RMAD (2019 Spring 19)

Hello,

I've memorized it but would like to satisfy my curiosity so that stuff does not get jumbled in a moment of panic.

We are instructed that if the Company's Carried Reserve + Materiality Standard < Range then there is a risk of materially adverse deviation.

Why is it that if the company's reserve plus materiality standard fitting into the actuarial range is considered risky? My immediate intuitive guess would have been exactly the opposite.

Thanks,

Chatterjee.

Comments

  • I know exactly what you mean but it only seems backwards. Here are 2 examples:

    Example 1: Carried Reserve + Materiality Standard > Range

    • carried reserve = 200
    • range: (195, 205)
    • materiality standard = 10

    Here there is no risk of material adverse deviation because a material adverse deviation would have to be 200+10 = 210 or higher. But the actuary's range stops at 205. So even in the worst case scenario (assuming the actuary's range is accurate!) the actual required reserves shouldn't be higher than 205. (No risk of material adverse deviation.)

    Example 2: Carried Reserve + Materiality Standard < Range

    • carried reserve = 200
    • range: (195, 205)
    • materiality standard = 3

    The only change in example 2 is the materiality standard. Let's again suppose we have the worst case scenario and the actual required reserves are at the top of the actuary's range, 205. But this represents an adverse deviation of 5 which is greater than the materiality standard of 3, so there is is risk of material adverse deviation.

    You should make up a few examples like this to think through it. Then you can rely on the inequality you wrote in your post. Once you're totally clear on the concept, that's a good shorthand way of doing a problem quickly.

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