Discounting in 10-10

luohuasheng

In 2019 F 27 part c answer in the examiner report, it mentions ERD consider discounting, which imply 10-10 does not consider discounting.

In the example in your manual, you calculated the present value of ceded loss. https://www.battleacts6us.ca/pdf/Freihaut.Reins_(10-10)_practice_01-02_v2.pdf

Taking 2018 F 25 part a as an example, the examiner report just state the conclusion in 10-10. But if I want to calculate the ceded loss and compare it to 1.1*premium , should I discount the loss and premium?

In ERD, NPV of UW loss = NPV of ceded loss - NPV of premium, so both ceded loss and premium are discounted. If we only discount the ceded loss in 10-10, is that going to cause inconsistency between ERD and 10-10?

graham

As you noted, this has come up twice in old exam problems. I included a footnote to the BattleTable about the 2018 problem:

• The answers to part (c) & (d) in the examiner's report are wrong. Most of the advantages listed for the ERD method over the 10-10 rule are not valid. It lists advantages of the ERD method as being able to incorporate discounting, modeled loss distributions, simulation, and variation or parameters, but these items can also be incorporated into the 10-10 rule. (See the 10-10 rule practice template ) The larger issue is that there is no explicitly defined procedure underlying application of either method.

In terms of how to answer such a question on the exam, I would probably use the answer in the examiner's report (even though it's wrong.)

Premium discounting: In the example problem I provided in the wiki, the premium is paid at the start of the year, so discounting is not necessary. The losses are discounted from year 4 back to the beginning of the year the policy was written. But you're correct that in general, premiums should be discounted as well. (Note that the effect of discounting premiums should be less than the effect of discounting losses because premiums are generally paid in the year the policy was written whereas losses can come several years later.) A numerical example is presented the appendices in the Freihaut and Vendetti reading that show discounting for premiums but the syllabus states that the appendices will not be directly tested.