CAS Exam 6C Fall 2015, Question 20
Study guide: Exam 6C
A monoline property and casualty insurance company that does not purchase reinsurance is testing scenarios for its DCAT report. One of the scenarios modeled is an increase in unpaid claims. The increases in unpaid claims at different percentiles of the modeled cumulative distribution are listed below.
| Percentile | Increase in unpaid claims |
|---|---|
| 90.5th | 1% |
| 93.5th | 3% |
| 96.5th | 8% |
| 99.5th | 15% |
Modeled results for the first year of projection are shown in the table below. All amounts are in thousands of dollars ($000s).
| Balance sheet | Base Scenario Year 1 | Adverse Scenario Year 1 |
|---|---|---|
| Total Assets | 55,800 | ? |
| Accounts Payable | 2,000 | 2,000 |
| Unearned Premiums | 3,900 | 3,900 |
| Unpaid Claims and Adjustment Expenses | 35,000 | ? |
| Premium Deficiency | 100 | 100 |
| Other Liabilities | 1,300 | 1,300 |
| Total Liabilities | 42,300 | ? |
| Total Equity | 13,500 | ? |
| MCT ratio and capital required | Base Scenario Year 1 | Adverse Scenario Year 1 |
|---|---|---|
| Capital available | 13,500 | ? |
| Premium liabilities | 800 | 800 |
| Unpaid claims | 3,200 | ? |
| Catastrophes | 2,200 | 2,200 |
| Margin required for reinsurance ceded to unregistered insurers | 0 | 0 |
| Interest rate risk | 1,200 | 1,234 |
| Foreign exchange risk | 0 | 0 |
| Equity risk | 2,000 | 2,000 |
| Real estate risk | 0 | 0 |
| Other market risk exposures | 0 | 0 |
| Counterparty default risk for balance sheet assets | 600 | 600 |
| Counterparty default risk for off-balance sheet exposures | 200 | 200 |
| Counterparty default risk for unregistered reinsurance collateral and SIRs | 0 | 0 |
| Operational risk margin | 1,942 | ? |
| Diversification credit | 1,298 | 1,325 |
| MCT ratio | 187% | ? |
| Other information for the operational risk margin | Base Scenario Year 1 | Adverse Scenario Year 1 |
|---|---|---|
| Direct premiums written in the past 12 months (previous year) | 42,500 | 42,500 |
| Direct premiums written in the past 12 months (current year) | 43,000 | 43,000 |
| Direct premiums written risk factor | 2.5% | 2.5% |
| Base capital/margin risk factor | 8.5% | 8.5% |
| Cap | 30% | 30% |
Additional assumptions:
- There are no income tax effects.
- There is no impact on paid claims during year 1.
- There is no phased-in capital.
Part a (1.5 points)
Construct a plausible adverse scenario and calculate the resulting MCT ratio using the modeled cumulative distribution for the increase in unpaid claims.
Part b (0.5 points)
Briefly describe two possible ripple effects of this scenario.
Part c (0.5 points)
Briefly describe two corrective management actions the company could take to minimize any major threats from this scenario.
Part d (0.5 points)
Evaluate the company's future financial condition, assuming this scenario year 1 MCT ratio is the lowest of all scenarios during the forecast period.
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