CAS Exam 6C Fall 2019, Question 20
Study guide: Exam 6C
A monoline property and casualty insurance company is testing scenarios for its Dynamic Capital Adequacy Testing (DCAT) report. One of the scenarios modelled is a catastrophe occurring on January 1, 2019. The amount of loss at different percentiles of the modelled cumulative distribution are listed below. All amounts are in thousands of dollars ($000s).
| Percentile | Gross Catastrophe Loss |
|---|---|
| 90th | 100,000 |
| 93th | 350,000 |
| 96th | 605,000 |
The company purchases catastrophe excess-of-loss reinsurance coverage with the following two registered reinsurance companies:
- Reinsurer A: 150,000 xs 50,000
- Reinsurer B: 400,000 xs 200,000
There is no reinstatement premium.
Cumulative payment pattern for catastrophe claims:
| Age (Months) | % Cumulative Paid |
|---|---|
| 12 | 60% |
| 24 | 100% |
Payments are made in the middle of the year. The payment pattern is the same for the insurer and the reinsurers.
Projected MCT results for the first year:
| Item | Base Scenario at 2019/12/31 | Adverse Scenario at 2019/12/31 |
|---|---|---|
| Capital available | 37,750 | 27,000 |
| Capital required for premium liabilities | 1,500 | 1,800 |
| Capital required for unpaid claims | 12,750 | ? |
| Capital required for catastrophes | 300 | 300 |
| Capital required for reinsurance ceded to unregistered insurers | 0 | 0 |
| Capital required for interest rate risk | 2,000 | 1,750 |
| Capital required for foreign exchange risk | 0 | 0 |
| Capital required for equity risk | 1,600 | 1,600 |
| Capital required for real estate risk | 0 | 0 |
| Capital required for other market risk exposures | 450 | 450 |
| Capital required for counterparty default risk for balance sheet assets | 700 | 700 |
| Capital required for counterparty default risk for off balance sheet exposures | 100 | 100 |
| Capital required for counterparty default risk for unregistered reinsurance collateral and SIRs | 0 | 0 |
| Capital required for operational risk | 2,900 | 4,300 |
| Diversification credit | 1,900 | ? |
| MCT ratio | 278% | ? |
Other information:
| Item | Value |
|---|---|
| Risk factor for unpaid claims | 15% |
| Discount rate | 3% |
| Claim liabilities margin for adverse deviation (MfAD) | 10% |
| Correlation factor between asset risk margin and insurance risk margin | 50% |
Part a (0.5 points)
Briefly describe two purposes of stress testing.
Part b (0.5 points)
Define reverse stress testing and briefly describe how it can help the insurer with its DCAT analysis.
Part c (2.25 points)
Calculate the MCT ratio for the plausible adverse catastrophe scenario as at December 31, 2018.
Part d (0.5 points)
The company decides to model an additional scenario that includes both the catastrophe and the bankruptcy of a reinsurer. Describe how this would impact the MCT ratio calculated in part c. above.
Answer this question and see the worked solution