Actuarial Notes

CAS Exam 6C Fall 2015, Question 18

Study guide: Exam 6C

The following information is available from the March 31, 2015 P&C-1 of an insurance company. All amounts are in thousands of dollars ($000s).

Minimum Capital Test: Capital Required and MCT Ratio

Item Current Period
Total Capital Available 52,050
Capital Required at Target:
Insurance Risk:
Premium liabilities ?
Unpaid claims ?
Catastrophes 2,510
Margin required for reinsurance ceded to unregistered insurers ?
Market Risk:
Interest rate risk 2,000
Foreign exchange risk 500
Equity risk 6,000
Real estate risk 2,500
Other market risk exposures 100
Credit Risk:
Counterparty default risk for balance sheet assets 3,000
Counterparty default risk for off-balance sheet assets 1,500
Counterparty default risk for unregistered reinsurance collateral and SIRs ?
Operational risk margin ?

Unpaid Claims Margin

Class of insurance Net unpaid claims discounted Pfads (claims) Risk factor
Personal Property 80,000 7,000 15%
Automobile – Liability and Personal Accident 220,000 30,000 10%

Premium Liabilities Margin

Class of insurance Net unearned premium Net premium liabilities Pfads (Premium liabilities) Risk factor
Personal Property 10,000 7,000 700 20%
Automobile – Liability and Personal Accident 25,000 23,000 2,500 15%

Unregistered Reinsurance

Insurer Name Unearned Premiums ceded to assuming insurer Outstanding losses recoverable from assuming insurer Reinsurance receivable Non-Owned Deposits - RSA Letters of Credit
ABC Re 5,000 3,000 500 8,500 2,200

Operational Risk Margin

Direct premiums written in the past 12 months Assumed premiums written in the past 12 months - third party reinsurance Ceded premiums written in the past 12 months – third party reinsurance
Personal Property 25,000 1,000 4,000
Automobile – Liability and Personal Accident 60,000 2,000 5,000
Risk Factors 2.50% 1.75% 2.50%

Other information:

  • The collateral held for unregistered reinsurance exposures is subject to a risk factor of 0.25%.
  • The correlation factor between the asset risk and the insurance risk is 50%.
  • The growth in gross premiums written in the past 12 months is 7%.
  • The company does not have intra-group pooling arrangements.
  • The risk factor applied to total capital required, before the operational risk margin and diversification credit for the calculation of the operational risk margin, is 8.50%.
  • Capital composition limits are not reflected in the information given above.

Part a (0.5 points)

Briefly describe the purpose of OSFI establishing a supervisory target MCT level.

Part b (2.25 points)

Calculate the capital required for insurance risk.

Part c (0.75 points)

Calculate the capital required for credit risk.

Part d (0.75 points)

Calculate the capital required for operational risk.

Part e (0.75 points)

Calculate the diversification credit and briefly describe its purpose.

Part f (0.5 points)

Briefly discuss how OSFI will likely react based on the company's MCT.

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