2016Q26

edited April 2019 in Freihaut.Reins

For this problem, can I solve the problem as following:

The groundup loss at 90th under contract #1 is 20,000
20,000 > 10% x 10000 (10% of contract premium) -> risk transfer occur

Also, to determine the 90th percentile loss, should I use the cumulative probability (0.1 + 0.3 + 0.5) or (1 - 0.04 - 0.05) ? Probably an easy probability calculation, but somehow I get confused with the concept.

In part (b),since contract #2 is considered as Deposit Accounting. It should fall under R1 - fixed income asset?

Comments

  • Q1:

    • Your solution is equivalent to the one in the examiner's report.
    • The condition I use in the practice template:
      ==> NPV@90 >= 110% x (prem)

    • is algebraically equivalent to the inequality they use in the examiner's report:
      ==> (prem - NPV)/prem <= -10%.

    Q2:

    • No. The 90th percentile loss is given directly in the table as 20,000 for contract 1 and 500 for contract 2.
    • For contract 1, the way to interpret the table is:
      ==>There is a 0.30 chance of a loss of exactly 3,000
      ==>There is a 0.10 chance of a loss of exactly 20,000
      ==>There is a 0.05 chance of a loss of exactly 30,000

    • In sample answer 2, they are doing the calculation "backwards". They are calculating the probability of getting a loss of at least 11,000 (which is 110% x prem) and then seeing whether the result is over 10%. To get an "at least" value from "exact" values, you have to sum the "exact" values.

    • (I found sample answer 2 in the examiner's report less clear than sample answer 1.)

    Q3:

    • I'm not sure about this. The text doesn't go into the details of deposit accounting, but if contract 2 doesn't qualify as reinsurance, then it would definitely not contribute to R3 (reinsurance). But that money doesn't technically go into reserves either so R4 isn't affected.
    • This money is definitely an asset because it appears explicitly on the balance sheet:
      ==> (Line 16.2) Funds held by or deposited with reinsured companies

    • But I couldn't find anywhere in Odomirok that gave the RBC factor for this item. It isn't cash but it isn't exactly a fixed income asset like a bond either. Not a great answer. Sorry!

  • Thanks for the quick answer, Graham. I was thinking about the given probability as how you mentioned above. But then the examiner report and the way the table is structured made me feel like I should think of a cumulative distribution.

  • Yes, I see what you mean. The way they provided the information is a little confusing. In cases like that it's best to explain any assumptions you make and to show all your work. That way they will know you understand the material and you will maximize partial credit.

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