CAS Exam 6C Fall 2016, Question 18
Study guide: Exam 6C
The following information is available as of December 31, 2015 for a property and casualty insurance company. All amounts are in thousands of dollars ($000s).
| Item | 2014 | 2015 |
|---|---|---|
| Direct Written Premiums | 200,000 | 300,000 |
| Assumed Written Premiums | 0 | 0 |
| Ceded Written Premiums – Not Intra Pool | 6,500 | 10,000 |
| Total capital (margin) required excluding operational risk and diversification credit | 125,000 | 175,000 |
You are also given the following information:
| Risk factor | Value |
|---|---|
| Risk factor for Direct premiums written in the past 12 months | 2.50% |
| Risk factor for Reinsurance assumed in the past 12 months - Not Intra Pool | 1.75% |
| Risk factor for Reinsurance assumed in the past 12 months - Intra Pool | 0.75% |
| Risk factor for Reinsurance ceded in the past 12 months - Not Intra Pool | 2.50% |
| Risk factor for Reinsurance ceded in the past 12 months – Intra Pool | 0.75% |
| Risk factor for Premium growth above 20% threshold | 2.50% |
| Risk factor for Capital/margin required component | 8.50% |
Part a (0.5 points)
Define operational risk.
Part b (2 points)
Calculate the operational risk margin.
Part c (0.5 points)
Explain the purpose of the diversification credit.
Answer this question and see the worked solution