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#1
 MISTA JOJO Member SOA Join Date: Sep 2011 Studying for Life Posts: 266 Spring 2015 LFV US #1C

Sorry if the notation is inconsistent.

Here's my solution:

K = 60/150 = 0.4
DAC(1) = K*PV1(EGP)-PV1(Deferred Expenses) = 0.4*30 - 4 = 8
DAC'(1) = K*[PV1(EGP) + IGL(1)] - PV1(Deferred Expenses) = 0.4*(30 + 5) - 4 = 10
Shadow DAC Adjustment(1) = DAC'(1) - DAC(1) = 10 - 8 = 2

However, the solution shows -2 for the shadow DAC adjustment. Where did I go wrong?
#2 E Eddie Smith SOA Join Date: May 2003 College: UGA Posts: 9,350 Looks like maybe you just got the sign reversed. Since the unrealized gain is proﬁt-neutral, there is no need to recalculate k, meaning we can take the shortcut approach. The shadow DAC adjustment is intended to partially oﬀset the UHG of +5, so the adjustment needs to be negative.

Shadow DAC Adj = −k × UHG = −0.4 × 5 = −2
#3
 FrancisY Member SOA Join Date: Apr 2013 Posts: 868 Here's how I worked it:

EGP'(t) = IGL + EGP(t)
EGP'(t) = EGP assuming unrealized gains/losses (IGL) are recognized
Positive IGL represents a gain

Then...

where,
Shadow DAC(t) = [DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP'(t)
Primary DAC(t) = [DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP(t)

going back to the original equation...
Shadow DAC Adjustment(t) = {[DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP'(t)} - {[DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP(t)}
Shadow DAC Adjustment(t) = k-factor x [EGP(t) - EGP'(t)]
Shadow DAC Adjustment(t) = k-factor x [-IGL]

Shadow DAC Adjustment(t) = 0.4 x [-5] = -2
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#4
 MISTA JOJO Member SOA Join Date: Sep 2011 Studying for Life Posts: 266 Quote:
 Originally Posted by FrancisY Here's how I worked it: EGP'(t) = IGL + EGP(t) EGP'(t) = EGP assuming unrealized gains/losses (IGL) are recognized Positive IGL represents a gain Then... Shadow DAC Adjustment(t) = Shadow DAC(t) - Primary DAC(t) where, Shadow DAC(t) = [DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP'(t) Primary DAC(t) = [DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP(t) going back to the original equation... Shadow DAC Adjustment(t) = {[DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP'(t)} - {[DAC(t-1) + DAE(t) x (1+i)] - k-factor x EGP(t)} Shadow DAC Adjustment(t) = k-factor x [EGP(t) - EGP'(t)] Shadow DAC Adjustment(t) = k-factor x [-IGL] Shadow DAC Adjustment(t) = 0.4 x [-5] = -2
Thanks, that all makes sense to me. Strange that I couldn't get it to work out prospectively though.

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