PDR Calculation

marquatymarquaty
in Feldblum.Surplus

Hi,

On pages 8&9 of this reading, Feldblum goes over some PDR calculations and for the life of me I can't figure out this math.

So the 'set-up' (all in millions) is $100 written 7/1, so $50 unearned a/o 12/31 with $10 DAC and $45 expected claims. Investment and expenses are assumed to 'cancel out'.

In the first example, incurred losses are $45 resulting in a reduction of DAC to $5 and no PDR. This matches Odom's math as well.

In the second example, incurred losses are $65 resulting in a reduction of DAC to $0 and a PDR of $15. This for both GAAP and SAP.

Questions...
1. Why would incurred losses impact PDR? Since UEPR is meant to pay for losses for the unexpired portion of the policy, it seems counterintuitive that incurred losses would impact this calculation
2. How is Feldblum coming up with 15 PDR? I've cut this thing a few times and I'm consistently getting a PDR of 10 even when trying to duplicate this UEPR reduction technique. Notably, this math seems super odd... expected total claims = 110 and the premium + PDR = 115. I'm not really following why we would need to book a PDR to result in more premium than what's required to cover the claims cost.

I've skimmed Odom briefly and don't see any mention of modifying UEPR based on incurred losses.

Am I missing something here? Or is this just a weird source and we should rely on Odom for this calculation?

Comments

  • grahamgraham
    edited October 2022

    I think Feldblum made a typo in the statement of the second example. I think he reversed the 65m and 45m so that he really meant to say at Dec 31, 20x4:

    • incurred losses = 45m (the reading said 65m)
    • expected future losses = 65m (the reading said 45m)

    If that's the case, then I think his numbers work out. The 65m of future losses is 25m more than expected so the first thing you would do is reduce DPAC from 10m to 0. But then you still need to "find" 15m more and that's where the PDR comes in. Set PDR=15m to account for the remaining expected losses.

    The 45m of incurred losses has nothing to do with DPAC and PDR.

    Note: I'm not sure why this reading contains material on DPAC and PDR since those are GAAP concepts and this reading is on "Statutory Surplus". I think all of what you need to know about that is in Odomirok anyway.

  • marquatymarquaty

    Thanks Graham. Yeah I think swapping the incurred and expected makes more sense.

  • grahamgraham

    You're welcome. Slay the beast this week!

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