2016Q26
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:
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:
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.
Q3:
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.