Task 3

[ILAmember]

Task 3 questions and comments here

[Joseph Martin]

I'm struggling with the Coinsurance scenario. Getting ROIs through the roof. I don't know how much we can share without it being against the rules, so I will be cryptic for now.

1. I'm applying the coinsurance % to premium (premium tax), commissions, and claims. Even if I stop applying it to commissions, my distributable earnings start out positive (>1000) and the sum across the projection never turns negative which is why my ROI is not reasonable.
2. My reserve at the end of the 1st year is over double (negative) the amount in the Baseline scenario and my strain is over 500% (positive)

I must be doing something wrong, but can't figure it out. Any ideas?

[ILAmember]

When you say coinsurance % you mean the allowances, right?  And are you applying this to the Premium Tax, etc. directly or in the Reinsurance Section?  I would think this would be to the reinsurance section and not the individual sections.

[Joseph Martin]

Not the allowances. I am talking about the 50% ceded coinsurance%. I am applying the 50% to premium tax implicitly since the formula for the premium tax is based on premium which has the 50% applied. Either way, this is such a small part of the cash flow that it won't make that big of a deal either way. My EV is still incredibly high (>$600).

[Hailey]

I am struggling on whether or not the premium tax should be based on the gross or net premium. My understanding was that the company would still pay 100% of premium tax and then there may or may not be an allowance for the premium tax from the reinsurance company. But the prompt for task 3 only calls out the expenses as not being ceded so I am leaning towards the applying the 50% to the premium tax even though my gut instinct says it shouldn't be included. 

Including the 50% to the premium tax, I am getting results that seem reasonable, EV of ~20. 

[DragonV]

It should be based on net premium. The result is more meaningful.

[Joseph Martin]

There was a message that was posted but then deleted talking about their first DE stream being super high. This is my problem right now. My first DE is >1200 with my reserve being <1600 in the first year. My EV is >600 which is unreasonable. I can't figure out what I'm doing wrong. I am applying the 50% to everything except the expenses and getting CFs of around -50 for my first year. I am thinking something has to be wrong with my reserve. Can someone confirm that my first year reserve looks way off and give me an approx value you are getting?

[Anne-Laure Theall]

I’m still trying to sort through the coinsurance and mortality sensitivity. For coinsurance, my allowance seems to make the first year look great followed by a decrease in the second year. For mortality I am ending up with negative profits but perhaps I didn’t spend enough time with the other spreadsheet yet to determine the proper assumption.

I was honestly wondering whether it’s ok that ROI doesn’t make sense bc if you have any other pattern than negative followed by positive DE, ROI is weird. Says so in the material too. Just can’t remember if that’s module material or exam material and if that matters.

What are your thoughts? Are we supposed to get meaningful answers to all scenarios for all profit measures?

[DragonV]

Since this is a 50% coinsurance scenario, it makes more sense if your EEV results is around half of baseline results. If this is not the case, then you need to figure out why. If you couldn’t figure out why, perhaps there is something wrong with the formula.

[DragonV]

All your results in alternative scenarios are supposed to make sense. If they don’t, maybe there is something wrong with the formula. Maybe try checking the formula again?

[Anne-Laure Theall]

My first year is messing everything up in my coinsurance scenario because of the 200% reinsurance allowance on ceded premium in the first year. Am I reading that wrong? I read that as I should apply 200% times ceded (50%) premium. Seems simple but creates a ridiculous reserve.

[Anne-Laure Theall]

Thanks for your help! I fixed my mortality sensitivity. I just applied the assumption wrong. I’m completely puzzled by first year coinsurance. Maybe I need to sleep on it but u feel so sure that I’m applying it correctly.

Do you have a different first year allowance? Mine is 200% followed by 16%

[DragonV]

I think this is already given as input in the <Inputs> tab? So the figures are given and there is no need to change it. And according to the instruction, they are applied on ceded premiums yes.

[Anne-Laure Theall]

Thanks, I finally found what I was doing wrong here too. I was taking 200% times the PV of ceded premium so that’s why it was huge. Everything looks good now! What a relief!

[Joseph Martin]

I'm still struggling with the Coinsurance scenario. This seems like a slam dunk deal for the ceding company. They are paying the reinsurer 50% of prem and getting paid 50% of claims, 50% of commissions, AND 16% of ceded premium (200% in the first year). The allowances way more than make up for the expenses being paid and plus being able to reserve for the allowances, it decreases reserves significantly. My DE is only negative for years 20 and 21. My reserve in year 1 is ~ -700 and then ~ -600. Am I way off? I must not be understanding something conceptually because it seems like the ceding company is just swindling the reinsurer company as far as I can tell.

Also, quick note about the comment above, in my formula, I'm not reserving for the 200% allowance in the first year since that has already happened so I don't think it should be included in the reserves. I have the PV of reserves starting with year 2 CFs consistent with the gross reserve formula.

[Anne-Laure Theall]

I looked at commissions to help me understand the calc for allowance. I would suggest doing the same. It should fix your cash flows.

[Joseph Martin]

I think I figured it out. They are assuming commissions are expenses. I was assuming commissions were ceded like benefits, but after I looked in the Tiller book, I realized that it assumes commissions are expenses also. Results look much better now.

[ILAmember]

Where in the Tiller book did you find help exactly?  I'm still confused.  Also, probably a stupid question but the Reinsurance Ceded % is only applied in the first month, correct?  Or does it continue past the first month?  Thanks!

[EZ]

It should continue. Each year, the reinsurer gets 50% of the prem and pays the allowance plus 50% of the claims.

Don't have Tiller, but got my info here: https://www.swissre.com/Library/the-essential-guide-to-reinsurance.html

[Joseph Martin]

In the Tiller book, page 85 gives an example of a first year Income Statement with no reinsurance. Compare that to the example with coinsurance on page 95.

[Joseph Martin]

In the description for the mortality sensitivity, it says to assume only 1 shock lapse. I presume this is only when creating the mortality assumption and not for the actual scenario in the scenarios spreadsheet. That has two years of shock lapse. Did anyone change the shock lapse to only one year for the actual scenario? I am planning to keep it the same at two years of shock lapse.

[Anne-Laure Theall]

I didnt change it. It’s not highlighted yellow. And i do think it’s pertaining to mortality.

[Joseph Martin]

How long was everyone's email? More than one but less than two pages?

[Melanie Gravel]

I'm not sure I understand the mortality scenario.  The baseline scenario applies a 300% mortality shock which comes to 400% of the CIA 97-04 mortality rates starting at duration 21.  However, it is written in the scenario to use 100% of mortality from the excel tool provided.  It creates a completely different mortality pattern and it's no more comparable.  I end up having higher mortality rates for duration 21 to 29 and then, lower mortality rates than the baseline scenario.  Was I supposed to apply the 400% on the resulting mortality rates from the tool or not ?  A little confused here.

[Joseph Martin]

I also had what you described - having mortality higher for duration 21 to 29 and lower for the rest of the years. I think this is okay even though it makes the comparison not "apples to apples" in terms of pattern. Unless someone else thinks something different, I would go with what you said and explain it the best you can.

[Jerri Stewart]

to complete task 3, has anyone referenced the pdf (217019e.pdf)  in the assignment?

is this useful, where can i find it?

[Lim Mei Gie]

Hi may i know where to get 217019e.pdf?

[Lim Mei Gie]

i agree also . it is 21 to 29 higher. so do i undrstand it correctly ? anyone can help?

[BH]

Has anyone started this task yet? I know that were are suppose to edit the cells in yellow but the only blank cells was the post-mortality assumption and the profit measures.

I noticed that PV Commissions and Commission cashflow calculations were already updated in the "Levelized" tab to account for the more level commission payment. We are suppose to update these cells as well? I am confused what to do from here.

[Vandan Patel]

I think I saw a question already about the cashflows calculated in the "Levalized tab" that were filled out already. I think we would leave those as is and just focus on calculating the profit measures on that tab. 

Also had a question for the mortality sensitivity... Did anyone else have a higher mortality rate in years 21 to 32 from the sensitivity tool compared to what is shown in the pricing section? I see some people saying they saw years 21-29 was higher so a little concerned with what I have. 

Did anyone read the actual educational note as well? I just skimmed over it. 

[BH]

I got a higher mortality for years 21 to 32 as well. I think they got a different worksheet from us since ours was updated on 2/14/2020. I didn't read the actual educational note.

[Vandan Patel]

Thanks for confirming! I also noticed that the claim amount from years 21-29 was higher than the baseline. 

What did you discuss when analyzing the profit position?  I just compared within each scenario the change in each profit measure when looking at just the level period vs. the total pricing horizon. 

[vera zhang]

Not sure if anyone still replies to this group... but am facing similar questions now - seems like the 'levelized' and 'coinsurance' tabs have already been updated to incorporate the scenario differences, do we still need to check the calculation and make changes to those existing formulae? They seem quite reasonable imo

[Evan Bischoff]

I'm looking at it and I also think sensitivity 1 and 2 are already 'completed' for us. The 3rd scenario is the only thing that requires updating. 

[Nick Odegaard]

I’m slightly confused about how to calculate NB strain. Do I just take DE in year 1 divided by premium in cell C27? Wanna make sure I calculated it correctly? Thanks in admavce!

[Shannon]

Yes, NB Strain should be DE(1)/Premium(1).

[Nick Odegaard]

Thank your for verifying.

[Shannon]

Are the steps for the mortality sensitivity as simplistic as they seem? I.e. open the Excel Tool for the Canadian mortality table, input the five items input tab directly from the Exercise instructions and just copy and paste the resultant mortality rates from column U on the VTP2 tab into the exercise Inputs tab x 1000?  

Am I missing something? It seems too easy.

[Nick Odegaard]

I think so. Just fill in the inputs and the grab the yellow highlighted mortality rates and paste them in your input tab. Don’t forget to scale them by 1000 but I think it is that easy. Not sure what else you would do

[Lim Mei Gie]

how about the NB strain in mortality sensitivity tab - duration 1 to 40? is it still using the 1st year to calculate NBS? period 20 starting to have negative DE. 

[Alexandra Altshuller]

Hi group, 

Please help!

For EV calculation in Task 3, baseline scenario, I used formula 11.5.3 from the reading. 

Profit (time 39) =  Profit (time 40)/(1 + hurdle rate) + Profit (time 30), where Profit = Distributable Earnings (row 44) and hurdle rate = 10%

When DE is negative: t=1,20,21 instead of hurdle rate I used 4% (pricing interest rate).

And copied the formula all the way to time 1. 

I get 42.01 at time 0 using this method. 

I have seen on the forums people are getting $16.10... using from should be similar methodology. 

What am I missing? 

Thank you!!

[Paul Uchida]

The formulas you describe sound right to me.  My guess was you copied the formula using 4% to durations that had a positive distributable earnings, but I tried that in my file and can't reproduce your result.

Are your distributable earnings in row 44?  In my file, on the Baseline tab, they're in row 43.

My approach was to code one formula starting in duration 39.  Use hurdle rate if DE>0, otherwise use earned rate.  Then copy that one formula back to time 0.  This avoids having different formulas in different durations.

Hope this helps.

[Low]

Hi there, 

Not sure if this is still active, but just going to try my luck and see

For the ROI calculation, should we use the IRR function in excel? or the method in the reading (Life Insurance Products and Finance: Charting a Clear Course (Atkinson and Dallas, 2000), where an interest rate 4% is used to discount the DE(t-1) for years with negative PVFP(t)?

[Joe]

https://www.actuarialoutpost.com/forums/topic/intro-to-ila-module-study-group/

There's a discussion about that here

[K Z]

Following this method and I got higher mortality for year 21-32 as well. I saw several posts were saying they got higher mortality for 21-29. Anyone else working on the "Mortality Sensitivity" section now? Also just to validate, my duration 21 mortality = 68.245 from the excel tool.

[MrTurtle]

What's the difference in calculating NB Strain between durations 1-20 and 1-40? Is it the same number for both as in DE(1)/Prem(1)?

[Paul Uchida]

My answer to that question is yes, strain is based on first year numbers, and won't change based on the number of future durations.

[Z]

I see a few people are doing this module, too.

I think I've got it all pretty much done, but I'm struggling to explain my very low ROI for the Mortality Sensitivity. I get why it should be low, but I'm wondering if this is one of the situations where the IRR represents the borrow rate instead of the yield. I say so because my EV came out negative, so I'm lead to believe this scenario is not an overall profitable situation.

[Haiyan Li]

I also get very low ROI and negative EV in duration 1 - 40. Yeah, agree, I think they are consistent to tell us that this scenario is not profitable.

[Kody Michal]

From the assignment: " Strain should be the same in the level and pricing
horizon" Hope this helps :)

On Saturday, January 29, 2022 at 12:34:46 PM UTC-5 MrTurtle wrote:

[eli pinhas]

Anyone still on this thread?

Where can we find the EV and ROI calcs in the slides? Or is it only in one of the texts?

Thank you for the help!!!

[Jolli Khoo]

There's a PDF for sections 11.5 & 11.6 of Life Insurance Products and Finance: Charting a Clear Course (Atkinson and Dallas, 2000) linked on slide 286 / 524 (Product Design: Profitability Measures)

[Samantha Renth]

Is anyone still on this thread? 

What do they mean by summarize pricing results? Do they want the profit summary or just an explanation of different pricing strategies in the scenarios and baseline?

Thanks!

[Tim Krahe]

I had seen this text referenced but didn't know where to find it, so thanks for your post! I ended up finding the link on page 261 of the slides.