I'm a little confused on what exactly is the homework assignment for Module 12. I know we're supposed to evaluate Joseph's schemes but are we also supposed to explicitly answer all of the bullet point questions too?

[NEAS: Just comment on Joseph's ideas. The bullet points help you see the errors that he makes.]

Here's my reasoning for each one (I tried to get each of the 6 lessons to fit somewhere - perhaps this was a mistake.)

A.  Lesson 1: He is assuming past data will help predict future trends.

Lesson 2: He won't know more than everybody else because Schedule P is publicly available and the analysis he is proposing is an obvious idea easily carried out by any investor.

 

B.  Lesson 3: The price of the stock will indicate investors' suspicions regardless of Jacob’s statement. 

Lesson 4:  Jacob’s statement has the goal of bringing a financial illusion to an end.  However, there are no financial illusions and the price must be taken as an indication of true value.

 

C.  Lesson 5:  Shareholders can more effectively and efficiently diversify on their own, so they prefer to not have companies attempt to do it for them.

Lesson 6:  Stocks should be assessed for ROI and nothing else.  Hence the guiding principle behind decisions should be maximizing ROI; not, as Jacob suggests, principles such as diversification or smooth earnings.

 

[NEAS: The homework assignment was not written to use all six lessons. This summary is good; we point out several items.

Lesson 1: Loss reserves are not an efficient market. Past data are good indicators of future figures.

Lesson 2: Correct. Stock analysts have been using chain ladder development for thirty years to analyze insurers’ profitability. Jacob’s suggestion is simple. It is done by many stock analysts and is embedded in the market price.

Some actuaries presume that actuaries are better than stock analysts at reserve estimates. This is the common wisdom in the actuarial community, but it is unlikely to be true.

Actuaries have little financial incentive to properly value an insurer. The actuary’s salary is not ties to the accuracy of his or her estimates. If the actuary’s estimate are completely misguided, he or she won’t stay employed too long. But for most actuaries, advancement and bonuses are based on other management skills, not on the accuracy of their reserve estimates.

Stock analysts have enormous incentive to properly value insurers. If their estimates are incorrect, they may lose their clientele.

Lessons 3 and 4: The NAIC and the actuarial community place great weight on the Statement of Actuarial Opinion. Investors consider Jacob’s statement like that of any other market analyst’s.

Lessons 5 and 6: Well stated. From the shareholders’ perspective, Dina is right. Synergies are valid justification for mergers; diversification is not a valid justification. These are the first two bullet points at the end of the homework assignment.

From management’s perspective, diversification is a justification for mergers. This is the third bullet point at the end of the homework assignment.]

Can anybody help me with scenario b? I don't understand how finding the corresponding violating lesson has anything to do with "explaining why Joseph's Statement of Actuarial Opinion has no effect on the stock price if the market is efficient".

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enirehtac07

There are a lot of different names used for the "Chain Ladder" reserve analysis technique. It is also known as "Link Ratio," "Triangular," and "Paid/Incurred Loss Development Method." All the same technique, just different names. This is covered on the CAS Exam 6 Syllabus.

If anyone out there wants to know or still wants to know, Schedule P data is found in the published financial statements.  I'm not sure if the general public has access to them, but they are at least the reports that they make available within the company and the ones they submit to the insurance departments and other people for auditing and things like that.  The data in Schedule P includes earned premium, paid losses, paid expenses, salvage received, case reserves and IBNR (Incurred But Not Reported).  I think there are a few other things, but those are the biggest ones that we look at when we do our reserve analysis every quarter and the end of the year.

And even though I do reserving, I have no idea what a chain ladder reserve analysis is...sorry...

Scenario A says that Jacob is going to use a "chain ladder reserve analysis of Schedule P data" to try and figure out which insurance companies have reserve deficiencies and redundancies.

They then ask the question:

"Is a chain ladder reserve analysis of Schedule P data easy to perform?"

I don't work in reserving and I have no idea what chain ladder reserve analysis is or Schedule P data. For all I know Jacob could be finding a market anomaly here.

I'm assuming since Jacob is violating lesson 2: Trust Market Prices, because he is assuming he knows more than other investors. But really I have no idea what Jacob is talking about and am therefore reluctant to judge his investment strategy. 

Hey rangers..you gotta read the chapter before you try the homework. The last section of the chapter, section 13.4 is called "The Six Lessons Of Market Efficiency". the readings page says they WILL be tested on the final.

[NEAS: The six lessons are described fully in the text.]

Can someone please list what 6 lessons we are talking about?

I don't think the short sales has anything to do with the question. 

I only found one lesson for each scenario although I did think B could be lessons 3 and 4.  I could only reason for lesson 3 and I only thought 4 because the question mentioned a split.