Q22
part a choice 2: 10% of Reserves - it looks like your calculation uses the AA's point-estimate instead of the Companies Liabilities for Losses + Loss Adjustment Expenses.
My answer was 10%*(22.5+17) = 3.95, my reasoning being that I don't believe we are supposed to use the actuarial estimate to calculate materiality standards
Comments
I did the same thing, and wanted to make sure that we weren't supposed to include the liability for other expenses as part of the reserves.
I see your point although hopefully the actual reserves and the actuary's point-estimate are close so it wouldn't make a material difference. If they are not close, then the actuary presumably thinks the company's reserves are not accurate and may feel more comfortable basing the materiality standard on a reserve estimate that's more in line with what they think is correct.
And there is a lot of leeway in selecting a materiality standard since it's based on judgment. The only real requirement is that it makes sense in the context of that particular company.
Hi, for c), is it reasonable to state the assumption that surplus = TAC, and use brightline test? Thanks
Bright Line test is conducted to check if there is reason for the financial analyst to pursue the appointed actuary for comment on risk of material adverse deviation (RMAD), whereas this question wants you to evaluate RMAD based on the givens. Plus, you would need company action level capital for the test, which is not given in the question.