CAS Exam 6C Fall 2019, Question 16
Study guide: Exam 6C
The following scenarios with and without a catastrophic event are projected for a federally regulated property and casualty insurance company as at December 31, 2018 on a gross of reinsurance basis. All amounts are in thousands of dollars ($000s).
Below are the expected financial statements figures with and without a catastrophic event:
| Item | Without catastrophic event | With catastrophic event |
|---|---|---|
| Bonds | 750,000 | 700,000 |
| Cash | 150,000 | 100,000 |
| Gross earned premium | 450,000 | 450,000 |
| Gross incurred losses | 325,000 | 525,000 |
| Expenses | 100,000 | 100,000 |
The insurer is considering purchasing a catastrophe reinsurance treaty with the following features:
- The treaty costs 5% of gross earned premium and is paid in full at inception.
- The treaty pays for losses from a single event in excess of 20% up to a maximum of 100% of gross earned premium.
- The treaty has a mandatory reinstatement premium provision, with the reinstatement premium due once the treaty attachment is reached on a paid basis.
- The reinstatement premium charge is 2% of gross premium.
The investment yield on bonds and cash is 5%.
Calculate the insurer's total income if the insurer purchases the reinsurance treaty and a catastrophe occurs. Assume there are no other events that would trigger payment on the reinsurance treaty.
Part a (1.75 points)
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