CAS Exam 6C Fall 2016, Question 15
Study guide: Exam 6C
You are given the following information about a property and casualty insurance company as at December 31, 2015. All amounts are in thousands of dollars ($000s).
| Investment | Denomination | Market Value (in $CAD) | Modified Duration |
|---|---|---|---|
| Cash | $CAD | 10,000 | 0.0 |
| Bond | $CAD | 40,000 | 2.0 |
| Bond | $USD | 9,000 | 4.0 |
| Common Shares | $CAD | 8,000 | n/a |
| Common Shares | $USD | 5,000 | n/a |
| Investment Property | $CAD | 2,000 | n/a |
Other information:
- The investments in foreign denominations are not hedged.
- There are no liabilities in foreign denominations.
- There are no other market exposures.
- The company writes only one line of business uniformly throughout the year.
Discounting Assumptions for Policy Liabilities:
| Assumption | Value |
|---|---|
| Assumed payout pattern at 12 / 24 / 36 months | 10% / 60% / 100% |
| Discount rate, net of management fees | 2.0% |
| Margin for adverse deviation for claims development | 5.0% |
| Margin for adverse deviation for reinsurance recoveries | 0.0% (no reinsurance is purchased) |
| Margin for adverse deviation for interest rate risk | 0.5% |
Premium Liabilities:
| Item | Amount |
|---|---|
| Unearned premiums | 12,000 |
| Maximum policy acquisition expenses deferrable | 1,248 |
Undiscounted Claims Liabilities:
| Accident Year | Paid Losses | Case Reserves | Provision for IBNR and ULAE |
|---|---|---|---|
| 2013 and prior | 18,000 | 0 | 0 |
| 2014 | 10,000 | 3,000 | 500 |
| 2015 | 2,000 | 15,000 | 5,000 |
MCT Risk Charges at Target
| Risk | Charge |
|---|---|
| Premium liabilities | 20% |
| Unpaid claims | 10% |
| Interest rate risk | 1.25% |
| Foreign exchange risk | 10% |
| Equity risk | 30% |
| Real estate risk – own properties | 10% |
| Real estate risk – investment properties | 20% |
Part a (5.25 points)
Determine the capital required for interest rate risk as at December 31, 2015.
Part b (1 point)
Determine the capital required for market risk as at December 31, 2015.
Answer this question and see the worked solution