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Discounting Reserves - Expenses

G

Gareth

Member
I'm looking at chapter 11 "Valuation Bases", page 15. It indicates that discounting will not affect expenses, but thinking about this, surely if your ALAE have a payment pattern associated with them (i.e. same / similar to outstanding claims payment pattern), then you should also discount the expenses?
 
It all depends on the bases used in the accounts, but in effect, your are absolutely right.

For example, if the 'expenses' entry is expenses paid during the year, then you wouldn't discount them. But if you are allocating your LAE to your claims incurred shown in the accounts, and you are discounting your claims, then yes, you would be discounting your LAE automatically. If you leave your LAE reserves in your expenses figure, however, you'd need to discount them (if that's what you or your regulations required). At the end of the day, it's all down to the accounting basis you are using.

As an aside, thinking about a different purpose altogether, imagine you are analysing the profitability of, say, a quota share treaty, and you had details of claims, premiums, expenses, brokerage, commission etc. Then to do this you would have to discount everything to a common date.

Hope this helps:)
 
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