Using the higher PD rating when there are conflicting ratings affects the estimation of which liability component?

• A. Past costs
• B. Current liabilities
• C. Estimated profits
• D. Future liabilities

Answer: (D)

The main idea is how reserves for self‑insurance are split by timing. The PD rating represents the chance that a claim will require payment in the future. When ratings conflict, selecting the higher PD is a conservative move that increases the estimated probability and size of future outflows. That directly inflates the expected future payments, so it raises the future liabilities component.

Past costs are already incurred, so changing the PD rating doesn’t alter those amounts. Current liabilities reflect obligations due in the near term and aren’t driven by long‑term probability adjustments. Estimated profits isn’t a liability at all, so it isn’t affected by changing an expected payment probability.