answer 8

7. For the purposes of input into the MCT calculation, the duration would be net of reinsurance and net of salvage & subrogation

Question 9

Is it permissible for the actuary to rely on an investment specialist for the calculation of asset duration? Explain

Answer 9

Yes, the actuary would be the ENQUIRING professional, and the investment specialist would be the RESPONDING professional

• The actuary must review the investment specialist’s work for methodology and reasonableness