CIA.Runoff

Question 1

What is the conceptual way of describing “runoff”

Answer 1

Runoff is analogous to calendar year emergence

Question 2

What is the issue with “runoff” and “discounting”

Answer 2

Standard approaches for runoff evaluation MUST BE MODIFIED to be appropriate for a discounted basis

Question 3

Describe two ways to calculate runoff on an undiscounted basis, which should produce the same results

Answer 3

1. Emergence in t with respect to AYs t-1 and prior = (Ultimate amounts estimated at t-1) - (Ultimate amounts estimated at t)
2. Emergence in t with respect to AYs t-1 and prior = (Claim Liabilities at t-1) - (Paid during t) - (Claim Liabilities at t)

Question 4

Briefly describe the two approaches which account for the time value of money when evaluating the runoff of claims liabilities (aka two ways to calculate runoff on a discounted basis)

Answer 4

1. Discounting approach:
   - Discounting the amounts paid during the year (time t) as well as the later period’s claim liabilities (time t) back to the original period (t-1)
2. Substration approach (based on method 2 from previous card):
   - Substract a term for the portion of the investment income earned during calendar year t on assets supporting liabilities
   = (Claim Liabilities at t-1) - (Paid during t) - (Claim Liabilities at t) - (Investment Income earned during CY t)

Note: source text actually adds investment income in formula above, both solutions have been accepted