CAS Exam 6C Spring 2017, Question 21
Study guide: Exam 6C
In the context of the dynamic capital adequacy testing (DCAT) analysis, a property and casualty insurance company wants to evaluate the impact of a decline in the stock market. Based on an analysis of past common shares performance, the following distribution was established:
| Percentile | Decline of common shares portfolio |
|---|---|
| 80.0% | -10.0% |
| 90.0% | -20.0% |
| 99.0% | -40.0% |
| 99.5% | -50.0% |
The following additional information is available:
- The shock is tested at the end of 2018.
- Assume that there is no tax implication.
- Assume that the impact of the decline in common shares flows to the income statement.
- The MCT risk factor for equity risk is 30%.
- Assume that the MCT total uncapped operational risk margin is less than 30% of the sum of asset and insurance risk.
- Assume that there is no impact on investments other than common shares following the market decline.
The following information from the DCAT base scenario for 2017 and 2018 is available:
| 2017 | 2018 | |
|---|---|---|
| Common shares portfolio | 90,000 | 90,000 |
| Capital available | 100,000 | 100,000 |
| Capital required for insurance risk | 20,000 | 20,000 |
| Capital required for credit risk | 5,000 | 5,000 |
| Capital required for equity risk | 27,000 | 27,000 |
| Capital required for interest rate risk | 2,000 | 2,000 |
| Capital required for foreign exchange risk | 0 | 0 |
| Capital required for operational risk | 5,000 | 5,000 |
| Diversification credit | 6,714 | 6,714 |
| MCT ratio | 287% | 287% |
Evaluate the impact of a plausible adverse scenario on the 2018 MCT ratio.
Part a (2.25 points)
Answer this question and see the worked solution