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  • Steve Zeske
    Participant

    I’ve already submitted my module exercise so I haven’t been paying close attention to this thread. My answer here may be too late, but you need to use the 4% discount rate when PVFP(t) < 0, not when DE(t) < 0. This should occur at t= 17-21.

    Steve Zeske
    Participant

    Yes, I got those results. The EV is higher than the baseline group for the 40-year pricing horizon because the reinsurer absorbs some of the costs of the shock lapse event in year 21.

    Steve Zeske
    Participant

    Thanks to you too. I also feel better about my answers.

    Steve Zeske
    Participant

    Ah, I see. I think you’re right to assume end-of-year distributable earnings because pieces of distributable earnings in the projection, like Investment Income on Required Capital, require a full year to achieve the full return. Mid-year earnings would probably be an acceptable solution too, although it would require modifications to the 11.5.3 formula. Beginning of the year distributable earnings is probably not acceptable. I’ve reworked my EV calculations to assume end-of-the-year timing and got your answer.

    I also verified the PV(Distributable Earnings) = 0 at time 0 using the ROIs calculated by Excel’s IRR function. So I did not change my answer there. PV(Distributable Earnings) = 0 at time 1 as well. Discounting 0 at time 1 is still 0 at time 0.

    For NB strain, yes, I left the percentage negative. The textbook does not say to take the absolute value so I did not. Admittedly, this did make it more difficult to describe in words whether the sensitivities made new business more or less strained.

    Steve Zeske
    Participant

    If you read the two paragraphs in section 11.6.2.3 following the example in the textbook where both positive and negative cashflows are discounted using the 7% hurdle rate, it says it is wrong to use the same rate for discounting both types of cashflows. Instead, it says to use the more generalized 11.5.3 formula, which allows for different discount rates. It sounds like you ended up using that formula anyway.

    I got 11.3% (after rounding) for the ROI, so we’re only off by 0.1%. I used the IRR function in Excel to calculate ROI since the ROI in the textbook is essentially an IRR measure. I did not directly use the 11.5.3 formula for ROI. It’s possible that there are timing differences in the Excel IRR formula (cashflows assumed to be at the beginning of the year v. end of the year) that may result in the small difference.

    For the baseline 40-year horizon EV, I used the 11.5.3 formula directly and got $16.10. I assumed distributable earnings occurred at the beginning of the year so I could use the 11.5.3 formula exactly as it is in the textbook. Although, I’m not sure this is the exact right approach because the projections assume some cashflows occur at the beginning of the year and some occur in the middle of the year. What cashflow timing assumption did you use? If you assumed middle or end of the year earnings, your distributable earnings would be discounted more. That may explain why your EV is a bit less than mine: $14.64.

    For NB Strain, I calculated it exactly as you described.

    Steve Zeske
    Participant

    I went forward and calculated ROI how the Atkinson & Dallas book defines it. I got an ROI around 11% for the baseline 40-year pricing horizon. I did not go ahead and try to determine the other 2 possible solutions that would solve PV(Profits) = 0 since 11% seemed like a reasonable value. Generally, the other possible solutions to an IRR equation are unreasonable like <0% or >100%.  I used the same ROI definition for the sensitivities to stay consistent.

    I used the 4% pricing discount rate to discount negative distributable earnings, also consistent with the methodology in the Atkinson & Dallas book. I’m still just unsure if this is the right rate, but I don’t see any other logical value to use.

    I have not actually submitted the module exercise yet. Since I’m in no hurry, I decided to wait for a reply on this post.

    What were you thinking?

    in reply to: [ILA Track] Intro to ILA – Format and length of EMA? #1508
    Steve Zeske
    Participant

    No, the end-of-module exercises for the FSA modules are not timed like the FAP module exercises. They are much more relaxed and easy-going. You have two years from the time you start the module until you must submit the exercise. Otherwise, you will have to pay for the module again and complete a new exercise. Although, if you haven’t submitted the exercise within one year of the purchase date, you will be charged a $50 6-month extension fee before you can submit it. You are allowed two 6-month extensions after the 1-year initial period (hence, 2 years total). Most candidates don’t come anywhere close to the time constraints. 2-3 months is a typical time frame to complete 1 FSA module and the exercise.

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