CAS Exam 6C Fall 2017, Question 17
Study guide: Exam 6C
The following information is available for a property and casualty insurance company starting operations on January 1, 2017. All amounts are in thousands of dollars ($000s).
The company considers purchasing the following aggregate excess of loss treaty to stabilize its loss experience:
- The treaty will be effective on January 1, 2017, and will expire on December 31, 2017.
- It will cover 100% of losses and LAE above 600.
- The premium is 100 and payable at start of the year.
- There is no ceding commission and no profit commission.
- For simplicity, assume there is no discounting of unpaid claims and no provisions for adverse deviations.
- The company purchases no other reinsurance.
- The investment return rate is 0%.
- The income tax rate is 0%.
The actuary forecasts three possible scenarios of underwriting results for the year.
| Scenario | Incurred Losses and Adjustment Expenses | Losses Paid In 2017 | Probability |
|---|---|---|---|
| A | 400 | 100 | 25% |
| B | 500 | 100 | 50% |
| C | 800 | 200 | 25% |
The actuary also forecasts the following for the company's financial statements on December 31, 2017, under Scenario C without purchasing the treaty.
| Scenario C Without Reinsurance | |
|---|---|
| Written premium | 1,550 |
| Earned premium | 750 |
| Incurred losses | 800 |
| Operating expenses | 200 |
| Unpaid claims | 600 |
| Unearned premiums | 700 |
| Other liabilities | 0 |
| Surplus | 1,100 |
Part a (0.75 points)
Briefly describe three functions of reinsurance other than stabilizing loss experience.
Part b (1.5 points)
Calculate the following for Scenario C with reinsurance.
- i. Net written premium
- ii. Net earned premium
- iii. Net unearned premiums
- iv. Net incurred losses
- v. Underwriting income
- vi. Net unpaid claims
Part c (0.75 points)
Assess whether this aggregate excess of loss treaty qualifies as reinsurance.
Answer this question and see the worked solution