CAS Exam 6C Spring 2015, Question 29
Study guide: Exam 6C
The results as of December 31, 2014 for the three most adverse scenarios for two automobile insurance companies' Dynamic Capital Adequacy Testing (DCAT) are shown below. Both companies are federally-regulated Canadian property and casualty insurers. Assume the Minimum Capital Test (MCT) ratios and equity shown below reflected the most adverse results during the forecast period.
| Company A | Base Scenario | Frequency/Severity (Catastrophic event) | Premium Volume (Decrease) | Government and Political Risk |
|---|---|---|---|---|
| MCT Ratio | 140% | 125% | 105% | 120% |
| Equity ($000s) | $400,000 | $300,000 | $224,000 | $280,000 |
| Company B | Base Scenario | Increase in Social Inflation | Premium Volume (Decrease) | Government and Political Risk |
|---|---|---|---|---|
| MCT Ratio | 170% | 120% | 110% | 97% |
| Equity ($000s) | $500,000 | $350,000 | $300,000 | $265,000 |
| Company A | Company B | |
|---|---|---|
| Main region of operation | Quebec | Ontario |
| Litigation environment in region | No-fault | Threshold no-fault |
Part a (1 point)
Discuss whether or not each company's financial condition is satisfactory.
Part b (0.5 points)
Briefly describe one adverse scenario under the Government and Political Risk scenario that might be applicable to both companies and one that might be applicable only to company B.
Part c (1 point)
Define social inflation and briefly describe how different this risk can be for the two companies with respect to the current automobile litigation environment in each province.
Part d (0.5 points)
Briefly describe one ripple effect and one management action that may be considered under the Government and Political Risk scenario.
Answer this question and see the worked solution