CAS Exam 6C Fall 2014, Question 14
Study guide: Exam 6C
The following information is available for a property and casualty insurance company that writes both personal and commercial automobile business. All amounts are in thousands dollars ($000s).
| Assets | Balance Sheet Value | Asset Risk Factor |
|---|---|---|
| Bond | 200,000 | 0% |
| Preferred Stock | 50,000 | 15% |
| Common Stock | 50,000 | 15% |
| Mortgage Loans | 50,000 | 5% |
| Agent Balances Receivables | 8,000 | 5% |
| Reinsurance Recoverables | 40,000 | 10% |
| Factor | Commercial Automobile | Personal Automobile |
|---|---|---|
| Deficiency Factor | 1.05 | 1.08 |
| Discount Factor | 0.89 | 0.88 |
| Baseline Capital Factor for Loss Reserve | 0.38 | 0.38 |
| Baseline Capital Factor for Premium | 0.36 | 0.39 |
| Company Size Factor | 0.95 | 0.95 |
| Company Stability Factor | 1.10 | 1.15 |
| Company Profit Factor | 1.02 | 1.00 |
| Item | Value |
|---|---|
| Spread of risk factor | 16% |
| Potential market depreciation of fixed income securities after 120 bps interest rate rise | 29,000 |
| Liquid assets | 350,000 |
| Gross PML | 30,000 |
| Credit Risk | 5.4 |
| Net written premium for commercial automobile | 11,000 |
| Net written premium for personal automobile | 25,000 |
| Carried reserve for commercial automobile | 21,000 |
| Carried reserve for personal automobile | 77,000 |
| Diversification factor for loss reserves | 0.9357 |
| Diversification factor for premium | 0.9083 |
| Growth factor | 1.0 |
| Adjusted surplus (APHS) | 55,000 |
Calculate the following under A. M. Best's Capital Adequacy Ratio (BCAR) rules:
Part a (1.5 points)
Asset risk
Part b (1.25 points)
Underwriting risk
Part c (0.75 points)
BCAR ratio assuming there is no business risk and that the risk covariance can reduce capital by 35%.
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