CAS Exam 6C Fall 2013, Question 18
Study guide: Exam 6C
A reinsurer is entering into a commutation agreement with a primary insurer. The following information is available about the transaction as at December 31, 2012.
| Period | Estimated Payment to Reinsurer ($) |
|---|---|
| 2013 | $350,000 |
| 2014 | $150,000 |
Assume the following:
- Required capital is based on a regulatory approach.
- The company must hold target capital equal to 180% of required capital.
- A margin of 10% of the claims liability is required.
- The discount rate is 1%.
- The risk cost of capital rate is 5%.
- All payments are made in the middle of the year.
Part a (2.5 points)
Estimate the commuted value of the claims.
Part b (0.5 points)
Identify an advantage and a disadvantage of this transaction from the primary insurer's perspective.
Answer this question and see the worked solution