CAS Exam 6C Spring 2017, Question 20
Study guide: Exam 6C
The following information is available from the December 31, 2016 P&C-1 of an insurance company. All amounts are in thousands ($000s).
Capital (Margin) Required for Interest Rate Risk
| Fair Value | Modified or Effective Duration | |
|---|---|---|
| Interest rate sensitive assets: | ||
| Term deposits | 0 | 0.00 |
| Bonds and debentures | 900 | 4.75 |
| Commercial paper | 0 | 0.00 |
| Loans | 0 | 0.00 |
| Mortgages | 50 | 25.00 |
| MBS and ABS | 0 | 0.00 |
| Preferred shares | 50 | 3.00 |
| Other (specify) | 0 | 0.00 |
| Total interest rate sensitive assets | 1,000 | |
| Interest rate sensitive liabilities: | ||
| Net unpaid claims and adjustment expenses | 500 | 2.50 |
| Net premium liabilities | 100 | 2.75 |
| Other as approved by OSFI | 0 | |
| Total interest rate sensitive liabilities | 600 |
Part a (0.5 points)
Define interest rate risk.
Part b (0.5 points)
Contrast effective duration and modified duration.
Part c (1 point)
Calculate the margin required for interest rate risk at target based on a 125 basis point interest rate shock factor.
Answer this question and see the worked solution