CAS Exam 7 Spring 2015, Question 19
Study guide: Exam 9
A monoline property insurance company writing business exclusively in the U.S. requires catastrophe reinsurance in order to remain within acceptable levels of risk tolerance. The company is considering two different reinsurance options from reinsurers willing to write 100% of the risk for the same price.
- Reinsurer A has $10 billion of surplus, writes primarily U.S. property reinsurance and has the highest possible financial strength ratings.
- Reinsurer B has $10 billion of surplus, writes primarily casualty reinsurance and has the highest possible financial strength ratings.
Part a (0.75 points)
Explain how the risk level differs between the two options and how that might impact the required surplus as measured by the company's capital model.
Part b (0.5 points)
Explain why placing 100% of the coverage with one reinsurer may lead to a suboptimal use of capital for the company.
Answer this question and see the worked solution