RBC: Interest Disc Factor

[Jim James]

Long-Tailed Lines
Premium: Expect more investment income => larger adj or smaller factor
Reserve: Expect less investment income => smaller adj or larger factor

Short-Tailed Lines
Premium: Less
Reserve: More

Premium
Long-Tailed Lines: More
Short-Tailed Lines: Less

Reserve
Long-Tailed Lines: More
Short-Tailed Lines: Less

Is this at all close to what we expect? I'm having trouble understanding this.

[roseberykebab]

I had trouble understanding it too: and then someone explain it about 50 posts back...here is my understanding:

It all depends on the payout pattern:

R5 (Premium Risk): risk that business won't be profitable in NEXT YEAR; thus if you have a large payout in the first year you won't make a lot of investment income so the factor will be low
R4 (Reserving Risk): measures the susceptibility of reserves to adverse deviation, after the first year; so if you have a long tail you will have a large discounting safety net so it is large

I think this is kind of a bad question to ask because there are many many considerations about which one would have a bigger discount factor and words don't really cut it.

[triplea]

I think TIA had a nice explanation in their solutions to the new accounting problems. I can't remember it now though, which is really not a good sign.

[Jim James]

Originally Posted by roseberykebab

I had trouble understanding it too: and then someone explain it about 50 posts back...here is my understanding:

It all depends on the payout pattern:

R5 (Premium Risk): risk that business won't be profitable in NEXT YEAR; thus if you have a large payout in the first year you won't make a lot of investment income so the factor will be low
R4 (Reserving Risk): measures the susceptibility of reserves to adverse deviation, after the first year; so if you have a long tail you will have a large discounting safety net so it is large

I think this is kind of a bad question to ask because there are many many considerations about which one would have a bigger discount factor and words don't really cut it.

Thanks. I think the bolded part is key. You're probably right about it not being likely asked in this level of detail but the simple question of why the two are different in general is as likely as anything imo.

[Jim James]

Originally Posted by triplea

I think TIA had a nice explanation in their solutions to the new accounting problems. I can't remember it now though, which is really not a good sign.

I must be losing my comprehension abilities then because that's what prompted me to ask! :LMAO:

[triplea]

let me look at it again and see if I truly understand it, or am I kidding myself. Again.