Re: Questions on Part 10 Material
john.w.rollins@ArthurAndersen.com
Mon, 20 Apr 1998 11:45:33 -0400
I can answer questions 1 and 3. Butsic's empicical formula for Z (risk
adjustment) from industry data DID depend on the risk free rate, as well as
a bunch of assumptions about industry cash flows. This is the formula
referenced in the problem, I think. The implication is that Z is constant
and does not depend on the level of the risk-free rate is stated elsewhere
in the paper, in the theoretical derivation of Z=e(R-i). Technically, this
formula value does depend on the risk-free rate, but Butsic assumed that
(R-i) was constant when he made the statement.
I believe the CAS model answer to the Myers Cohn problem is wrong. The
paper specifically states that underwriting profits are taxed as the
associated losses are paid, NOT at the end of the policy period. This is
why they use the simplifying formulas x2 and x4, intended to represent the
durations of loss payments discounted at the risk-adjusted and risk-free
rates, respectively. The examiner solved the problem from common sense
rather than using M-C's duration approximations. His or her common sense
was incorrect under the assumptions in the paper.