Spring 2015 #25b
It is not mentioned in the examiner's report but I am wondering if another possible answer is that each contract covers a catastrophic event so it is self-evident that risk transfer has occurred?
It looks like you're new here. If you want to get involved, click one of these buttons!
It is not mentioned in the examiner's report but I am wondering if another possible answer is that each contract covers a catastrophic event so it is self-evident that risk transfer has occurred?
Comments
I think you can make a case for option 1 because the potential loss (100m), the subsequent payout (60%), and the likelihood of the event (15%), are all very high, even given the 20m premium. The insurer is clearly taking on a big risk. And this is proven by the ERD of 28%. I'm not sure what the graders had in mind but I think they should accept the self-evident reason, with a brief explanation of course.
Options 2 isn't quite so obvious though, and option 3 certainly isn't. The likelihoods of loss are only 2% and 1% respectively so I would feel safer doing the ERD calculation here. And option 2 failed the 10-10 rule from part (a) so I definitely wouldn't have said that was self-evident!
Side note: Strictly speaking none of these reinsurance contracts qualify for reinsurance because there is no timing risk for the reinsurer. The question says payment will be made on July 1, 2015 and specifying a payment date removes timing risk. The same issue came up in 2018-Fall-25 and there was a forum discussion about it:
I don't think this is what the examiner's had in mind though. I may have mentioned this but I wouldn't have left it at that.