CAS Exam 6C Spring 2019, Question 18
Study guide: Exam 6C
The following information is available for a federally-regulated property and casualty insurance company as at December 31, 2018. All amounts are in thousands of dollars ($000s).
| Item | Value |
|---|---|
| Probable Maximum Loss (PML) 500, East Canada | 90,000 |
| PML 500, West Canada | 350,000 |
| PML 250, East Canada | 25,000 |
| PML 250, West Canada | 130,000 |
| Common shares issued and paid | 60,000 |
| Retained earnings | 155,000 |
| Accumulated other comprehensive income | 45,000 |
| Earthquake premium reserve | 10,000 |
| Nuclear and contingency reserves | 0 |
The company has the following reinsurance coverage for any earthquake occurrence:
| Layer | Ceded to Reinsurers |
|---|---|
| 75,000 xs 25,000 | 90% |
| 100,000 xs 100,000 | 100% |
| 50,000 xs 200,000 | 50% |
The insurance company is progressively phasing in from a 420-year return period in 2014 to a 500-year return period in 2022.
Part a (2.25 points)
Calculate the insurance company's margin required for catastrophes at target as at December 31, 2018.
Part b (1 point)
Fully explain the impact on the MCT components of a decrease in the earthquake reserves.
Part c (0.5 points)
Explain how personal property earthquake exposures impact the surplus used in A.M. Best's BCAR score.
Part d (1 point)
Briefly describe four qualitative earthquake risk management practices that would improve the A.M. Best rating with respect to the catastrophe analysis.
Answer this question and see the worked solution
Concepts tested
- Earthquake Reserves
- Best's Capital Adequacy Ratio
- Earthquake Exposure Risk Margin
- Probable Maximum Loss
- MCT
- Rating Agency